With reimbursement cuts and other financial threats on the horizon, having a future-oriented money strategy is more important than ever.
After a severe ski accident last year kept him off work for a month, David Saenger took stock of his financial life.
Even though he was ultimately able to avoid having to make a disability insurance claim, the scare of that happening so early in his career (he's now 44) made him thankful for the diligent saving he's been able to do and the moves he's made to shore up his most important financial asset: himself.
"Like a lot of specialty practices, we went through a huge shift that is still going on," says Saenger, a Eugene, Ore., cardiologist. "We had our own cardiac lab that we were running ourselves and it was working very well."
But when reimbursements were cut about six years ago, his salary tumbled about 40 percent. His group of specialists then joined a hospital and his income is higher today than before the change.
Both of the experiences, he says, taught him that his earning potential - financial advisers call it "human capital" - is by far his biggest wealth-building tool.
To be sure, there are still plenty of good ways to invest and minimize taxes, advisers say, but investments can't move the needle, so to speak, as much as saving more can. And by developing a good wealth-building strategy, Saenger can focus on what he loves the most.
"I enjoy [practicing] so much and really like having a purpose," says Saenger. "I do a really good job and enjoy it so much that I don't even think about retiring."
Mid-career to younger physicians like Saenger are coming to grips with the same realities hitting other professions, that wealth is something that's built, not guaranteed.
Calling early retirements a "fantasy" even for many of today's physicians, former neurologist turned author and investment adviser William Bernstein warns that practicing for a few decades and then expecting a portfolio to last through today's longer life expectancies simply won't work.
"It used to be that physicians had fairly predictable income paths, but current industry trends suggest that traditional income paths are less reliable," echoes Paula Hogan, a Milwaukee fee-only financial adviser who has several family members and clients who are physicians. She says she's a big believer in the human capital phenomenon.
If you're among the physicians feeling a little shaky about creating wealth, there are still some good strategies you can employ.
Think long term
Physicians who personally feel their earning potential is uncertain should think about taking a more sober asset-allocation strategy when deciding how much of their long-term savings to invest in stocks and equity-based mutual funds, Hogan says. They should also consider other long-term issues, such as where they expect to be in five years, or how the shifting market may affect them and prepare accordingly.
"Give even more thought to how your career could unfold and how you would like to position yourself as the industry changes," she says. "Some will switch to a salaried environment from a more entrepreneurial setting. Others might switch to an administrative role, or even an encore career."
Hogan advises physicians to stay networked in their field and thoroughly check out compensation arrangements and performance metrics if they move to a salaried position.
They should also set aside six months or more of living expenses to better position themselves for a potential career move.
"Having several months of living expenses stashed in a money market account makes it easier to negotiate" with an employer or take advantage of new training opportunities, she says.
Ben Utley, a financial planner whose practice works predominantly with physicians, and includes Saenger, agrees that many physicians today are worried about future income. But he hasn't yet had clients who took a big pay cut and haven't been able to recover.
Other than encouraging affluent clients last fall to minimize the impact of the fiscal cliff by pushing as much income as possible into the 2012 tax year, he hasn't changed his asset allocation strategy as a result of the fear around health reform and its impact on salaries.
He recommends mid-career physicians to generally have about half of their investments in equities and half in fixed-income strategies such as bonds.
Bernstein advocates a mid-career portfolio (for physicians roughly ages 45 to 60) of about 60 percent stocks and 40 percent bonds. By age 65 or around retirement, he aims to have a whopping 25 years of essential expenses in very conservative investments, with any remainder in stocks.
Anything more in equities, he says, is "skydiving without a parachute."
Don't rely solely on tax breaks
Many planners disagree with Bernstein's level of conservatism, but being cautious about risk in retirement is critical, says Daniel Horton, 64, who retired from a cardiology practice at the Marshfield Clinic in Marshfield, Wis., in 2010.
For part of his career, Horton also served on the board of trustees for the clinic's retirement plan and wrote frequently about investing for the clinic's in-house newsletter for physicians.
And one of the best pieces of advice to physicians is to not rely solely on tax breaks for savings.
"You need to save money in addition" to what's going into a 401(k) plan, IRA, or other tax-advantaged account, says Horton. "Once you're in retirement, it's nice to have the flexibility to draw from accounts with low tax consequences," either in taxable accounts or Roth retirement accounts, which take in after-tax contributions but grow and come out at retirement typically tax-free.
Particularly in an era of rising taxes, this can be difficult advice to follow, but Horton says having a pot of money that can be withdrawn without having to pay income taxes can help avoid withdrawals that throw you into a higher tax bracket.
Aim for realistic savings budget
Having a savings goal in mind isn't a holy grail, but it's at least a target that can keep you from overspending, Horton says. In his peak earning years, he generally aimed to spend a third of his income, save a third, and use the remaining third for taxes.
"Don't get sucked into a high spending level," he says.
Ultimately, he says, aim for 10 to 11 times your final annual pay before thinking about retirement, so if your total annual pay is $200,000, you should accumulate at least $2 million by retirement.
These are aggressive savings goals, to be sure, and they often fly straight into conflict with physicians' reputed high-spending ways.
Get over it, Hogan says.
"Understanding the cost of your current standard of living is the first step to being able to evaluate the impact on you of industry change," she says.
A couple of years before retiring, Horton traded his night call to other physicians eager for higher pay. It was a significant pay cut for him, but it extended his work life, a move financial advisers say is a great tradeoff.
Physicians will have to cover more of their retirement income through personal savings than will many other workers, says Horton. That's because Social Security replaces a smaller percentage of pay for affluent workers. And for physicians who own their practices, not having an employer match retirement plan contributions is another hurdle, financial advisers say.
Plan to preserve the nest egg
Once in retirement, don't think you'll be able to blindly ratchet up your spending at the rate of inflation, cautions Ross Levin, founding principal of Accredited Investors Inc. in Edina, Minn.
Levin, who has a large physician clientele base, has written extensively for investment industry publications about optimal withdrawal strategies for retirement.
An old rule of thumb that involves taking 4 percent of a portfolio for income in retirement's first year, then boosting that by inflation the next year, and then boosting that amount by inflation the following year, and so on, won't withstand terrible market conditions with any comfortable level of security, he says.
For his clients, about a third of them physicians, Levin might set aside 15 percent of a portfolio to lock up the first three years' worth of living expenses in retirement. The remainder is invested anywhere from 60 percent to 80 percent in stock-based mutual funds, he says.
"The studies all say that cash is a drag on returns, and it certainly is," Levin says. "But when the market goes down 20 percent, clients who have plenty of cash don't panic and disrupt the plan."
Staying flexible about withdrawals once in retirement is also vital.
Levin might start a client out at retirement by taking 5 percent of the portfolio for the first year's living expenses. That's higher than the rule-of-thumb 4 percent, but Levin doesn't bump up the figure automatically for inflation the next year.
Later, if the market falls substantially, a client may need to take a 5 percent cut in spending. And if any time the withdrawal amount would exceed 10 percent of the portfolio, there's another 5 percent cut, he says.
Then every five years in retirement, he recalculates a new spending policy based on long-term market trends, he says.
Charlie Stanton, 57, is a vascular surgeon in Eugene, Ore. (and another of Utley's clients) who plans to retire in about two years. His wife, Julie Gemmell, who is also a physician, plans to work about five more years, Stanton says.
"Years ago I played the investment game a bit and learned you can spend a lot of time and energy chasing returns," says Stanton, who through Utley invests now mostly in low-cost mutual funds tied to market indices.
He says the moves have paid off and he's planning to retire to continue running a vineyard with his wife.
"They say that if you want to end up in the wine business with $1 million, start with $2 million," he jokes, adding that the business is more about a passion for wine and a dislike for traditional retirement hobbies like golf than about making an income these days. "I'd just rather be out on my tractor."
Aggressively saving for college and retirement after paying down debt has put the couple in a strong position to retire, but younger physicians face an uncertain future and should not only save when they can but be careful when it comes to investing. Stanton cautions young physicians to stay away from exotic investments and stick solely to ones you understand.
Here are a few other tips when considering where to put your extra money:
• Maximize tax-advantaged savings vehicles first. Utley urges clients to save for college in state-run 529 college savings plans in addition to whatever retirement plans are available through work.
• Know investment risks. If your workplace offers additional plans, such as deferred compensation plans, make sure you understand the risks entirely, says Utley. Often the income in those accounts can be forfeited in certain business situations.
• Consider hiring an experienced tax planner. Good tax planning can save physicians a substantial amount of money throughout a career, so consider finding not only a tax preparer for your returns, but an experienced tax planner who can talk about long-term strategies, Utley said. One important question to ask a potential tax adviser is how he or she would handle a client's exposure to the alternative minimum tax, Utley says. If you can't understand what the adviser is saying, you might need to look for a better communicator, he says.
"This whole thing with physician reimbursement can get turned on its head at any time," he says. "We're in a situation now where you're going to need to pay for retirement when you can."
If you're among the physicians feeling a little shaky about creating wealth, there are still some good strategies you can employ:
•Consider taking a more sober asset-allocation strategy.
•Consider where you expect to be in five years and prepare accordingly.
•Having a savings goal in mind can keep you from overspending.
• Good tax planning can save you a substantial amount of money, so consider finding an experienced tax planner who can talk about long-term strategies.
Janet Kidd Stewart writes personal finance articles for Physicians Practice and writes a syndicated retirement column for the Chicago Tribune and other Tribune newspapers. She holds a bachelors and masters degree in journalism from Northwestern University. She can be reached at firstname.lastname@example.org.
This article originally appeared in the February 2013 issue of Physicians Practice.