2016 Financial Playbook

With physician pay on the rise by some measures, now is a good time for doctors to take stock of how to keep more of those dollars in their pocket.

Whether it’s tapping home equity, rethinking how you  get financial advice or boosting retirement savings, making a few smart moves today can substantially improve one’s financial outlook, experts say.

For her physician clients who have extra income this year, financial adviser Darla Kashian of RBC Wealth Management in Minneapolis recommends putting it toward debt reduction and tax planning.

 Physicians beginning careers after long periods of training often start to “live the dream” a little too quickly, she says. “Many times, physicians then get to mid-career age and they aren’t quite as prepared to retire” as their counterparts in other professions.

The good news is, with average salaries relatively high, now is a great time to chip away aggressively at any lingering medical school or credit card debt. She also counsels clients to begin building reserve funds, separate from retirement accounts.

Saving the oft-recommended goal of six to 12 months’ worth of expenses can be a daunting task for affluent households spending $15,000 a month or more (a common
monthly outflow for affluent clients), she acknowledges, so she has clients start with amassing enough in reserve to cover one particular expense, and build from there. 

So how should physicians choose where to start? If disability insurance would replace 75% of take-home income, for example, they  should build an emergency fund to help cover the other 25% in case disaster strikes.

Kashian advocates making large contributions to Roth 401(k) retirement plans, either through a plan administered by the practice or through a so-called Solo 401(k), designed for self-employed business owners.

Unlike Roth IRAs, Roth 401(k)s allow contributions regardless of how much the owner earns, so all eligible plan participants can contribute up to the current limits-$18,000, plus $6,000 in catch-up contributions for those 50 and older. Business owners over 50 can sock away up to $59,000 in Solo 401(k) plans and business owners of all ages can save up to $53,000 in Simplified Employee Pension IRAs.

And while Roth contributions aren’t deductible, and thus don’t generate an immediate tax savings, they grow and can be withdrawn tax-free at retirement. With many economists forecasting future tax increases, it makes sense even for savers in high tax brackets to forego the deduction in favor of tax breaks down the road, she says.

Generally, a Roth makes tax sense if physicians plan to leave the assets in the account at least 15 years, notes Ginita Wall, CPA, CFP, a San Diego-based financial planner. For shorter time frames, she says, a traditional account with its upfront deduction typically provides a better return.

Beyond saving more and cutting debt, physicians should consider these strategies for getting the most out of the money they save, or simply be aware of a few trends that could affect them and their practice:

1. Retain a retainer

The retainer-based medical model has a counterpart in the financial services world, and it’s gaining traction. Fueled in part by the U.S. Department of Labor’s new fiduciary standards governing investment advice-which require advisers working with retirement accounts to act in their clients’ best interest-some financial industry observers are questioning the practice of charging investors based on the amount of assets they keep with an adviser. They contend the practice creates incentives for keeping more assets under management, when a more prudent strategy might be to pay off a mortgage, for example.  

Offering hourly and flat fees as well as some services compensated through a percentage of client assets, Rob Jones, MS, a financial planner with Hutchins & Haake LLC in Overland Park, Kansas, says more clients are gravitating to the flat-fee model. For $599, his firm offers a “financial checkup” that includes budgeting and saving, insurance reviews and asset allocation, which is the appropriate mix of stocks and bonds for a client’s risk tolerance.

Some advisers charge a retainer fee on an annual or monthly basis. Konstantin Litovsky, principal of Litovsky Asset Management in Newton, Massachusetts, for example, works on a retainer basis, charging clients about $4,800 a year (depending on the scope of work) as a flat fee that covers ongoing financial planning and advice on running private practice retirement plans. 

Most big firms still charge a percentage of client assets to manage investments and provide planning advice, and traditional brokerage services that charge by the transaction are still available. But be aware that new models are coming, and physicians should use the trend as a way to think about what key financial planning tasks they truly value, and how they are willing to pay for them.

2. Check plans

The federal government is looking hard at advice fees on 401(k) plans. A series of lawsuits brought in recent years by employees against their retirement plans allege the plans charged inappropriately high fees to participants. Most of the lawsuits involve large plans, but the Labor Department can, and does, audit small plans, and it is ultimately the plan sponsor (the employer) who has the fiduciary obligations to participants. 

So questioning fees charged by a plan provider can pay off not only for participants, but also as a fiduciary responsible for the plan, notes Robyn Credico, defined contribution consulting leader, North America, for advisory firm Willis Towers Watson. It’s also important to regularly benchmark a plan’s fees against industry averages in order to proactively look out for participants’ best interest.

“If an employee decides to make a claim to the Labor Department that things appear to be unfair, then you’ll need to show the fees are reasonable compared to other plans your size,” she says.

3. Check state changes

Several states are creating programs that require employers to offer their employees access to IRAs through the workplace if they don’t already have a retirement plan. Some even require them to enroll workers automatically, though employees can opt out. Illinois was among the first states to pioneer such plans, making them mandatory for businesses with at least 25 workers that don’t already offer retirement plans.

In June, the Pew Charitable Trusts analyzed current or proposed legislation with similar goals in 25 states. The idea has gained even more attention after a late-summer Labor Department rule clarified that the plans wouldn’t be subject to stringent federal oversight laws that govern traditional retirement plans.

4. Watch expenses

Expenses on mutual funds and exchange-traded funds (ETFs)-baskets of securities often tied to market indices that trade on various exchanges-are continuing to fall, so if physicians don’t know how much they are paying for the underlying investments in their portfolio, they should find out. The average expense ratio for all stock funds hovers around 68 cents for every $100 invested, according to the Investment Company Institute. 

5. Bank on homes

Reverse mortgages used to be a financial planning tool of last resort for seniors who are down to a small amount of remaining assets, but a revamp of the product has
lowered costs on the loans and made them more attractive as a tool for managing income and taxes for people 62 and older.

Now, the products are seen as helping retirees better manage their real estate assets along with their liquid investments, says Shelley Giordano, chair of the Funding Longevity Task Force and author of “What’s the Deal with Reverse Mortgages?” 

The federal reverse mortgage loan program, known as the Home Equity Conversion Mortgage (HECM) program, allows homeowners to borrow from their home equity, with principal and interest due upon the death of the last homeowner on the mortgage. Seniors are using the money for retirement income in lieu of making taxable withdrawals on IRAs in years when a withdrawal would bump them into the next-highest tax bracket in a given year, she says.

With some physicians working well into their 60s and 70s-many of whom got a late start on retirement saving and are living in large homes-the income can also help delay portfolio withdrawals, allowing retirement accounts to grow, she says.

The loans can be structured as lines of credit and borrowers can choose to make interest-only payments to keep the balance down in case borrowers expect they or their heirs may want to retain some equity in the property down the road.

It’s important to note that these mortgages are costlier than traditional mortgages and can be complicated, so physicians should make sure to check out multiple prospective lenders and understand the terms before signing. For more information, go to toolsforretirementplanning.com. 

6. Splitting assets

If a physician is preparing for a divorce this year, he or she should make sure to get accurate valuations on major assets such as their practice or any commercial buildings and homes, says financial planner Wall, who specializes in divorce situations. And physicians buying a spouse out of a home should calculate any taxes owed on the eventual sale of the property into the agreement, she says.

Wall has worked with several physicians who wanted to transfer ownership of a practice office building to a spouse as part of a divorce settlement and then pay the spouse rent. That’s usually not a good idea, she says. “It keeps them financially tied to one another, it’s difficult to agree on market rent and if the practice moves out, the spouse is stuck with a building that might be difficult to sell,” she says.

7. Hit the road

More physicians today are willing to relocate for better pay and a more hospitable tax climate, says Johanna Fox Turner, CFP, owner of Fox & Co. Wealth Management in Mayfield, Kentucky. And starting a career in a lower-tax state is an even smarter move if a goal is to maximize income, she says. 

8. Shop around for advice

When Parul Goyal, MD, left academic medicine a few years ago to open a private otolaryngology practice in Syracuse, New York, he was approached by the usual cadre of advisers pitching their often-pricey services, along with the golf games and free meals that typically accompany those relationships. When it came time to start a retirement plan for his small staff, however, he chose Betterment for Business, a so-called “robo” adviser that provides 401(k) plan administration services. 

“With just two employees, a receptionist and a medical assistant, it’s hard to offer competitive benefits,” says Goyal. He established a Safe Harbor 401(k) plan, a retirement plan that frees small business owners from certain requirements of larger employer plans, provided they meet minimum matching-fund benchmarks.

For big-picture legal and tax advice, he still uses a lawyer and an accountant, but the low annual fees-0.10% to 0.60%, depending on size of the plan-drove his decision to automate as much of the investment process as possible, he says. 

9. Vet advisers

For tasks that can’t be automated, or that  practice owners don’t want to automate, financial advisers can certainly add value. Vetting potential providers is extremely important, however. Some advisers focus exclusively on physician clients, but that alone shouldn’t lead a physician to hire one.

Physicians should select an adviser with plenty of experience working with clients like them, while keeping in mind any  special circumstances or assets that differentiate from other physicians, such as a high-earning spouse with stock options to manage. Or an adviser may work predominantly with academic physicians and be less helpful to someone running her own practice. Physicians should look for at least three candidates with deep experience with clients their age and in their general professional area. But don’t exclude advisers who serve a broad mix of clients.

10. Review estate plans

Many physicians created family limited partnerships years ago as estate tax and asset protection vehicles. With the estate tax exemption now $5.45 million per person, however, it’s tempting to forego starting such a plan or ignore existing ones. But new regulations-including recent challenges to the way assets are discounted in these partnerships-make it important to keep those legal structures current, says Mark Williamson, JD, partner with Alston & Bird and leader of the law firm’s wealth planning group. 

11. Cut debt

The median education debt for medical school graduates in 2015 was $183,000, according to the Association of American Medical Colleges (AAMC). That includes their undergraduate loans, but it’s still a daunting number for physicians entering practice. 

The AAMC offers a free download at www.aamc.org that helps graduates understand the repayment process.  It includes good tips for managing it all, such paying the minimum or requesting a lowering of the minimum on the lowest-interest loan physicians hold, while maximizing payments toward the highest-interest loans. Physicians can also often get an interest-rate reduction by signing up for automatic debits, which are time and money savers.