Contract negotiations. Family considerations. Personal finances. Your anticipation of the end of residency can easily be stymied by the overwhelming stress of finding a job and all that it entails.
Understanding the basic financial planning concepts for physicians will arm you with the knowledge you need to conduct an efficient interview with a financial professional and hopefully minimize any mistakes or unnecessary products or fees. In this Financial Fitness article, we’ll touch on some general concepts of retirement planning, life insurance, disability insurance and recommended estate documents.
There are three phases of an individual’s financial life cycle: asset accumulation, conservation or protection, and distribution.
For most professionals, asset accumulation begins in their early- to mid-20s and tends to last 25 to 30 years. Physicians start their asset accumulation phase much later than the average person - in some cases as late as their mid-30s. To overcome the late start, it is important to understand the value of compounding interest over time. Allow yourself to reap the rewards of your hard work, but understand that time is your best asset.
Most people will require 60 to 80 percent of their preretirement income to maintain a similar lifestyle in retirement. Work with an adviser who will assist you in calculating your future nest egg, and remain proactive with your plan. At a minimum, request annual or semi-annual meetings to review performance. It is much easier to alter your plan early in your career than a few years before retirement.
One of the most common questions I encounter from young physicians is, "How much life insurance do I need?" Unfortunately, there is no simple answer to that question. The amount of coverage needed depends on factors such as income or cash flow needs; expenses and debts; and spousal or dependents’ needs.
One of the most popular approaches used to determine an amount is the capital retention approach.
This method provides a death benefit amount that, along with other assets, is sufficient in providing a level of investment income that covers the projected needs of the family without invading the death benefit principal. If other income-producing assets are available, this would reduce the required death benefit.
"Term" is usually the most appropriate type of life insurance for young physicians, as it allows you to purchase the most death benefit while minimizing your premium. For example, if you purchased a $2.5 million term policy and your spouse could safely withdraw 4 percent ($100,000) without invading principal, would this amount of income be adequate to maintain a comfortable lifestyle? The ability to communicate between spouses regarding a gloomy topic is important.
Disability insurance is a way for you to insure one of your most valuable assets: your income. After years of medical education and training, you now have the ability to maximize your income.
Disability insurance will pay if you meet the insurance company’s definition of disabled. This is very important for a young physician who has not had the time to save for retirement.
As you interview for jobs, your prospective employer may or may not offer disability insurance. Most employer-offered policies are "plain vanilla" policies that may not contain language needed for your specialty.
For example, if you’re interviewing as an orthopedic surgeon and your employer does not offer an own-occupation disability policy, it may be in your best interest to purchase one. This will allow you to receive benefits if you are no longer able to perform the duties of an orthopedic surgeon but still earn income while working in another occupation or medical specialty. Generally, disability insurance should replace 60 to 70 percent of your gross income.
One of the most overlooked aspects of financial planning is the creating or updating of simple estate documents, all of which can be drafted by an attorney. Three documents to consider are:
Wills. This is a legal document that provides the will maker (the "testator") the opportunity to control the distribution of property. This document is extremely important for young families as it can name a guardian for minor children.
Living will or advance directive. This document can be drafted when in full capacity, giving personal directions to a physician regarding health care in the event of being severely disabled or suffering from a terminal illness.
Durable power of attorney for health care. This is a written document executed by one person (the principal) authorizing someone else to make medical decisions on the principal’s behalf. This power takes effect when the principal cannot give informed consent to a medical decision and not just in the event that the principal has a terminal illness.
Before you leave residency, examine your existing situation to establish a starting point. Educate yourself on the products and services you’ll need, and find an adviser who can help guide you through these decisions.
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 registered investment adviser representative of SWS Financial Services, Inc., a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Views and opinions expressed herein are solely the author’s, and SWS Financial Services, a member of FINRA and SIPC and a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH), with headquarters at 1201 Elm St., Ste 3500, Dallas, TX 75270 (214-859-1800). Premier Physician Agency, LLC is not affiliated with SWS Financial Services, Inc.)