It’s easy to forget that doctors are average people just like everyone else. They have mortgages, bills, and student loans.
See this? 👆 That’s how retirement living is supposed to be.
But setting yourself up for a life like this after you hang up the white coat? Well, that’s anything but a day at the beach. In this comprehensive guide to physician retirement planning, we cover everything doctors need to do now to reserve a picturesque life after practice, including:
Let’s get started.
For many doctors, retirement planning is equal parts fantasy and torment. Joy comes from imaging the ideal retirement. You dream of endless days traveling, golfing, reading and napping. You consider it a reward for decades of hard work and dedication to your practice.
But before you live that dream, you endure the stress of preparation. You save what you can. You watch those savings grow in value and breathe easy. Then a market crash causes part of your nest egg to disappear. You hyperventilate. Each day you get closer to retirement, the doubt in your mind gets louder. You question every spending decision and how it will impact your retirement. You ask yourself:
The good news for many physicians is that they are on track to meet their retirement needs.
According to a 2015 study by Fidelity Investments, the median savings rate for physicians was 15.2 percent of their income.
The bad news is that many physicians are saving little to nothing. According to the same study, nearly 60 percent of female doctors were not making maximum contributions to a retirement plan. Roughly 45 percent of male physicians were not either.
In a 2013 survey by the American Medical Association, about half of responding physicians said they consider themselves behind in preparing for their financial futures.
A recent Medscape survey of physicians showed that 34 percent between the ages of 50 and 64 have a net worth under $1 million. And nearly a quarter of doctors 65 and older have a net worth under $1 million. Since a person’s net worth includes more than retirement savings, it’s likely these physicians do not have enough money for a comfortable retirement.
It’s not just physicians who fall behind. A 2018 study by Northwestern Mutual showed 21 percent of Americans have nothing saved for retirement. About a third of workers have less than $5,000 saved. According to Vanguard, here are the average 401(k) balances by age:
Of course, unless you’re retiring tomorrow, it’s never too late to save. But keep in mind the longer physicians wait to financially plan for their future, the more ground you have to make up. Are you now closer to retirement than you are on your first day of professional practice? If so, that means you will need to make some sacrifices in order to realize your retirement dreams.
If you haven’t started investing for retirement, the time to do so is right here, right now. Simple as that. In his 2018 shareholder letter, investor Warren Buffett told the story of his first investment. It illustrates how saving a little and letting it grow for decades can accumulate substantially.
The investment was three shares of Cities Service preferred stock that 11-year-old Buffett bought for $114.75 in March 1942. He wrote that, had he invested that money in a no-fee S&P 500 index fund, his stake would be worth more than $600,000 today. Think about that. A one-time investment of $100 — what you might spend to detail your car — can eventually grow large enough to finance a very nice house.
Sure, you may not have 77 years to accumulate retirement savings. But this just goes to show that saving a little today can go a long way in retirement.
In short, compound interest is “interest on interest.” By reinvesting interest (instead of paying it out), you earn interest not only on what you invested, but also on the previous interest you earned. It’s what makes many investors so successful.
For example, say you invest $10,000 today. Within a year, that money accumulates 8 percent interest, earning you $800 (10,000 x .08 = 800). Therefore, your principal balance is $10,800.
If the investment earns 8 percent the second year, you will then earn more than $800. You get 8 percent on the new balance of $10,800. That equals $864 in interest, giving you a second-year balance of $11,664. As you can see, compound interest accelerates an investment’s growth over time. Investing more money in subsequent years also gives you more interest to compound.
The more time you save, the more those small investments compound in size. For greater context, this example shows why you should start saving for retirement as soon as possible. Imagine you start saving $100 a month today. Not a huge amount, but certainly enough to get the ball rolling. After saving $100 each month for five years, you then decide to increase your monthly contribution to $300. You do that for another five years.
This hypothetical savings account grows at a 5 percent compound interest annually. At the end of 10 years, your investment would be worth $29,773. Now imagine you saved nothing the first five years. During the second five years, you saved $300 a month at 5 percent annual interest.
In this scenario, your investment would be worth $20,900 after 10 years. The inability to save just $100 a month in the early years costs you almost $10,000 in retirement savings.
That’s not all. Getting a head start in those early years in the first scenario means you have more interest compounding in later years.
Say both of these doctors, after 10 years, can save $15,000 a year. Like before, the annual return is 5 percent. In the 20th year of practicing medicine, the first doctor who saved $100 a month for the first five years has $246,600 for retirement.
The second doctor? He or she has $232,100. That’s $14,000 less despite saving the same amount of money for 15 out of 20 years as the first doctor.
And keep in mind the longer your horizon and the greater the returns on your investments, the more that compound interest pads your retirement savings.
If you’re earning an income, the time to save for retirement is now. Don’t wait another day.
Determining how much you need for retirement is a daunting task. It requires savers to predict decades into the future. Questions to consider include:
A common rule of thumb is to accumulate enough to withdraw 70 to 80 percent of your pre-retirement income annually. So if you earn $100,000 a year just before you retire, you want the ability to withdraw $70,000 to $80,000. That means living 25 years in retirement would require $1.75M to $2M in total assets.
Because the average doctor makes roughly twice as much as this example, chances are you’ll need more retirement funds. The same goes for if you live longer than 25 years. You may also need more than 70 to 80 percent of your pre-retirement income if:
On the other hand, some experts believe physicians will actually spend just 50 percent of their working income in retirement. Not only will they will pay much less in taxes in retirement, but they also won’t have anything left to save for. And most will earn enough in their working years to pay off all debt, including their mortgage, by the time they retire. Still, it’s easy to see how forecasting all of these unknowns makes retirement planning a major challenge.
It’s a question that crosses everyone’s mind sooner or later. Fortunately, there are a number of online retirement calculators that can provide a ballpark number to shoot for. They factor in a number of variables, such as:
For example, here’s what a 30-year-old new attending physician earning $300,000 will need to save for retirement by age 65:
Although insightful, clearly estimates will vary depending on the tool you use. So how do you determine what to trust? According to Fidelity, you should reach the following retirement saving milestones:
To hit these milestones, Fidelity suggests saving 15 percent of your income toward retirement each year. If you receive employer matching funds, you could contribute less than 15 percent. But if your total annual savings equal less than 15 percent for several years, you will have to make up that shortfall by saving more of your income.
Plus, many physicians will enjoy higher incomes in their working years than most. That’s why financial advisors often recommend that they save between 20 percent to 25 percent of their income for retirement. That’s because it will take more in retirement savings to continue the lifestyle most physicians become accustomed to.
People put off retirement savings for a number of reasons. For many, retirement appears far enough away to not make it an immediate priority. Others don’t think they are earning enough money to save for retirement. Some would simply rather splurge and enjoy life now than plan for tomorrow. Other reasons you may fall behind include:
Needless to say, saving requires a great deal of discipline. And doctors face more pressure than most when it comes to splurging on luxuries items (homes and cars) and experiences (travel and entertainment).
Like most people, doctors plan to maintain the same lifestyle in retirement that they had while working. This only further complicates their approach to retirement planning.
For those on the outside looking in, it may be difficult to understand why physicians struggle to adequately save for retirement. (After all, it’s among the highest-paying careers out there!) Truth be told, the two main challenges doctors face actually stem from the amount of education the profession requires. First and foremost, physicians get a much later start on their careers than other professionals:
All money aside, consider the amount of time spent here — at least a decade of their adult life. While others are able to the hit ground running in their respective careers and begin saving for retirement, doctors are left in the dust.
Second, the amount of student loan debt doctors begin their careers with leaves less money in their budgets for savings. About 75 percent of new doctors in the U.S. graduated with debt in 2017. That same year, the average new doctor entered practice with a whopping $161,772 in student debt.
IRS contribution limits for qualified retirement plans are another major challenge physicians must overcome. Why? Because limits don’t allow high-earning doctors to save as much of their income.
The contribution limit in 2021 for employees who participate in 401(k), 403(b), and most 457 plans, is $19,500 for people under age 50. Those over age 50 can contribute $26,000 for the year.
That means if you’re a doctor in your 40s and earning $300,000 a year, you can only save 6.3 percent of your income in a qualified retirement plan. Employer contributions might bump that percentage up a little, but it’s still far short of the 15 to 25 percent recommended by financial experts.
Given the obstacles physicians face, doctors need to get creative when it comes to retirement planning.
You can do so with investments other than qualified retirement plans. A few examples include:
Annuities are savings vehicles sold by insurance companies. They are designed to pay a stream of income or a lump sum. The amount is based on:
You can opt for lifetime income or an amount for a set period. You pay tax on the income above what is considered a return of your premium. There are no IRS contribution limits to an annuity. However, it’s important to note that you will not receive a tax deduction for that contribution.
You may need to invest in a diversified portfolio of investments held outside of a qualified retirement plan. A typical portfolio may include stocks, bonds, mutual funds, and/or real estate.
There are no tax deductions for investing outside of a qualified plan. In addition, many of these investments will require capital gains taxes if you sell the assets for more than you originally invested.
Recommended investments include:
Deferred compensation is an arrangement in which you earn income from an employer one year, but collect it in a future year. It’s typically reserved for executives or other high-earning individuals.
Deferred compensation plans are often used as supplemental retirement plans. The employer sets aside earned income, then pays it out during the employee’s retirement. Unlike other types of qualified retirement plans, there are no caps on the number of contributions made to a deferred compensation plan.
This can benefit high-earning employees who already contribute the maximum allowed amount to their IRAs and 401(k)s, but need to save more in order to maintain their lifestyles in retirement.
A major challenge of retirement planning is the combination of inflation and taxes. You have to save enough to cover the increasing cost of:
You may also owe tax bills in retirement even if you’re not earning a regular paycheck.
According to the Life Insurance and Market Research Association (LIMRA), 1 percent annual inflation over 20 years will cost you more than $34,000 in retirement savings. A 3 percent annual inflation rate over the same period eats up more than $117,000.
That means if you’re 20 years away from retirement, you have to save an extra $117,000 just to account for 3 percent annual inflation. You will also have to save enough to cover future federal tax obligations.
Withdrawals from traditional qualified retirement plans such as 401(k)s and IRAs are taxed as ordinary income. Whatever you pull out in a given year will be taxed as if you earned it on the job.
Any non-qualified investments you sell for retirement income will require capital gains taxes if you sold them for more than you invested. This includes stocks, shares of mutual funds, and real estate.
Depending on how much you earn from other sources, you may also owe taxes on your Social Security income.
What you pay in federal taxes will depend on:
Certain states will also require taxes on retirement income.
Another expense that can quickly erode your retirement savings is long-term care. To protect against this risk, you may want to consider long-term care insurance — not to be confused with disability insurance.
Long-term care (LTC) insurance helps cover the expenses associated with nursing homes, assisted living, and home health care. Whereas a disability can occur at any time in life, long-term care is generally something that occurs in retirement. And it’s not cheap. The current cost of long-term care can run between $80,000 and $90,000 annually.
Many companies that offer other types of insurance also provide LTC policies. If you become unable to care for yourself, the insurance policy will pay the contracted benefit to help you pay for professional care.
Many policies will pay a maximum daily, weekly, or monthly amount for care. It may be for a set number of years. Some policies establish a lifetime maximum coverage amount. Or you can buy a policy with a lifetime option. The more the per-day benefit and the longer the insurance company has to provide benefits, the higher your premium will be.
Like with other types of insurance, the LTC coverage only becomes more expensive with age. Some experts suggest buying LTC insurance in your mid-50s. This is usually an individual’s peak earning years. Also, most people in their 50s are relatively healthy. Therefore, they will pay far less than if they wait until their 60s.
If you’re just starting out with retirement savings, experts say you should first take advantage of tax-qualified retirement plans. These include:
For the sake of tax advantages, it is recommended that you contribute the maximum amount allowable by law in your qualified plans before investing in non-qualified plans.
In 2021, the maximum combined amount you can contribute for the year in all qualified plans is $19,500. If you are age 50 or older, you can contribute $26,000.
If you have a retirement plan sponsored by your employer, you should also take advantage of matching contributions. Employers will often match an employee’s contributions dollar-for-dollar up to a certain amount.
For example, an employer might match an employee’s contributions up to the first 5 percent of income the employee contributes. That means if the employee contributes 5 percent of their salary, the employer will also contribute 5 percent of the employee’s salary. Therefore, the employee will collect 10 percent of their salary in retirement funds for that year.
But if the employee only contributes 2 percent in this scenario, the employer will also only contribute 2 percent.
To maximize your retirement savings, you should contribute enough to your employer-sponsored retirement plan to collect the full matching contribution.
Plan sponsors provide a number of investment options for you to allocate your retirement funds. Depending on the plan, you may be able to invest in:
Some may even provide the option of allocating funds to precious metals and real estate.
Your risk tolerance, among other factors, will help you determine how much of your funds you want to allocate to each type of investment.
Some may want to invest 60 percent in bonds and 40 percent in stocks. Others may allocate 30 percent to CDs and split the remaining 70 percent split between:
As they say, to each their own.
A 401(k) is one of the most common retirement plans. They are set up by an employer for the benefit of employees. If your employer offers a 401(k), you can allocate a percentage of your salary toward retirement savings.
To contribute to a 401(k), you defer a percentage of your salary to the plan. Contributions are made on a pre-tax basis. That means the money you contribute reduces your taxable income. Your retirement funds also grow on a tax-deferred basis. You then pay income taxes on the amount you withdraw each year in retirement.
Because these plans are designed for retirement, you will pay a tax penalty for amounts withdrawn before you reach age 59.5. In addition, you are required to take minimum withdrawals beginning at age 70.5.
Currently, if you are under the age of 50, you can contribute a maximum of $19,000 annually. Those 50 and older can contribute $25,000.
Your employer may also contribute to your 401(k) through what are known as matching funds. The IRS annual limit for combined employee, employer, and profit-sharing contributions is $56,000.
Employer contributions are often subject to a vesting schedule. This means you may forfeit some of your employer contributions if you leave the employer within a certain timeframe.
For example, many employers set a vesting schedule of 20 percent a year. That means if you left employment after two years, you would be able to take 40 percent of the contributions your employer made to your individual plan. You would forfeit the remaining 60 percent. After five years, you would keep 100 percent of your employer’s contributions.
Vesting does not apply to your individual contributions. Those go with you anytime you change employment.
When you do leave a job, you can either roll over the accumulated and vested funds into your new employer’s 401(k) or into your own IRA. You can withdraw the funds, but you will pay income taxes on the amount withdrawn. You will also pay a significant tax penalty if you do so before reaching age 59.5.
If the plan allows, you can loan yourself money from your 401(k) account. You must pay loans back within a certain timeframe. Otherwise, you may incur a tax penalty for an early withdrawal.
A Safe Harbor 401(k) is designed for small business owners. They help owners deal with certain IRS regulations that can negatively impact small businesses.
Most 401(k) plans face an annual test to ensure they do not discriminate. If highly compensated employees or business owners are saving considerably more than other workers, it may raise a red flag with the IRS.
The test is whether the average contribution of highly compensated employees and owners with more than a 5 percent stake is more than 2 percent above the contributions of everyone else. The IRS can reject plans that fail this test. This means the plan may have to refund or reject contributions.
Unfortunately for small business owners, the small number of retirement plan participants can skew this test.
A Safe Harbor 401(k) is structured to automatically pass the test or avoid it. The employer must contribute to employees’ plans. Those contributions must be the same percentage of each employee’s salary.
A SIMPLE 401(k) plan is for small business owners with 100 or fewer employees. Its main benefit is that it is not subject to the nondiscrimination rules that apply to regular 401(k) plans.
Unlike a regular 401(k) plan, the employer must make either:
The Solo 401(k), also known as an Individual 401(k), is not a viable option for most physicians. Its biggest limitation is it can only be used by business owners who have no employees.
One of the benefits of a solo 401(k) is the contribution limits. In this plan, the IRS considers you both an employer and an employee. That means:
The main difference between a traditional 401(k) and Roth 401(k) is the tax treatment.
In a Roth plan, you do not get an immediate deduction for contributions to the plan. You will pay income taxes on the amount you put into the plan each year.
However, in retirement, you get to withdraw the money from the account tax-free. Otherwise, the same features and rules apply to both types of plans.
An Individual Retirement Account (IRA) is similar to a 401(k). The difference is that an IRA is established by you outside of your place of employment. You can set up an IRA through a bank or other financial institution.
IRAs are commonly used as a fall-back plan when you leave a job where you have a 401(k) established. You can transfer the funds into your own private IRA.
The most you can contribute to all of your IRAs is the smaller of your taxable compensation for the year or $6,000. The limit is $7,000 if you’re age 50 or older. This means if you don’t earn money during a year, you cannot make a contribution to an IRA.
The IRS considers contributions above those limits as excess contributions. An excess contribution can also occur if you contribute to an IRA after the age of 70.5.
Excess contributions are taxed at 6 percent per year if they remain in the IRA. To avoid the tax penalty, you have to withdraw the excess contributions plus interest.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If you or your spouse were covered by a retirement plan at work, deductions for IRA contributions are subject to income phase-out ranges. If neither of you was covered by a retirement plan at work, the deduction phase-outs do not apply.
As a physician, your income will likely impact whether you can take both an IRA deduction and a tax deduction for employer-sponsored plan contributions.
Here are the phase-out ranges:
A Simplified Employee Pension (SEP) is one of the most flexible self-employed retirement plans. Because it’s similar to setting up an IRA for you and your employees, it’s also one of the easiest to establish.
As an employer, you can contribute to a SEP for your employees up to the lesser of:
The IRS dictates that you make the same percentage contribution to your employees’ retirement accounts as your own contribution. So if you contribute 25 percent of your income, then you must also contribute 25 percent of your employees’ salaries to their accounts.
Another key limitation of this plan is that only the employer can contribute. Employees cannot contribute to their accounts under a SEP.
One of the key benefits of SEPs is that there are no minimum contributions dictated by the IRS. You can fund more into the plan when business is good and less when times are tight.
The Savings Incentive Match Plan for Employees (SIMPLE) is another way to save for retirement and provide a way for employees to do the same.
SIMPLE plans have a contribution limit of $13,000 in 2021. There is an additional $3,000 allowed for individuals 50 and older. You cannot have another retirement plan in addition to a SIMPLE IRA.
SIMPLE IRAs have an advantage over SEPs in that employees can contribute. The downside is that you as an employer is required to contribute to your employees’ accounts.
In doing so, you have two options.
Similar to their 401(k) counterparts, the main difference between a traditional IRA and Roth IRA is the tax treatment.
In a Roth plan, you do not get an immediate deduction for contributions to the plan. You will pay income taxes on the amount you put into the plan each year. However, in retirement, you get to withdraw the money from the account tax-free. Another benefit of Roth IRAs is that there are no required minimum distributions (RMDs).
Roth IRAs, however, have income limits to participate. In 2021, a single taxpayer must have adjusted gross income (AGI) below $137,000 to participate in a Roth IRA. Starting at $122,000, the amount you can contribute is reduced from the regular limit of $6,000 a year. For married filers, the maximum AGI is $203,000. The phase-out level is $193,000.
Otherwise, Roth and standard plans are quite similar. Annual contribution limits are the same. In addition, the money inside both plans grows tax-deferred.
When comparing Roth IRAs and Roth 401(k)s there are three main distinctions:
A nondeductible IRA is similar to a traditional IRA. As its name implies, the major difference is that you do not receive a tax deduction for contributions to the plan. Otherwise, the contribution limits are the same. The account grows tax-deferred.
This type of plan is best for high-income earners such as physicians. If your income is more than what is allowed for Roth IRAs, a nondeductible plan is an option. This also applies if your income rises above the tax-deductibility limits on regular IRAs.
Another common use is for married couples in which one spouse has a workplace savings plan and the other does not.
A spousal IRA enables a working spouse to contribute to an IRA in the name of a non-working spouse. This strategy method is designed to bypass the requirement that IRA contributors earn an income in the year they make contributions.
Basically, one spouse makes contributions to two IRAs:
IRAs cannot be held jointly. However, spouses can share their account distributions in retirement.
The total that married couples can contribute to IRAs is $12,000 in 2021. Those over 50 can contribute $14,000.
That being said, this strategy only works if the couple files a joint tax return. Spousal IRAs can be either traditional or Roth IRAs. The strategy adheres to the same annual contribution limits, income limits, and other provisions as well.
A self-directed IRA (SDIRA) gives investors more control over investment decisions. As the plan owner, you manage the IRA’s investment portfolio.
SDIRAs have more investment choices than stocks, bonds, and mutual funds. They can invest in:
Other than the assets they hold, SDIRAs have the same features and rules as a traditional or Roth IRA.
Investments are held in an account administered by a custodian or trustee. The firm that serves this role will not be a traditional brokerage. Instead, investors will need to find a company that specializes in SDIRAs.
A 403(b) plan is also known as a tax-sheltered annuity (TSA). Although similar to 401(k) plans, the main difference is who offers these retirement plans.
Employees of 501(c)(3) nonprofits, public schools, and cooperative hospital service organizations can participate in a 403(b).
A 403(b) has the same contribution limits and tax treatment as a 401(k). They also have the same penalty for early withdrawals.
One difference between a 401(k) and 403(b) is the ability to make additional contributions based on years of service. If the plan allows, an employee with 15 years of service can contribute an additional $3,000 a year for up to five years.
Another difference is the ability to elect lifetime income during retirement. This means your TSA will pay you a set amount for the rest of your life. That amount will be based on:
Cash-balance plans are a fast-growing segment in retirement planning. They are similar to a traditional pension plan in that they are insured by the Pension Benefit Guaranty Corporation (PBGC). If a cash-balance plan is terminated with insufficient funds to pay all promised benefits, the PBGC has the authority to assume trusteeship of the plan and pay benefits.
How cash-balance plans differ from pensions is that instead of a benefit based on your years of service to a company, a cash-balance plan creates a hypothetical account that grows in value based on annual compensation and a set annual interest rate.
These accounts are considered hypothetical because they do not reflect actual contributions to an account or actual gains and losses allocable to the account.
Cash-balance plans have much higher contribution limits than other retirement plan options. The limits increase with age and can reach up to $200,000 a year at older ages.
As mentioned previously, there’s no shortage of retirement planning apps and online calculators at your disposal.
While these tools can help you determine a ballpark estimate, you will also need a professional advisor. This individual will help you:
After all, physicians lead very busy lives. If a retirement planner is not part of your financial advisory team already, it’s time to add one now.
Paying your future self first is an ideal approach to retiring on time.
“Financial Independence, Retire Early”, otherwise known as FIRE, pushes this mindset to the next level. FIRE is a growing movement embraced by individuals who want to retire well before their 60s and 70s.
The first part of the equation is financial independence. This means having enough money saved that you never have to work again. If you save enough, then you have the option of retiring early.
The basic method of achieving FIRE is to spend as little and save as much of your income as possible. The bigger the gap between what you earn and what you live on, the sooner you achieve financial independence.
Once you retire, you may have the opportunity to relocate to a different state. Many retirees choose places for better weather, lower cost of living, or recreational opportunities. So where are the best places to retire? That largely depends on what you value most. Publications that rank the best and worst states for retirement usually consider affordability, tax liability, climate, health care access, and recreation and culture.
States that have been ranked high as being ideal for retirees include:
If you’re only concerned about taxes, the list of top states for retirees looks a little different. According to Kiplinger, Alaska is the most tax-friendly state for retirees. So, what makes AK so special?
For all of its tax benefits, Alaska does not rank high among overall retirement destinations. WalletHub ranks it 32nd, while Bankrate ranks it 36th. Both factor cost of living, quality of life, and health-care factors in their rankings. The remaining top 10 tax-friendly states for retirees, according to Kiplinger, include:
It’s easy to forget that doctors are average people just like everyone else. They have mortgages, bills, and student loans.
While most people likely think medicine is among the highest-paid careers, that’s not always true. How much you make entirely
What is a Personal Loan for Physicians? Doctors have unique financial situations at all different stages in their careers. For