What’s your retirement plan?

When it comes to retirement, you either outlive your assets or they outlive you. The deciding factor is whether you have a formal, comprehensive physician retirement plan.

Depending on your specialty, you just spent the last 12 to 15 years of your life preparing for your “real job.” While your friends from undergrad have been in the workforce for 10 years, you have been increasing your debt load during medical school while working for a fraction of your worth during residency. You have given up one of the most important components of investing: Time.

Fortunately, physicians can earn a higher paycheck than most. Unfortunately, the temptation to purchase items that were unrealistic during residency (luxury cars, large houses) can be overwhelming.

The good news is that by exercising some common sense and creating a formal plan, accumulating the assets needed for your “work optional” lifestyle is not as difficult as it seems.

1. Create a budget beyond student loans

Creating a budget is a great idea for two reasons. First, it will give you an idea of how much you spend on necessities, the things you need to live. Secondly, it will determine your discretionary income, or surplus, after you cover the necessities.

From this discretionary income, you can determine how much you need to invest to achieve your target retirement age. There will be non-investing factors, such as the cost of setting up a practice or running expenses for a clinic. There will also be investing factors to consider, such as contributing to a taxable account vs. retirement accounts.

2. Start saving early

Once you decide on a “work optional” age, you’ll need to calculate how much to invest each year to accomplish your goal. You will also want to choose a hypothetical rate of return determined by your risk tolerance.

Everyone’s risk tolerance is different. If you are able to tolerate volatility and have a long-time horizon, a portfolio weighted more heavily in equities may be suitable for you. If market volatility gives you sleepless nights or you have a shorter timeline, a balanced portfolio consisting of equities and fixed income may be more suitable. Be sure to consult a financial professional if you are unsure of your risk tolerance.

Inflation is another factor to consider when creating a financial plan. Inflation is the rate at which the general level of prices for goods and services increases over time. Consequently, inflation can erode purchasing power, something to consider when building your portfolio.

Consider Dr. Jones, 30, fresh out of residency. She would like to have a “work-optional” lifestyle at age 66. She desires to withdraw $8,000 per month from her retirement accounts, adjusted for inflation. Using 3 percent inflation, Dr. Jones will need to withdraw roughly $24,000 per month at age 66 to maintain the same purchasing power as today. At a 4 percent withdrawal rate, she would need a retirement account of over $7 million!

Fortunately, time is a great ally for young physicians. What may seem daunting fresh out of residency can be achievable with some planning and discipline.

Don’t get caught up comparing numbers, as everyone’s situation is different. There are many factors that can influence your plan. Social security benefits, pensions, private business interests, liquidating shares of a surgical hospital or selling a practice can all impact your situation. The important thing is to be proactive and work with a qualified financial professional.

3. Establish an emergency fund

It’s recommended to have three to six months of expenses in a liquid, low-volatility account. If you are the primary income source in your household, six months should be the target. If your spouse is also a high earner, you could reduce your fund to cover three months.

Look for an FDIC-insured, high-yield savings account. As interest rates have gone up, so have the yield on these accounts. It’s best to avoid investments with volatility, such as individual stocks or equity funds. Think of this money as an emergency fund only, not a slush fund for entertainment purposes!

4. Work with a professional

Similar to the medical profession, the financial industry offers an array of designations. The term “financial advisor” can be used to describe a very diverse field of individuals. It is in your best interest to form a relationship with someone who can represent and work with several companies or investment products. Even as a resident or newly practicing physician, you need to be proactive with your retirement plan. 

Your financial numbers need to be monitored and reviewed just like your personal health. If you don’t like your current financial situation, it is much easier to make changes in your 30s and 40s than it is in your 60s.

James McNaughton, CFP, is a partner at Siouxland Investment Group, LLP, and financial adviser for Premier Physician Agency, LLC, a national consulting firm specializing in physician job search and contracts.

(Disclosure: James McNaughton is a registered representative and a registered investment adviser of Hilltop Securities Independent Network Inc. a registered broker-dealer and a registered investment adviser that does not provide tax or legal advice. Views and opinions expressed herein are solely the author’s, and not Hilltop Securities Independent Network Inc. member of FINRA and SIPC and a wholly owned subsidiary of Hilltop Holdings, INC. (NYSE: HTH), with headquarters at 1201 Elm Street, Suite 3500, Dallas, TX 75270 (214-859-1800). Premier Physician Agency, LLC is not affiliated with Hilltop Securities Independent Network Inc.)