Financial planning for physicians in an uncertain economy

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After a long stretch of relative stability, the U.S. economy has hit a rough patch in recent years. Inflation and interest rates have reached levels not seen in decades, and even though both have started to come down, many Americans feel pessimistic about their financial future.

What do these developments mean for doctors as they plan their savings and investment strategies? To find out, Medical Economics spoke with Dan Danford, CFP, founder and CEO of Family Investment Center in St. Joseph and Kansas City, Missouri. During his 39 years as an investment adviser, Danford has worked with dozens of physicians and other professionals. The interview has been edited for length and clarity.

Medical Economics: For a doctor just starting practice, what are the best ways to accumulate a retirement savings nest egg?

Dan Danforth, CFP: The first is to use the 401(k) or, if you work for a nonprofit, the 403(b). You want to put away the limit every year. Then be fairly aggressive in how you invest it. This is money you’re not going to touch for decades. Let it compound at a high rate.

Medical Economics: The benefit there is tax-free compounding, right?

Danforth: Absolutely. It will compound over time especially if you’re young. Then you also have some control when you retire about how fast to take it out and when are good times, tax-wise.

After that, it’s mostly lifestyle sorts of things. When doctors were going to school, they didn’t make a lot of money. Then when they finally get out of school they make what seems like a lot of money to them, so there’s a temptation to splurge. I don’t blame them, but it’s probably not in their long-run best interest.

Medical Economics: How do you persuade them of that?

Danforth: I try to show them whatever that number is they’re making that year, it’s likely to go up. So instead of saying, “I’m making $300,000 this year and I know next year I’m going to make $350,000 so I’m going to buy the car I want and the cabin on the lake,” I tell them to wait until they’re at the point where they’re actually making the money before spending it.

Sometimes a doctor who’s been living [frugally] sees a big [salary] number and it seems almost inexhaustible. And you have to show them that it is exhaustible, but if they wait for a few years they’ll be able to do the things they want to do.

Medical Economics: What’s been the impact of the inflation we’ve been experiencing on tax and financial strategies? Has that been affecting investment decisions or retirement planning?

Danforth: I think the biggest thing there is that we had 25 to 30 years of low inflation, so a lot of people today never really experienced high inflation.

The Federal Reserve’s inflation target is 2% a year. But even 2% to 3% inflation over 10 years makes a huge difference in the value of money. So that drives people into investments that can keep up. And in general, stocks do a pretty good job of keeping up with inflation.

The other thing is stock prices have been a little subdued over the past few years. I think there’s real growth opportunity there once we wring some of the fear out of the market. I think the economics are pretty good; it’s been people’s fear that’s kind of held things back.

Medical Economics: Interest rates are at their highest level in a long time and may go even higher. What does that mean for tax and financial planning strategies and the economy generally?

Danforth: One thing it means is that for the past few years any money you had in bonds or certificates of deposit, any of that [fixed income] stuff, you were getting practically nothing for it. That’s ticked up now. Some money market funds are paying over 4%, and some are even bumping up into the fives.

Let’s say you have an investment portfolio that’s 50% stocks and 50% bonds and other fixed-income stuff. Well, the 50% that’s been in bonds hasn’t been earning much in the past few years. Now all of a sudden you’ve gone from zero to 4% or 5% for half of your portfolio. That’s a pretty dramatic change and good for investors.

So one of the things we’d say is if you have money sitting in a bank account and it’s not earning anything, get invested someplace where you can earn 4% or 5% a year.

Medical Economics: You mentioned the importance of diversification in investment portfolios. With the understanding that everyone’s situation is different, is there a rule of thumb as to how an investment portfolio should be allocated?

Danforth: My general rule is to be more aggressive than you’re comfortable with. So if you’re comfortable with a 40% stock portfolio, it probably ought to be 50%. If you’re comfortable with 50%, it’d probably be better off at 60%.

I think many people are more risk-averse than they need to be. We know the averages tend to be in your favor if you’re a little more aggressive. So I tend to push people up to the edge of what they’re comfortable with because I know they’ll be rewarded for it in the long run.

Most people need some combination of safe investments and ones that involve some risk. And you don’t want it to be so growth-heavy that it keeps them up at night. But the more it’s in growth assets, the more they will have for retirement.

Medical Economics: Is there a value to being less aggressive in your investing approach as you get closer to retirement?

Danforth: I think that was more the case in the past than now because people live so much longer in retirement today. It used to be people lived seven years in retirement. That’s not how it is anymore. Now if there are spouses who are doing well in their 60s, chances are one of them will live another 30 years.

Medical Economics: That’s a nice problem to have.

Danforth: Yes, but not if you run out of money. You’re trying to build a nest egg so you don’t have to live just on Social Security. With that time span, you need to continue being fairly aggressive with investments.

Medical Economics: I want to ask about student debt because I know that’s a big issue for a lot of doctors, and not everyone agrees on the best ways to approach it. What’s your approach?

Danforth: Well, two things. One is, I’d look at all the debt the doctor has and go after the highest-costing debt first. That might be credit cards, it might be student debt. But that’s how I would work it, paying off the highest first.

But the wild card is [President Joe Biden] keeps talking about reducing or eliminating student debt. So I’d be reluctant to pay it off faster than necessary at this point. You’d feel terrible about paying it off and then the next week they come in and forgive everyone’s debt.

Medical Economics: Isn’t it more of an emotional decision for some people? They just don’t like having debt hanging over them?

Danforth: Yes, and I get it. It’s like paying off a home mortgage. There are some people who can’t sleep at night if they have a mortgage. And if that’s the case, you just pay it off and find another avenue to create your wealth.

Medical Economics: We’re starting tax filing season. Are there any changes in the tax code doctors should be aware of?

Danforth: Nothing significant, but it does bump up a little bit what you can do with retirement contributions. The maximum deferral to a 401(k) jumps to $23,000, and if you’re over 50 years old, there’s another $7,500 on top of that. The same goes for individual retirement accounts. The contribution now is $7,000 and I think that’s up a bit from 2023.

The Social Security COLA [cost-of-living adjustment] is up about 3.4% for next year. It’s not as much as it was for 2023 but it’s still a nice little bump. Not everyone wants to delay drawing Social Security. But between the ages of 65 or 66 to age 70, it goes up 8% a year. So waiting those four years can make a big difference in how much you get.

Medical Economics: What are the most common financial planning mistakes you see doctors make?

Danforth: I think they’re easy prey. Everyone’s promising them the moon. They’re going to tell the doctor to buy this or that stock and they’ll double their money real fast. Most of the time that doesn’t work. But if people keep calling you, at some point you start thinking maybe there’s something to it.

And not just doctors but a lot of Americans make bad spending decisions. We spend money on stuff that doesn’t maintain value very well. You buy that sparkling new car and two days later it’s worth $25,000 less. Making good spending decisions makes a huge difference in how you fare over time.

Medical Economics: How do you determine what’s a good spending decision?

Danforth: A lot of it’s just research. Like reading Consumer Reports, which has huge amounts of information on things like the resale value of different cars and which TVs and appliances are better. I don’t think a doctor should spend a lot of time poring over that stuff but it’s pretty easy to find information on which is the best.

Medical Economics: Do you see any differences in how people approach money or financial planning today versus when you started out?

Danforth: Yes. First of all, there’s a lot more information available today. It used to be financial advisers got paid because they knew stuff nobody else knew. That’s not the case anymore. I doubt I know anything that you couldn’t find out if you wanted to. But the value I bring is that you don’t have to look it all up yourself because I can help you do that.

I also think a lot of people think they’re doing a good job with investing and finance but they don’t know what they don’t know.

Medical Economics: Doctors would probably say the same thing about patients.

Danforth: That’s exactly right. I can read up on medical stuff but there’s a real value for me to sit down with my doctor and he helps me understand it and apply it to my own circumstances. And that’s what a good financial adviser does. There’s a real value in an ongoing relationship.