Episode 3: Tips for building a retirement nestegg

Joel Greenwald, MD, CFP, is principal of Greenwald Wealth Management in St. Louis Park, Minnesota, a firm he founded more than two decades ago. Joel has provided financial advice and wealth management counseling to hundreds of medical professionals. As a former internist and longtime spouse of a doctor, Joel knows the unique challenges medical professionals face when it comes to planning and saving for their long term-financial security.

Joel frequently presents workshops on financial planning topics, and has spoken before the American College of Physicians, the Minnesota Medical Association and the Minnesota Dental Association, among others. He is also a long-time contributor to Medical Economics and other medical and dental publications.

The following interview with Greenwald is transcribed from a recent episode of the podcast “Off the Chart with Medical Economics” and has been edited for length and clarity. 

Q: Why do many doctors seem to have trouble saving for retirement, despite being among the country's highest earning professionals?

A: I would say that is multifactorial. First off, I don't think that difficulty saving for retirement is limited to physicians. There are certainly plenty of other highly paid folks who don't do a good job of saving for retirement. Spending money is fun. You know, having a big beautiful house is fun. Driving a fancy car is more fun than a run-of-the-mill car. Eating out is a big expense that we see. And the even bigger one is travel, travel to Europe travel to Asia. So, spending a lot and not being a good saver is just, I think, part of our culture.

Maybe something that's unique to physicians is the pent-up demand after all the years of training. You know, the four years of medical school, at least three years of residency, possibly more fellowship. Docs come out with the desire to keep up with their peers who maybe didn't go to medical school or again, just after making $55,000 in training, and now they go up to a salary that's four, five, six times or more than they were making as a resident. They want what's due to them. We certainly see that mentality.

I would say part of it for physicians and Americans in general is, we don't do a good job in this country of financial education. And it doesn't get any better in medical school or in residency or fellowship. Docs just don't learn this stuff.

Another thing that may play into it is that medicine is a helping profession. For some reason, the idea of helping people and thinking that money is important, seem to be contrary ideas. And so a lot of physicians are almost like, “I went into this to help people. I went into this because of my heart. And I'm going to ignore the money side.” It doesn't mean that they that one needs to be greedy, but certainly one should understand what's going on with your money.

I would say another thing that plays into this, and again, it's not unique to physicians, is family of origin. We see people who grew up without a lot of money, they can take one of two paths forward. One is that they're good about saving, maybe they don't even spend enough. On the other hand some people make up for the fact that they had deprivation when they were growing up.

Maybe the last thing Is that saving money takes hard work. And the hard work that it takes is understanding where your money goes. A lot of docs just don't bother to take the time to understand where their spending is going. And they figure it'll take care of itself or they'll just continue to make a nice income. So they'll never be a day of reckoning. And obviously, the day of reckoning is the day that they decide maybe they want to cut back. Maybe they don't want to practice anymore. Maybe they're not able to practice anymore. If they haven't been doing the savings, that's going to come back to hurt them.

Q: What percentage of their work income should doctors aim to replace when they retire and how many are in your experience have been able to meet that goal?

A: I've always been a little bit cautious of using the idea of replacing work income. That's not a term we use in the financial planning profession. What we look at is how much a physician wants to be able to spend in retirement. And I would break this into two different cohorts. The first cohort is young and mid- career physicians. It's very hard for those folks to get a handle on how much they want to be able to spend in retirement. If you were to ask a 40- or 45 -year-old doc, “how much do you want to be able to spend in retirement?” they don't have a clue, nor really should they. That's why at our firm, we use the 20% of gross income rule. So as long as our clients are saving 20% of their gross income, we're confident that they will be on track to retire at a reasonable age.

You mentioned earlier I've been doing this for over 20 years. So I've had a chance to see how some of this stuff turns out, you know, the doctors who saved 25, 30, 35%, they're in great shape. They can cut back when they want, they can retire when they want, and the ones who were saving 10% don't get to retire.

As far as the replacing income idea, sometimes we're asked, “What number do I have to accumulate and then I can be done working? And that obviously varies for everybody. We have clients who spend $4,000 a month in retirement, and they're perfectly happy. And when we point out to them, “you could afford to spend a lot more than that” they say, “No, we're doing all the things we want to do, we're enjoying life, spending more money would not bring us greater joy. We have other clients who are spending $20,000 a month. They just live a different lifestyle.

Once people get closer to retirement, then it's possible to run accurate retirement projections, because they have a good sense of what their baseline spending is. On top of that baseline spending, we break out health care as a separate expense, because we want to inflate that faster than regular inflation. We usually set aside a vacation bucket that runs until age 80. Because in our experience, a lot of our clients have pent up desires to travel and then at age 80, that gets cut back.

So to get back to your question, I guess it varies based on where they are in their life cycle. For younger docs 20% is good. If they're behind on their retirement savings, then it should be more than 20%. And for those closer to retirement, we can run a real robust financial plan to tell them where they are.

Q: What are some of the savings plans that are available to doctors? And can you talk a little bit about the advantages and drawbacks to each of them?

A: Sure. Most doctors are going to be familiar with the 401k or the 403b that they have at work. For those under age 50, they can put away $19,500. And for those 50 and above, they can put in $26,000 All doctors, in my opinion should be maxing out their retirement savings vehicle, the 401k or the 403b.

Q: Because those are tax advantaged?

A: Those are tax advantaged. One thing that we've been seeing is more and more retirement plans are allowing after-tax contributions to the 401k or 403b's.Traditionally it was only pre-tax you could put in but now you can put in after-tax money in our minds. For younger physicians, who are under 40, we have them do after-tax Roth contributions to the 401k. So really no tax advantage now. But on the back end, they don't have to pay any tax

Q: Explain what a Roth IRA is and how it differs from a regular IRA.

A: A traditional IRA, that's pre-tax money, so you don't have to pay income tax on that money when you put it in an account. The problem is, physicians can't use it [because they earn too much.] [But] the Roth is after-tax money. So you pay the tax on it the year you put it in, but it'll never be taxed again. So it grows all those years. And when you take it out in retirement, it's truly tax free.

I'm going to come to a related idea, and that's tax diversification. Imagine that you use your 401k at work as your primary savings vehicle, and you get to be 65 and you're ready to retire. What a lot of Doc's don't remember is, that money's never been taxed. For every dollar they take out, it counts as income. And so really, maybe 70% of it is theirs and 30% is the government's because the government is going to take their taxes.

So ideally, when our clients retire, we want them to have money in three different buckets. One is the 401k or 403b pre-tax money. The second would be the Roth bucket, which is tax free when they take it out. And the third is just a regular investment account, which is subject to capital gains taxes, but not to income tax. And the reason we like to see that is, it means that in any given year, when a doctor wants to spend $10,000 a month, we take that money from different buckets so that we can have them in the lowest tax bracket possible. So that's why having the Roth bucket is useful.

Another thing we get a lot of questions about are 457 plans. You can put up to $19,500 pre-tax into a 457. The problem with the 457 is that there's what's called a substantial risk of forfeiture. Meaning that if your employer goes broke, all the money that you've put into the 457 is now an asset of your employer. And you will be like every other creditor to get your money back. So we tend not to use a 457 for young physicians, and we do tend to use them for physicians closer to retirement.

Q: Are there ways in which retirement planning for somebody working for a large health system differs from someone who might own their own practice or as a partner in a small independent practice?

A: Yes, absolutely. Usually, when you work for your own practice, solo or a small group of doctors, they have a lot more flexibility. So they're going to have a 401k plan, but they're also going to have a 401k profit-sharing plan. So the doc will put in their $19,500, the practice can put in another roughly $40,000. If you're under age 50, and for those 50 and above, it's $63,500. So, particularly for a higher paying specialty, where the doctors can afford to put a lot of money into their retirement account, just adding a profit sharing plan to the existing 401k lets them put a lot more away for their for their retirement.

Q: All those sources can add up pretty quickly.

A: Absolutely. So you need the income to fund them. And you need to be savvy about just because you make $800,000 it's best to live as though you make $400,000 and then you'll have the money to fund these plans. The plans are no good if you're spending all your money and don't have money to put into them.

Q: A lot of doctors today are entering practice carrying pretty substantial student debt loans. How does that factor into retirement planning?

A: I'd say a few things. First of all, with good guidance, most of those people do find ways of paying off their student debt, while still being able to save 20% toward retirement. Something that's important to keep in mind right now, it's possible to refinance student debt at very low rates. So they might come out [of school] with loans at 7% or 8%, but they can pretty quickly refinance it to 3 or 4%, which makes a huge difference.

So the quick answer to your question is, while those numbers are intimidating, we see our clients smoothly pay off their debt while buying a first house, saving for retirement and living the lifestyle that they want. So handled properly, it's not an impediment to to retiring.

Q: Are you finding clients talking about retirement at a younger age or with fewer years in practice today than you were 10 or 20 years ago? And if so, what are the reasons behind that?

A: No, I wouldn't. I know we all read about burnout and discontent. Again, I've been doing this for 22 years. It's not like I have clients who come in and say, you’ve got to get me out tomorrow. They understand that it doesn't happen overnight. You have to accumulate enough money.

So no, I don't see people trying to get out early. What I will say is I sometimes will have a client say to me, I need to be done at 60, and the numbers just don't work in their case. What is very common in those cases is they work full-time until 60. And then they cut back to 80% or 60% of an FTE. They also try to have their work be in the areas of their practice that they like better, and get rid of the parts they don't like, which may be call or working on weekends. And doing that for three or five or seven years is incredibly powerful in that they're happier. And they're continuing to build their nest egg. More importantly, they're not having to start tapping their retirement funds as early.

I have a client who has been working with me pretty much since I started in this practice. And at age 50 she went to half time and now at 60 she just recently retired. And she told me the best thing she ever did was going to half time because over the last 10 years, she's been able to do all the things that she wanted to do that most people wait until they retire to do. So she feels like she's sort of done her bucket list. And yet, she was working half time and accumulating money. She was relatively young and healthy.

If you are miserable and working full time, and you say I'm gonna do this until 65, well, we all know we're not in as good shape, maybe health issues come up, etc. So hers is a dramatic example where she went to half time. But I can tell you, my clients who go even to 90% of full time, they are so much happier. Their lives are much more their own. And it's very do-able from a financial point of view.