The Complete Guide to Physician Retirement Planning
If you want to enjoy your retirement years, you’ll need to have a savings plan in place. Because doctors are some of the highest earning Americans, most new physicians assume that saving is easy.
However, that’s not necessarily the case. Unless you establish a solid retirement plan, you might not have enough to support yourself in your golden years. Among every age group of physicians, this is the #1 concern when surveyed according to the 2018 Report on U.S. Physicians’ Financial Preparedness.
Physician retirement planning can be complicated. With so many options to choose from, deciding on how to invest your money can be overwhelming. From 401(k) plans to IRAs and stocks, there are many different ways to save for your future.
Ready to start saving for retirement?
Thinking about making adjustments to your current plan?
Keep reading for our complete guide on physician retirement planning.
First Things First: How Much Should I Be Saving?
This is probably the most common question we hear from young doctors:
How much should I be saving for retirement?
At first, it might seem like a hard question to answer. After all, everyone is different. We all have different expenses to cover every month.
Additionally, many doctors have way more student debt than other people. So, it might make sense for you to save less than other people, at least until you pay off those loans, right?
No matter what field you work in, there’s an equation you can use to determine how much you should save:
The 50/30/20 Rule
The 50/30/20 rule is the key to becoming a personal finance wizard. If you run your own private medical practice or work for a public organization, following this rule will ensure that you have enough saved for retirement.
So what does it mean? What are we talking about?
Well, here’s the breakdown:
50% of Your Income = Living Expenses
You should only spend half of your after-tax income on living life. If you make $100k per year (after taxes), you should spend no more than $50k on your house, car, food, clothing, and other necessities.
This money should also cover:
- Student debt
- Credit card debt
- Business expenses
- Medical bills
- Life insurance
We know you’re excited to buy that BMW after spending a decade in medical school and training, but if 50% of your income isn’t enough to pay your bills, feed your family, and cover that car payment, you should go with a more modest car for now.
30% = Savings
You should save 30% of your income if you want to put yourself in a position where you cannot fail. Every time you earn a dollar, 30 cents should go directly into a savings, investment, or retirement account. Others may tell you a lower number is acceptable. While that may be possible, it usually requires taking more risk than you are probably willing to take. 30% is the amount that we would tell you is a slam dunk if the regulators would allow us, but unfortunately, there is no silver bullet.
As long as you live reasonably (and avoid buying cars you can’t afford), this should be able to sustain you through retirement. Remember, unless the economy tanks or laws change, you should have Social Security payments coming in during your later years, too.
Don’t touch your retirement savings before your goals are fully achieved, either. If you start thinking about withdrawing funds, it means that you need to reconsider your other expenses.
20% = Discretionary Fund
After the bills are paid and you’ve put money into savings, the rest is yours. Use it for whatever you’d like.
If you make a lot of money and you’re smart, you’ll put a few extra bucks into your retirement plan. Or, you might make extra student loan payments to work that debt down faster.
However, we understand that you just worked your butt off in medical school and training so you want to celebrate a little bit. If you want to take your discretionary fund and buy that car with the flames painted on the side of it, go right ahead. You earned it!
Retirement Savings Accounts: Everything You Need to Know
If you plan on retiring at some point (we hope you do), you’ll need a retirement savings strategy. Keep reading to learn the ins and outs of how to use retirement accounts, all of the types, and the best way to use them.
There are two main types of retirement plans.
The first type of plan is an employer-sponsored plan where your company deposits money directly into your account. The other plans are independent retirement accounts (IRAs), where you take a part of your earnings and deposit them yourself.
Most people want to have at least one of each type of retirement plan. As long as you have a pension and a well-funded IRA that leverages the 50/30/20 Rule, you should be able to live for decades on your retirement money.
Below, we’ll discuss everything you need to know about retirement savings accounts:
Employer-Sponsored Retirement Accounts and Pension Plans
When you look at your paycheck, do you see a box that says “Retirement Contributions,” “401(k) Contributions, 403(b) contributions,” or something along those lines?
Take a look; we’ll wait.
If so (and we’re guessing that’s a “yes”), it means that you’re enrolled in an employer-sponsored retirement plan. Every pay period, your employer takes a certain amount of money from your gross earnings and deposits it into your retirement account. Some employers will direct company funds into your account in addition to or in place of taking money from your paycheck. We’ll discuss this type later.
When you retire, all of the money grows tax-deferred and then once you hit a certain age, that money is yours free and clear of any penalties. The money you directed from your paycheck at the beginning is usually tax deductible unless you make a Roth election.
In the meantime, however, someone or something is managing it. A representative of the company is probably investing it into stocks and mutual funds that will help it grow over time, or you may be directed to enroll in an automatic, age-based, or target-date fund. That way, the million dollars you invest throughout your career will have grown to well over a million by the time you get your hands on it.
If you work for someone else and don’t run your own practice, this may be your primary source of saving. Therefore, it’s important to understand what type of plan you have.
Defined Benefit Plans vs. Defined Contribution Plans
There are two distinct types of pension plans: defined benefit and defined contribution. Your plan will determine how you go about saving, so you should be well aware of the difference between each.
Defined Benefit Plans
If you work for the government, you probably have a defined benefit plan. You might also have one if you work for a non-profit organization.
Defined benefit plans don’t require you to make any contributions out of your own pocket. Instead, your employer foots the bill. When you start working for the company, they’ll let you know exactly how much you’ll make when you retire (if you stay with the company).
The exact contribution amount is determined by your salary and the amount of time you work for the organization. In most pension plans, your payout is equal to a certain percentage of your average annual income throughout your entire career.
Unfortunately, most private corporations don’t offer this type of plan anymore. As you might imagine, they don’t want to take on the added cost of retirement contributions if they don’t have to. So, even the companies who offer defined benefits don’t usually contribute enough for you to live off later in life.
In other words, if you work for a private company and think their retirement plan alone will support you later on in life, think again. You should consider enrolling in additional retirement plans or asset management strategies to supplement your savings.
Defined Contribution Plans
If you work in the private sector, you likely have a defined contribution plan. Some non-profits also offer this type of plan for employees.
This type of plan is much more common in the private sector. It includes plans such as 401(k), profit-sharing plans, and stock ownership plans.
If you work for a tax-exempt organization like a public school or non-profit, you might even have a 403(b). This is a defined contribution plan for public service agencies.
With a defined contribution plan, you decide how much money goes into your retirement account. When retirement day comes, your payout reflects the amount you contributed and growth accumulated throughout your career.
Sometimes, employers contribute nothing to your retirement savings. Other times, they’ll offer a “matching” program, in which they promise to contribute the same amount that you do. See more on this topic below.
If your core plan is a defined contribution plan, you should consider opening an additional account. IRAs and stock investments can help you save more money, grow your wealth, and prepare for retirement.
Types of Defined Contribution Plans
As we mentioned above, the defined contribution category includes options like 401(k) plans and 403(b) plans. It also includes less common options like stock ownership and profit-sharing plans.
If you work full-time, you almost certainly have one of these retirement accounts. We can’t tell you for sure until we see a pay stub because within it you’ll see a deduction for the contributions.
Here are the primary types of defined contribution plans:
Traditional 401(k) Plans
401(k)s are the most common type of retirement plan. If you work for someone else, your employer most likely offers a traditional 401(k).
With this plan, you decide how much you want to contribute to your account. For example, you might contribute 5% of your income each pay period. If you make $2,000 per pay period, $400 will go directly to your retirement account. While in the account, the money may be invested in stocks, bonds, mutual funds, index funds or exchange-traded funds, all with the objective to grow.
The amount contributed is deducted before taxes, which has its ups and downs. It’s nice because you’ll pay lower income taxes on your paycheck, but once you retire and withdraw money, you’ll have to fork some dough over to the IRS.
You’re required to wait until age 59 ½ to make withdrawals. If you retire early, you’ll have to pay a 10% non-qualified withdrawal penalty if you take money out before retirement age.
As discussed above, some employers will also match contributions. For example, your employer might contribute up to $5,000 toward your retirement savings as long as you contribute the same amount.
Solo 401(k) Plans
The solo 401(k), or one-participant 401(k), is similar to a traditional plan. However, it’s only available to physicians who work alone in their own practice. If you are the only person in the office (no nurses, receptionists, or other employees), this is the plan for you.
It does, however, cover your spouse if they are on the payroll.
It works a lot like a regular 401(k): you contribute a predetermined percentage of your income to your account and withdraw it in chunks when you retire. You also have to wait until you’re 59 ½ to receive distributions.
When you enroll in a profit-sharing retirement plan, your employer has the option to contribute as much or as little money as they’d like. Typically, small businesses use these plans to reward their employees for helping to build an organization. However, some large companies also utilize them.
Your employer is allowed to contribute up to the lesser of these two options:
- $56,000 ($62,000 after you turn 50)
- An amount equal to 100% of your annual salary
Companies often contribute cash to their employee’s accounts. However, some employers contribute stock shares instead. This arrangement is referred to as a “stock-ownership” plan and is typically a part of a doctor’s benefits package.
Read more about doctor’s benefits packages on our blog!
Unfortunately, employees aren’t allowed to contribute to a profit-sharing plan. That means you’ll need another retirement account to stash money in.
Sometimes, employers offer a profit-sharing plan alongside a traditional 401(k). If that’s the case, you should participate in both.
Cash Balance Plans
Out of all of the defined contribution retirement plans, cash balance plans are the most similar to a defined benefit plan. If you participate in a cash balance plan, your employer will let you know exactly how much you’ll earn in retirement.
To someone who is used to old-style pensions, however, this looks more like a 401(k). Your employer invests your retirement savings into the stock market, which allows it to grow into the promised amount.
If you work for a hospital, non-profit, state, or local government, you may not be able to invest in a 401(k). But, your employer probably offers a 403(b) plan instead.
Luckily, they’re not that different. With a 403(b), you reap a lot of the same benefits that you would from a 401(k). It enables you to save money and grow wealth throughout your career.
The contribution limits are the same, too. Whenever 401(k) limits increase, 403(b) limits also go up. Plus, you’re not taxed when you deposit; you’re taxed upon withdrawal.
The main difference is that your employer, as a non-profit, doesn’t pay as many taxes as a private company would. So, there’s a higher chance that your employer will match your savings. With more money left over, why wouldn’t they reward you for your hard work?
403(b)s aren’t the only type of retirement plan offered in the non-profit sector. There are also a few others.
One popular example is the 457(b). Unlike the 403(b), this differs from a 401(k) in a few key ways.
For example, there isn’t a 10% penalty for early withdrawal. If you need to withdraw funds to pay for a medical emergency, you can do so without penalty. You’ll still have to pay taxes on it, but you won’t be penalized.
Of course, we don’t recommend taking any money out of your retirement account early, but it’s nice to have a safety net in case of a crisis.
The 401(a) plan, sometimes called a “money purchase plan,” is one more option for non-profit employers.
The plan is a lot like a 401k and 403(b). However, this plan requires employer contributions. So if your employer offers this, you should take it. They may also require mandatory contributions on your part, but that’ll help you save more money.
A Quick Note on Taxes: Qualified vs. Non-Qualified Retirement Plans
When it comes to taxes, retirement plans are pretty straightforward. Your taxes are deferred until you start making withdrawals. In most cases, you don’t have to hand any money over to the government until you retire.
However, that’s not always the case. In certain instances, you may be required to pay taxes up front.
If your only retirement plan is a 401(k) or another traditional account, you probably don’t have anything to worry about. But, if you receive an IRA or some other account through your employer, you should understand the tax implications.
Below, we’ll explain the difference between qualified and non-qualified retirement plans.
Qualified plans are tax-deferred retirement accounts. This includes most of the retirement accounts outlined above, such as 401(k), 403(b), 401(a), and profit-sharing plans.
These accounts are considered “qualified” because they meet the IRS’ Employee Retirement Income Security Act (ERISA) guidelines. This act was put forth in 1974 to protect the retirement savings of American workers.
It also ensures that the IRS gets its fair share of the money. That’s why qualified plans are accompanied by contribution limits and early withdrawal penalties.
Overall, qualified plans are beneficial for every employee at a company. Under ERISA guidelines, all full-time employees must have the option to participate in the same qualified plan. If the company offers to match 3% of your salary, everyone, including executives, receives the same offer.
Qualified plans are always tax-deferred. You pay the taxes when you retire.
Non-qualified retirement plans are not governed by ERISA guidelines. They don’t have contribution limits or early withdrawal penalties.
The IRS does not require companies to offer non-qualified plans to every employee. As a result, they’re often given to executives and high-level employees in the organization. Many times, employers offer these to high earners to help them save more than federal contribution limits allow.
As a physician, you’re probably among the highest earners in your organization. Therefore, you may come across a non-qualified plan at some point in your career.
Some common examples are deferred-compensation plans and executive bonus plans. A 457(b) falls under this category.
If you are ever offered one of these plans, keep in mind that ERISA guidelines don’t apply to it. Therefore, you may be required to pay taxes before deposit.
Every non-qualified plan is different. Your plan might be eligible for tax-deferral. However, misunderstanding the tax guidelines could result in Uncle Sam showing up at your door.
When in doubt, talk to a financial advisor or certified accountant. They’ll walk you through the process and help you understand the tax implications of your retirement plan.
We want to help you lower your tax liability. Learn more about our Tax Reduction services!
Individual Retirement Accounts (IRA)
In most cases, your pension plan won’t provide enough money for you to live off of in retirement. Even if you’re a high earner and you put away more than a million dollars, it might not be enough cash. Ultimately it all depends on your financial goals. Getting a complementary forecast is a great way to determine how much you may need for retirement.
After all, you’ll want to spend your retirement years enjoying life. You want to have enough money to pay your bills and have fun. You’ll probably want to travel, eat in restaurants, and drive a nice car.
Plus, it’s always nice to have some extra money to leave to your family when you’re gone.
So, it’s smart to have an additional savings outlet on top of your retirement plan.
One of the common options is an IRA or individual retirement account. These are private, unsponsored plans that you open independent from your employer. You can also contribute to an IRA even if you’re unemployed.
Like a traditional retirement or pension, it’s a way to make small, incremental investments throughout your career. Your contributions are invested in stocks, bonds, funds, and other financial outlets. Investing in these areas allows your contributions to grow.
By the time retirement comes around, your investments should (ideally) be much more than the sum you’ve contributed.
There are a variety of different options to choose from, each with its own limits and stipulations:
The Traditional IRA
You can invest up to $6,000 per year if you’re under the age of 50. Once you hit 50, the limit is increased, and you’re allowed to contribute up to $7,000 per year.
You can write your contributions off as tax deductions, too. This helps you save on taxes in the short-term, but only if your income is below the income threshold.
Like a 401(k), you may get a deduction on the money you contribute, and the growth of the assets is tax-deferred. You pay taxes on any money you withdraw during retirement, and it will be taxed at ordinary income tax rates.
Roth IRA Plans
The Roth IRA works a bit differently than the traditional IRA.
With a Roth IRA, you contribute after-tax dollars, meaning you don’t have to pay any taxes on the withdrawals you make when you’re retired. Contributions limits are the same as a traditional IRA, but unfortunately, you can’t deduct Roth contributions at this time.
To invest in a Roth IRA, your annual gross income must be less than $137,000 per year. Doctors who earn more can get around this limitation by using the “backdoor IRA” method.
Learn how a backdoor Roth IRA can help you build more wealth.
SEP-IRA is an acronym that stands for “simplified employee pension.”
Depending on your annual compensation, you can contribute $56,000 in 2019 or 25% of your yearly earnings, whichever amount is less. Unlike other IRA plans, the contribution limits don’t increase when you turn 50.
The balance grows tax-deferred, but you’ll have to pay ordinary income tax when you make a withdrawal. It’s similar to the traditional IRA regarding the age requirements and early withdrawal penalties.
These IRAs are designed for self-employed individuals. If you work as an independent contractor or are the sole employee of your own company, this could be a great option for you. It’s a fantastic supplement to a solo 401(k).
If you employ other people, however, you are required to offer them a SEP-IRA plan and contribute the same amount of money to their account as you do your own. If you contribute 20% of your income to your SEP-IRA account, you must also contribute 20% to theirs.
You don’t have to start contributing on their behalf until they are with your company for three years. Also, they must be over the age of 21 and have earned at least $600 working for you during the past year.
SIMPLE IRA Plans
SIMPLE IRAs sound like SEP-IRAs, but they’re quite different. In fact, it’s much more similar to a 401(k).
This acronym stands for Savings Incentive Match Plan for Employees Individual Retirement Account. Employers enroll in these plans to encourage their employees to save money. Only employees who’ve earned $5,000 or more from the company are eligible to participate.
SIMPLE IRA plans are non-elective, meaning that you must participate if you’re eligible. You aren’t required to contribute any money to your account. However, if your employer offers to match your savings or make a contribution, you must accept it (which doesn’t seem like a problem).
In 2019, SIMPLE IRAs have a contribution limit of $13,000 until age 50. After that, you’re granted a catch-up limit of $16,000.
How to Open an IRA
If you don’t have an IRA account yet, you’ll probably want one. It will help you build wealth throughout your career and save more money than you’re able to with just a traditional retirement plan.
Opening an IRA is easy. You just have to know how and where to do it.
Here’s a guide:
Step 1: Determine How Much Help You Need
When you deposit money into your retirement account, those funds don’t just stay static. They’re invested in stocks, index funds, mutual funds, and other outlets that allow them to grow.
It’s important to note that some IRA accounts are managed by an advisor, who decides which investments will be the best for you. Other accounts allow you to make your own investments.
If you’re a financial wizard with a strong understanding of the market, you may want to consider an online brokerage account. Keep in mind that if you’re going to do this yourself, you have to fully understand the risk of the underlying assets that you own. If you don’t subscribe to Morningstar, we recommend that you check it out to help you. It is a very expensive software program so you can request a complimentary report from us so that way you can invest more intelligently.
But honestly, if you’ve read this far down in the article, you’ll probably need some help (no offense). So, you’ll want to talk to a financial advisor. They’ll help you choose the best IRA (Traditional? Roth? SEP?) for your situation.
Our financial team understands what physicians need. Learn how our Financial Planning services can help you make smart decisions.
2. Choose an IRA Account
Once you determine how much help you want (or need), you’ll need to find a provider to handle your money.
It’s likely that your bank offers IRA plans. However, they may not be able to provide the financial advisory services you’re looking for. So avoid opening an IRA with your bank just because it seems like the easiest option, and research your options before choosing.
3. Open Your IRA
When you’ve made your decision, head to the provider’s website and open your account. If you’re working with a financial advisor, they’ll walk you through the process.
4. Deposit Money
It only takes a few minutes to open an IRA account. From that point, you can begin making contributions. Remember that retirement accounts have contribution limits, so you can only deposit an amount under that limit.
Also, it’s important to note that contribution limits cover all of your accounts. If you have a Roth IRA and a traditional IRA, you can only deposit up to the annual limit.
If you’re working with a financial advisor, they’ll direct you on how to choose investments, or potentially even handle the job themselves. If you’re managing the account yourself, you’ll be able to select investments on the provider’s website.
Other Taxable Account Investments for Physicians
401(k)s and IRAs are great ways to save money for retirement. Unfortunately, federal tax laws impose limits on how much you can invest in these plans.
For many physicians and other high-income earners, these options are too limiting. So, a lot of people choose to invest in other ways as well.
If you want to contribute more than your 401(k) and IRA allow, it’s time to consider investing in other areas.
Here are some additional options:
While an IRA plan allows you to invest your retirement savings into the stock market. You can also make stock market investments on your own outside of any financial institution.
There’s no doubt about it – investing in the stock market comes with risk. But, if you’re in it for the long term, you should see a profit. In fact, the average return on stock investments is 10% per year.
The key to making money with the stock market, however, is to do your research beforehand. Don’t buy stock in a company you know nothing about.
Some investors follow market trends to decide which stocks to pick. Others buy stock in companies that they have an interest in and want to support.
If you’re new to the stock market, it’s always best to consult with a broker who can provide you with sound professional advice.
Mutual funds are a way to invest your money into several stocks at once. Instead of just investing in Apple or Amazon, for example, you can invest in dozens of tech companies at the same time.
How does that work?
Mutual funds are managed by professional investment firms. They curate selections of different investments for their clients. Each client pools their money together to invest in the firm’s chosen stocks.
If you don’t have the time or interest in researching the stock market, this could be a great option for you.
Whereas buying stocks is a way to purchase ownership in an organization, bonds are a way to lend organizations money. In exchange for your investment, most of them will pay you interest up until the maturity date.
They tend to be a lot safer than stocks because the organization is obligated to pay you back at some point. However, because they involve fixed interest rates, the return isn’t as exciting as it can be with the stock market. Keep in mind that the value of your bonds has an inverse relationship with interest rates, so if interest rates rise, bond values drop. If rates fall, bond values rise. In light of this, bond values can fluctuate dramatically, so be careful when investing in them.
Tips to Maximize Your Retirement Savings Plan
Are you looking to save as much money as possible for retirement?
Here are a few ways you can do it:
1. Start Saving Today
Don’t wait until you’re in your late 30’s or early 40’s to start planning for retirement. Put a plan in motion and start saving the moment you begin working.
Saving even a small percentage of your salary in the first few years of your career can help you build a substantial nest egg. It’s always better to save something than nothing. Whenever possible, follow the 50/30/20 rule.
As you move forward in your career, think about your replacement rate. This is the amount of money you’ll need to live when you no longer earn a salary.
Most people need at least 70% of their yearly income to live a comfortable retirement. For example, if you earn $100k per year now, you’ll likely need at least $70k in annual retirement income to support your lifestyle.
2. Spend Less
The best way to save more is to limit your spending. It’s tempting to want the best vacation home and the finest new luxury car, but trying to keep up with the Joneses can put you in a financial bind.
Think about your long-term plans. Consider how you want to spend your retirement years. Try not to overspend and do what you can to cut down on unnecessary expenses.
If you own your own practice, you may want to think about merging it with other doctors. By teaming up with other physicians, you may cut down on overhead, reduce your expenses, and have more money to put aside for later in life.
3. Diversify Your Investments
Any good financial expert will tell you that diversification is important, but what does that mean?
It means, “don’t put all your eggs in one basket.”
If you’re dumping all of your savings into the stock market or real estate, you’re potentially making a big mistake. One shift in the economy could make your savings disappear. The strongest retirement plans involve a variety of different investments.
It’s best to have a range of investment channels that are all working for you at once. That way, you’ll have money left over if one investment goes sour.
4. Maximize Contributions
Whether you have a 401(k) plan or an IRA, take advantage of the contribution limits. Always invest as much money as your salary (and the tax laws) allow.
If you have an employer-sponsored retirement plan, find out if they offer a match program. Some employers may contribute nothing, but it’s more common to give you up to 3%-5% of your income subject to plan maximums.
If you’re fortunate, your employer may even offer a dollar-for-dollar match. Or, they might even contribute additional money outside of a matching program.
The point is this:
How to Start Saving for Retirement
A strong and stable retirement plan is essential for any physician, regardless of your employment status. Whether you work for yourself or under someone else, there are a few things you can do to put a retirement plan in place:
Hire a Financial Planner
Everyone has their area of expertise. As a physician, no one expects you to be a personal finance expert. It’s okay if you don’t understand every nuance of retirement accounts.
The best way to formulate a strong retirement plan is to hire a financial advisor. Just like patients rely on you for health care advice, you can rely on experts to help you create the best plan possible.
Just make sure you hire a planner who is independent and offers you a variety of detailed options. A good financial planner can explain all of the investment plans outlined above in greater detail.
Let us help you make smart investments.
Contact us for a Financial Planning Consultation today!
Develop a Realistic Savings Plan
Most people start by saving between 10% and 15% of their earnings for retirement. Whether you make weekly deposits or monthly deposits, that should put you in a position to live comfortably once you’re done working.
However, it’s also important to be realistic about your retirement goals. Don’t commit to investment schedule or strategy if you can’t stick with it. All it takes is one bad month to throw you off track.
So, set your sights on something manageable. As you move up in your career and pay your debts down, you’ll have the chance to increase your contribution percentage over time.
For physicians who want to give themselves the best possible odds, check out what we call the 50/30/20 rule. This is a home run for physicians who are able to be disciplined from day one of their careers.
If you haven’t already started planning for your retirement, it’s time to get the ball rolling.
Hire a financial planner to guide you and instruct you on all of your investment options. Take advantage of any 401(k) plans your employer offers. Set up an IRA or invest in stocks, bonds, mutual funds, exchange-traded funds, or index funds to create a strong and diverse portfolio.
As a hardworking physician who spent all those years in school, you deserve to live a happy, healthy life after retirement. Regardless of how much you earn per year, don’t underestimate the importance of retirement planning.
The best gift you can give yourself isn’t a brand new car — it’s the gift of financial security in your golden years.