Financial Planning for Emergency Physicians

by | Jan 25, 2022 | Debt, Investing, Other Cool Stuff, Retirement, Taxes

financial planning for physicians This is a comprehensive resource guide covering all the key areas of financial planning for emergency physicians.  This post, and all of ER Doc Finance, is dedicated to helping you cut through the noise (most of our articles can be read in less than 5 minutes). Don’t be intimidated by the length of this post. You can jump to any section you’re interested by pressing the link below in the table of contents. This article will cover:

Not even sure where to start?  We offer a free Financial Pulse Assessment™ to help you get clarity on your finances.  Or sign up for our blog to get weekly concise money advice straight to your inbox.

Debt for Emergency Physicians

For most people, debt is a necessary evil. Debt can enhance your financial situation if used wisely. Use “good debt” in moderation and avoid “bad debt” as much as possible. “Good debt” buys an asset. An asset helps you earn income or grow your net worth. Two types of good debt are discussed below.

Student Loans

Most people need student loans to get through medical school. So, most people start out as an attending with negative net worth: no assets and big loans. Negative net worth on paper, that is. As a new attending, your #1 asset is your ability to earn a high income. Student loans (plus blood, sweat, and tears) bought you that asset. This is why student loans are good debt. Say you become an attending at age 30 and make $300K per year until you’re 60. 30 years x $300K = $9,000,000 in future earnings. Your net worth at age 30 doesn’t look so negative anymore! Take on as little debt as possible, and manage your debt wisely once you get out. Take on as little debt as possible:

  • Attend a cost-effective medical school. You don’t need the Harvard name to get a good job in a desirable location.
  • Know what your future monthly payment will be.
  • Know how many ED shifts you’ll work to make the payments.

Student Debt

Monthly Payment12-Hour Shifts/Month

$100,000

$1,061

0.7

$250,000

$2,652

1.8

$500,000$5,303

3.7 12-hour shifts just to pay your student loans!

Assumptions: 10-year payment period, 5% interest, $200/hour x 12 hours = $2,400 gross, minus 40% taxes = $1,440 net take-home from your 12-hour shift. Manage your debt wisely:

  • Decide if you’re going to pay off your debt yourself, or pursue a program like Public Service Loan Forgiveness that will help with your loans.
  • If you’re going to pay it off yourself:
    • Keep your living expenses as low as possible, and pay down debt aggressively.
    • Consider refinancing your loans to get a lower rate. Base this decision on your personal circumstances.

Additional Resources: The Best Blog for Student Loan Planning The Biggest Pros and Cons of Refinancing Student Loans

Mortgages

A mortgage is good debt if and only if you buy a home that is well within your means. As an attending, you can buy a home that is much bigger and nicer than you really need. Banks will happily lend you the money! A home is well within your means if and only if you can pay the mortgage and still:

  • Pay down your student loans aggressively, if not pursuing forgiveness.
  • Save for retirement and your kids’ education.
  • Enjoy life.

What type of mortgage should you use?

  • We strongly recommend a fixed rate mortgage. With a fixed rate loan, the interest rate and payment can never change.
  • The most common fixed rate mortgages are the 15-year and 30-year. The 30-year has a higher rate and a lower monthly payment.
  • Many ER docs love the 15-year’s lower rate and quicker payoff, but not the higher payment. If in doubt, go with the 30-year.  This gives you a lower payment in case cash flow gets tight.  You can always pay more than the minimum if you want to.

Consumer Debt

Consumer debt is “bad debt” because it doesn’t help you earn income or grow your net worth.  The biggest examples are credit cards and car loans. Credit card interest rates can be 15%, 20%, or more.  This is clearly bad debt.  But we do see ER docs come out of training with credit card debt sometimes.  No judgment!  School and training are expensive, and people do what they have to do. If you have credit card debt, pay it off ASAP, before you do anything else.  You’ll save a lot of interest and improve your credit score.  This will get you a better rate on your other loans. Car loans are bad debt too.  A vehicle goes down in value, and costs money to fuel and maintain.  Most of us need a car to get around, but buy one that’s well within your means.  Pay cash if you can.

  • If your current car still runs, hold onto it as long as possible.
  • If you need a new car, and you can’t pay cash, buy a modest used car (oops, sorry, “pre-owned”) and borrow as little as possible.
  • If you need a new car, and you don’t want to pay cash because you can get a great rate on a loan, that may be OK, but be sure the payments are well within your means.

Should I Pay Off Debt or Invest?

Most early-career and mid-career emergency physicians have student loans, a mortgage, and car loans.  They want to get out of debt, but also invest so they can retire someday.  So, they ask us, “Should I pay off debt or invest?” The answer is “Yes.”  (I love answering an either/or question with “Yes.”)  ER docs who work full-time can pay down debt, invest for the future, and enjoy life today. See our video and article for more detail: Should I Pay Off Debt or Invest? Paying off debt without a strategy is one of the 5 biggest financial mistakes ER doctors make.  If you want to learn more about the 5 biggest financial mistakes ER doctors make, and how to solve them, download our free eGuide.

Investing for Emergency Physicians

Your training prepared you for whatever shows up at the ED.  But it probably taught you little or nothing about investing.  You’re an expert in your field, but a target for financial salespeople.

Evidence-Based Investing

Practice evidence-based investing just as you do evidence-based medicine.  Evidence-based investing is grounded in peer-reviewed research, not commercials during golf tournaments.  It’s not exciting, but it works. Our video and article, What Is Evidence-Based Investing?, covers three key principles of evidence-based investing:

  • Passive > active
  • Global diversification
  • Factors can increase expected return

Below are two more important points about evidence-based investing.

There Is No Return Without Risk

In investing, we can’t control (or predict) what the stock and bond markets do.  This is because we can’t control (or predict) so many important variables.  To name just three:

  • Geopolitical events
  • Interest rates
  • Global pandemics

All this stuff we can’t control creates risk.  That’s good because making money without risk is impossible.  Look no further than your bank account, which has no risk but is paying 0.01%.

Focus on What You Can Control

You can control some key factors in investing.  Focus on these and tune out the rest.

  • Keep costs low. All else being equal, lower cost means more money in your pocket.  If Mutual Funds A and B hold the same stocks, but Fund B charges 0.25% more, buy Fund A and keep the extra 0.25%.
  • Own only the amount of stocks that you need to meet your goals. If a 50% stock portfolio will meet your goals, why take more risk than that?
  • Rebalance your portfolio as needed. “Rebalance” means sell what has done well to buy what hasn’t.  You maintain your desired risk level and force yourself to “buy low, sell high.”
    • Say your target is 50% stocks. If stocks do well and they’re now 55% of your portfolio, sell 5% stocks and buy bonds.  If stocks drop to 45% of your portfolio, sell 5% bonds and buy stocks.

Not sure if your portfolio is consistent with the principles of evidence-based investing?  Our free Financial Pulse Assessment™ includes an investment analysis to help answer that.

Retirement for Emergency Physicians

Below are some tips for success at each stage on the way to financial independence.

Early and Mid-Career

Earlier in your career, retirement isn’t the main focus, so detailed planning generally doesn’t make sense.  For now, focus on making smart financial decisions.

  • For major purchases like your house and cars, live below your means. You don’t need to sweat your daily latte, as long as you get the big things right.
  • Put retirement on autopilot. Have all your investments deducted from your paycheck or withdrawn from your bank account.  Let retirement happen in the background while family and career are in the foreground.
  • Your savings rate is the #1 driver of your success. It’s how much you save, not what you invest in.  Saving a higher percentage of your income gives you more choices sooner.  It makes you the doc who can give up nights and cut back on shifts.

Later Career

Later in your career, you’re on the tail end of major obligations like mortgage and kids’ education.  Detailed planning makes more sense now:

  • When can I cut back on shifts?
  • How much will my desired lifestyle cost?
  • Do I have enough savings to retire? If not now, when?

There may come a point when you don’t need to save anymore, but you should still wait a few years to start withdrawing from your savings.  Say you’re 55 and you’ve saved enough that you could retire at 60, if you don’t draw on your savings until then. In the meantime, work just enough to pay your current bills, since you don’t need to save anymore.  More time off will increase your quality of life and your enjoyment of your final working years.

Financially Independent (Retired)

While you worked, you were in the “accumulation phase” of your financial life.  You planned and saved for a future when you’d no longer be working. Now that future is here!  You’ve entered the “withdrawal phase.” The first year of retirement is a major shift in mindset for many ER docs.  With no paycheck coming in, you must get comfortable starting to spend down the resources you built so carefully. Nobody can predict all the financial storms that will occur during your retirement.  This leads some newly retired ER docs to spend cautiously early on. This is understandable, but you risk spending less than you can afford to, and denying yourself and your loved ones some experiences you could have had.  ER docs know better than anyone that you can’t take it with you! So, how do you know how much you can afford to spend, so you can go ahead and spend it? The answer is evidence-based planning.  As an example, let’s focus on one financial storm, a bad stock market. We don’t know when the next market correction will be, but we do know there will be several corrections over the rest of our lives.  This can make newly retired people reluctant to spend enough.

  • What if I take that big vacation right before my investments drop 20%? I might wish I had that money back.
  • What if my investments drop 20% right before I take that vacation? Should I still take the trip?

Evidence-based planning to the rescue!  Many studies have looked at how much you can withdraw from your investments each year without running out of money, even if you get poor investment returns. This is often referred to as a sustainable withdrawal rate (SWR).  To make a long story short, it is reasonable to withdraw 4% of your portfolio each year, with an annual inflation increase, and expect not to run out of money over a 30 to 40-year life expectancy. You can start a bit above 4%, if you’re willing to make some adjustments when the next market correction happens.  One simple remedy is to skip your inflation increase if your portfolio had a negative return last year.  This won’t cramp your style too much.

Taxes for Emergency Physicians

Once you’re an attending physician, taxes are one of your biggest expenses for life.  Don’t pay more than you have to.  The IRS is like a restaurant with terrible service.  Pay your bill, but don’t leave a tip! Good planning has one eye on the present and one on the future.  Always take steps to save tax now and later.  Below are ways to do this, both working and retired.

Working

While you’re working, saving tax now means taking every possible tax deduction.  Some deductions are well-known, others less so. A few well-known ideas to save tax now:

  • Submit all legitimate business expenses for reimbursement through your employer. Reimbursement is not taxable.
  • Use Flexible Spending Accounts (FSAs), if your employer offers them, for medical expenses and dependent care. With FSAs, you avoid taxes on your contributions, and withdrawals are tax-free for qualified expenses.
  • Contribute the maximum to all retirement accounts. The most common accounts are a 401(k) with a private employer, or a similar account called a 403(b) at an academic medical center or nonprofit hospital.  You can make your contributions pre-tax or Roth.
    • Choose pre-tax if you want to save tax now. With pre-tax, your contributions are not taxed now, but withdrawals in retirement are taxed.  Save now, pay later.
    • Sneak preview: we recommend Roth instead. Pay now, save later.  Further discussion later in this section.

A few lesser-known ideas:

  • If you have a high-deductible health plan (HDHP) option, seriously consider choosing it. Having an HDHP lets you contribute to a Health Savings Account (HSA).  An HSA is the most powerful retirement account because it’s triple-tax-free:
    • You get a tax deduction for your contributions, no matter how high your income is.
    • The money grows tax-deferred inside the HSA.
    • Withdrawals in retirement are tax-free for qualified medical expenses.
  • If you do locums work, track and deduct all legitimate business expenses. Deductions against locums income are doubly valuable because you avoid both income tax and self-employment tax.  Examples: laptop, part of your personal cell phone and internet, the home office deduction if you qualify, and CME if not reimbursed by your employer.
  • Tax prep tips:
    • Popular DIY tax software is useful, but you can still make a mistake or miss something. It’s not uncommon for an ER doc using DIY software to miss a 1099 for investment income, or report their backdoor Roth IRA contribution as taxable when it really isn’t.
    • All tax preparers are not created equal. Going cheap can backfire with missed tax savings and your time to deal with an IRS letter if a mistake was made.  You don’t need a massive CPA firm, but get referrals from people you trust.

While you’re working, there is one key way to save tax later: build tax diversification.  This means building up different buckets of money that will be taxed differently in retirement.  Once retired, you’ll have more flexibility to structure your income to minimize taxes.

Retired

During retirement and at your death, your hard-earned money will go to three places:

  • You and your family.
  • Your charities.
  • The government.

If you find it hard to get fired up about the last option, you need to save tax both now (this year) and later (over the rest of your lifetime and your family’s lifetimes). To save tax now, project your taxes in advance for the year, and use your tax diversification to stay in a low tax bracket.  This is a three-step process:

  • Determine your baseline income before any investment withdrawals. Examples are part-time work, Social Security, and possibly a pension if you were in academia.
  • Determine how much more you’ll need to meet your total living expenses. This will come from investments.
  • Withdraw from investments tax-efficiently. Withdrawals from pre-tax retirement accounts are taxed as ordinary income, just like you earned it at a job.  Withdraw from pre-tax only to the top of a low tax bracket (12% if possible).  Take the rest from accounts where you pay less or no tax.

To project your taxes, use your DIY software, or work with your financial advisor or CPA. You can also get a tax return analysis as part of our free Financial Pulse Assessment™. To save tax later, make decisions with an eye on the future.  Three examples:

  • Consider delaying Social Security. You can start anytime between 62 and 70.  Delaying to 70 lowers your taxable income before then.  This lets you withdraw more from investments in a lower tax bracket.  Delaying to 70 also gives you a higher Social Security payment for life.
  • Starting at 72, you have an annual required minimum distribution (RMD) from pre-tax retirement accounts. RMDs raise your taxable income and reduce your tax planning flexibility.  Withdraw from pre-tax accounts before age 72 to reduce your future RMDs.
  • Disinherit Uncle Sam! Do this by leaving the right assets to the right people.  See below under Charitable Giving for further detail.

Insurance for Emergency Physicians

With insurance, just like with investing, you’re a target for salespeople.  Make sure you have the amounts and types of coverage that are in your best interest. Do not delay getting proper coverage in place.  ER docs know better than anyone that a health event or accident could make you uninsurable anytime. Below, we discuss disability, life, and home & auto insurance.

Disability Insurance

Disability insurance replaces your income if you’re unable to work.  There are two types: short-term and long-term disability.  Here, we focus on long-term, which usually kicks in after 90 days. We’ll focus on two questions:

  • How much disability insurance can you get?
  • How much do you need?

You can only get enough coverage to replace part of your income.  A common max is 60% of gross income up to $X per month.  They won’t cover more than 60%, because they want you to return to work so they can stop paying benefits! You can get insurance through work (group coverage), and/or on your own (individual coverage).  Here, we focus on an attending physician who has group coverage through work. A common group policy covers 60% of gross income up to $15K/month ($180K/year). This means you’re insured on $300k of income ($300k x 60% = $180k). You need enough disability insurance to replace your take-home pay and save for retirement.  Many people focus on take-home pay, but neglect retirement savings. It’s critical to know if your benefit is taxable.  Say your benefit is $180K.  If taxable, you only net $126K assuming a 30% tax rate! Whether your benefit is taxable or tax-free depends on how the premium was paid.

  • Taxable benefit = Premium paid pre-tax. This means the person who paid the premium took a tax deduction for it.
  • Tax-free benefit = Premium paid after-tax. This means the person who paid the premium didn’t take a tax deduction for it.

An individual policy benefit is tax-free.  You paid the premium yourself, and individual disability premiums aren’t tax-deductible. For a group policy benefit, it depends:

  • Group benefit = Taxable if your employer pays the premium, or if the premium is deducted pre-tax on your paycheck.
  • Group benefit = Tax-free if you pay the entire premium and it’s an after-tax deduction on your paycheck.

If you’re a partner in a private group, it may be tougher to tell if your premium is paid pre-tax vs. after-tax.  If in doubt, ask your group’s accountant. If your group benefit would currently be taxable, lobby to have the premiums paid after-tax so the benefit is tax-free. Note:  This discussion is simplified for brevity.  Disability insurance is complex.  There are several other important issues, some of which we address in other blog posts.

Life Insurance

Life insurance replaces your income if you die.  Many docs have some group life insurance at work, often 1x or 2x gross income.  This discussion focuses on individual coverage you buy on your own outside of work. We will focus on two questions:

  • What type of life insurance should you buy?
  • How much do you need?

Broadly speaking, there are two types of life insurance: term and permanent (also called “whole life”). Term life insurance has only a death benefit.  If you die within the policy term, it pays out; otherwise, the policy ends with no payout.  Common terms are 10, 20, or 30 years.  Term life insurance is simpler and cheaper than permanent. Permanent life insurance has two components: a death benefit, and a cash value that can grow over time.  A permanent policy can stay in force for your entire life if you pay enough in premiums.  Permanent life insurance is more complex and much more costly than term. To be blunt, almost everyone should buy term insurance only.  Most people don’t need life insurance anymore once their house is paid off, their kids are through college, and they have enough retirement savings.  So, only pay for what you need: a death benefit for a certain period of time. Now let’s look at how much life insurance you need.  Common goals include:

  • Pay off the house so your family doesn’t need to move or struggle to make the payments.
  • Provide money to raise minor children, including childcare you’re currently doing yourself.
  • Pay for children’s education.
  • Supplement your surviving spouse’s future earnings and retirement savings so he/she won’t have to work dramatically harder or longer, or change the family’s standard of living.

Picking an exact amount is an art, not a science.  Add up the above amounts, then subtract any current life insurance death benefit and the family’s current retirement savings.  For example, if the above amounts total $2.5 million, and you have no life insurance and $500K in retirement savings, your life insurance need is $2 million. Then decide how long you’ll need insurance.  ER docs usually get 20-year or 30-year term. A final note: Term life insurance is cheap peace of mind as long as you’re in decent health, so do NOT skimp on coverage.  If in doubt, go with a higher amount. For example, $2 million of 20-year term is $708/year for a 35 year old male and $607/year for a 35 year old female (Assumptions: best health class, non-smoker, living in Wisconsin. Source: www.intelliquote.com, 11/2/2021).

Home & Auto Insurance

A full discussion of home & auto insurance is beyond the scope of this post.  The key issue for ER docs is to carry a high limit (minimum $500K) for liability on your home & auto insurance.  This is in case you (or your teenage kids) cause an accident, or someone is injured on your property. Supplement this with an “umbrella” policy that provides more liability coverage.  Umbrella premiums are cheap peace of mind.  For example, I pay $168/year (2021) for a $2 million umbrella.  Consider a minimum of $1 million in umbrella coverage if you’re a new attending and an amount of coverage equal to your net worth if you’re later in your career.

Estate Planning for Emergency Physicians

Estate planning answers this question: “When I die, what should happen to my loved ones and my money?”

  • Do you want to choose a guardian for your baby, or have a court do it for you?
  • Do you want your minor children to buy Ferraris when they turn 18, or use the money for college, buying a home, or starting a family or business?
  • Do you want the government to take money that could go to your heirs and charities?

As you can see, estate planning is critical.  Still, most ER docs don’t run right out and do it.  They’re not negligent, just human. Below, we discuss common roadblocks, then provide a checklist for doing your estate planning quickly and efficiently.

Common Roadblocks

First, estate planning forces us to contemplate our own mortality.  Few people, even ER docs, find this exciting.  Plus, there’s no sense of urgency when you’re healthy, and especially when you’re young. Second, estate planning sounds weighty and complex.  It requires time and mental bandwidth.  Both commodities are in short supply with ER docs! Third, estate planning requires legal documents.  Most people don’t relish hiring and paying an attorney, so they put it off.

Checklist for Efficient Estate Planning

Step 1: Sit down with your significant other and make the decisions below.

PrimaryAlternate
Guardian for minor kids
Financial trustee for kids until they control money
Age kids should control money

 

Spouse 1Spouse 2
PrimaryAltPrimaryAlt
Financial decision-maker
Health care decision-maker

Step 2: Hire an attorney who specializes in estate planning.  Give them your checklist and have them draft legal documents to implement it.  Core documents to expect:

  • Wills
  • Powers of attorney for finances and health care.
  • (Maybe) Revocable living trust.

We don’t recommend DIY estate planning software, nor using an attorney who doesn’t specialize in estate planning.  This would be like Googling or consulting an oncologist if you have a gunshot wound.  It’s well worth a few thousand dollars to get high-quality estate planning in place.  If you’re going to do it, do it right. Step 3: You’re not done once you sign the documents!  Ask the attorney how you should title your assets, and how to set up your beneficiary designations on retirement accounts and life insurance.  Then follow through and do it!  If you don’t, your assets may not go where you want them to. Note:  This discussion is simplified for brevity.  It is not a substitute for legal advice.  It summarizes the main issues to consider for a married couple, in a first marriage for both, with no children from other relationships.  A good attorney will flesh out the details further based on your individual situation.

Charitable Giving for Emergency Physicians

Many ER docs give here and there, but not as much or as impactfully as they’d like.  Student loans, mortgage, kids, and retirement all demand your money and your energy. Many docs postpone serious giving until retirement, when expenses are lower and bank accounts higher.  You can be intentional and make an impact while you’re working too though! Below, we discuss how to make giving happen, and how to maximize your tax benefits.  The strategies are organized by timeframe: working vs. retired.  Some strategies apply in both cases.

Working

The single best way for busy ER docs to make giving happen is to set up recurring donations from your bank account or credit card.  You do the work just once, then all your giving runs automatically. Monthly donations work well because they help both you and the charity plan.  You don’t have to carve out one-time lump sums, and the charity can count on the regular income.  Some partners in private groups who get periodic bonuses prefer to donate lump sums at bonus time.  This is fine too; just be sure you actually make the donations when life gets busy. Giving any amount is great.  If you want to give more, set an annual goal.  Increase gradually over time if needed.  Once a year, raise the amount to one or more charities.  A few good times to do this:

  • At year end if you like to set goals for the new year.
  • At tax time when you’re tallying up last year’s donations.
  • Right now =)

Retired

To retire, you built up significant assets.  Bigger dollars = bigger tax savings if you know what you’re doing!  Below are three heavy hitters. If you have a non-retirement investment account, you probably have some holdings that have gone up a lot in value.  In that case, donate appreciated securities instead of cash for potential big tax savings.

  • Say you bought a stock for $50K and it’s now worth $100K. Now say you want to donate $100K to charity.
  • If you sell the stock and give the $100K proceeds to charity, you owe $7,500 of tax ($50K gain x 15%).
  • If you give the stock to charity, they sell it tax-free and you pay no tax!

For pre-tax retirement accounts like Traditional IRAs and 401(k)s, you have a Required Minimum Distribution (RMD) starting at age 72.  If you don’t need your RMD to live on, transfer it directly to charity via a Qualified Charitable Distribution (QCD) and avoid the tax.

  • Say you’re age 72 with a $1 million Traditional IRA, and your federal tax bracket is 22%. In 2022, your RMD would be about $36,500 ($1,000,000 / 27.4).
  • Your tax would be about $8K ($36,500 * 22%).
  • If you transfer the $36,500 to charity, they pay no tax on it, and neither do you!

At your death, leave the right assets to the right people.  Everyone’s situation varies, but in general:

  • Make charitable bequests from pre-tax retirement accounts. The charity pays no tax on that $1 million Traditional IRA.  Human heirs like your kids usually have to withdraw the entire $1 million within ten years.  If they are in the 22% tax bracket, they lose $220K to taxes!

Leave other assets to your heirs.  Roth IRAs are the most powerful because your heirs pay no tax on withdrawals!  Non-retirement assets (house, investment account, etc.) are also favorable under current tax law.

Conclusion

We hope this post is a valuable resource as your navigate the key areas of financial planning for emergency physicians! When it comes to handling their finances, most ER docs face the same issue: they’re simply too busy to do it.  That’s where we come in.  We start with a FREE Financial Pulse Assessment™.  This is a 3-step process to help evaluate our services and make an informed decision about working together.

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