By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC
Young physicians who have just finished their residency have a lot of financial topics on their minds. Which student loan do you pay off first? Should you rush out and buy a home because the prices are down at this time?
Picking that first job can be complicated in today’s medical world. Should you work for an independent medical group or a hospital? Large town or small town? To find your best fit, consider working with a locum company to start with and try several hospitals and medical groups before taking a permanent position. Plus, you can earn a top income while you are looking.
The following are some of the many questions that most young physicians are thinking about. The answer to these financial questions may be slightly different for each of you.
For professionals like doctors, your salary and benefits will be crucial throughout your career. The cash flow that you generate is what you have to count on. A few of you may become part owners of a surgical center, a clinic, or a hospital, but most of you will need to budget the cash flow that you generate every year in order to accomplish all of your goals.
Most of the cash flow that you generate will go for living expenses for you and your family. In the early years at least 5% to 10% of your income should go directly to a tax deductible retirement plan of some type. Also a high percentage needs to go to pay off any outstanding debts that you have after graduating from medical school. Start by paying off the loans that have the highest interest rates. Most of those loans charge interest which is not deductible.
I normally recommend that young physicians be frugal and save as much as possible in the first 5 years of their profession. Concentrate on accumulating cash in the bank. Towards the end of those first five years the accumulated cash can be used to make a large down payment on that first home, and also make a large initial payment on a new car. You may have heard someone tell you in the past that “cash is king.” That comment is true.
For most of you your future retirement and financial security will be based upon the amount of income that you generate and the amount that you save over the next 30 years.
If you go to work for a hospital, university, or not-for-profit organization there is a good chance that your
retirement plan will be a 403(b) plan. Many of those plans are managed by TIAA-CREF. Some organizations also use Vanguard or Fidelity. If you go to work for a for-profit clinic you will probably have a 401(k) retirement plan, which will be managed by an insurance company or large money management firm.
For any of these types of plans you should try to put at least 8% to 10% of your income into these plans every year for the next 30 years. The money in these qualified retirement accounts will be the backbone of your retirement. You need to have as much money in these plans at retirement time as possible.
In the next 30 years if you are able to save $1 million in a qualified retirement account you can take out comfortably about 4% to 5% per year, that equals about $50,000 per year. If you were able to save $2 million then your retirement income would be about $100,000 per year.
In addition to your qualified retirement account you need to save more cash that can be invested personally in many safe investments that will provide income for you in future years.
If you have several college loans that you have accumulated while you were in school you need to look at each loan and analyze the interest rate and the payback schedule. For those loans where the interest is not deductible and the interest rate is high those should be paid off quickly. The loans that have a lower interest would be paid off second or third. If you want to pay down $1,000 on one of the loans you would need to earn $1,400 of income, then pay $400 in income taxes, and then use the remaining $1,000 to pay down the loan.
Most physicians need to surround themselves with excellent advisors that will protect them during their career. You will probably need a business attorney to help review employment contracts and corporate benefits. You will also need an estate tax attorney to help prepare wills and trusts once you decide what state you plan to live in. You will need an excellent accounting firm which can help you make tax decisions each year and prepare your personal income tax return.
I would recommend that you have a financial advisory firm that charges fees for financial advice and does not sell products. This advisory firm should have partners that are very familiar with the medical profession and specifically your medical specialty. You will also need an insurance agent that can recommend excellent term insurance or perhaps universal life insurance policies which you will need to protect your family. You may also need disability income insurance during your career. Make sure that the insurance agent works for a large independent agency that can quote 10 to 20 different insurance companies.
In the future when you have financial or tax questions, talk with both your financial advisor and your accountant. When you have business questions or contracts that need to be discussed talk with both your financial advisor and your attorneys.
As a medical professional, remember during your career, your financial stability will be based upon the cash flow that you generate and the amount that you save for the future. It is not wise to go overboard on any one item. In the early years of your career try to be frugal and pay off your debts and save as much cash as you can. In your 40s and 50s invest your savings wisely and let it grow. In your 60s and 70s continue to invest carefully and there is usually no reason to take a big risk.
For most of you a big corporation is not going to provide for your retirement. For most of your career you will be on your own and that is why using the cash flow that you generate for the next 30 years becomes very important. Find good advisors and listen to them carefully.
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This article was written for Medicus Healthcare Solutions by Gary Pittsford, CFP®. Gary Pittsford is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping high net worth families and closely held business owners with asset management strategies, succession planning, estate and income tax analysis and family gifting techniques. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.castle3.com, call 1-888-849-9559 or e-mail Gary directly at email@example.com.