This is the first article in a two part series on financial planning for doctors. In this article we look at the specific challenges physicians face and five must have components of their financial plan. In the second part, we will explore strategies for handling physician’s student debt.
Physicians can spend over a decade completing college, medical school, residency, and in some cases, fellowships. At the end of that time, many doctors are saddled with serious student loan debt. Between this debt and the later age at which they enter the work force, physicians have unique financial challenges.
If you’re a doctor, it’s worth considering hiring a financial advisor who has experience and expertise working specifically with individuals in your position. In addition, putting certain measures in place are crucial for a physician’s financial success.
Unique financial challenges
Do physicians face unique financial challenges? Do they need “special” tools to properly plan their financial futures? Brian J. Knabe of Savant Capital Management is both a doctor and a Certified Financial Planner. He says that the individual challenges may not be unique, but the combination of them is. In addition to entering the workforce later, Dr. Knabe says, “There are certain expectations of wealth and lifestyle associated with the medical profession, and many physicians feel pressure to live up to those expectations.”
Dr. David Rosen, a board certified anesthesiologist with nearly two decades residency experience specializing in obstetric, trauma, orthopedics, and regional blocks, helped found the Midwest Anesthesia Partners. “I have found that what is unique amongst physicians versus other highly educated and paid professionals is that they are never taught about money during their training, they don’t talk about it, and are actually encouraged not to — bad form,” Dr. Rosen explains. “They then finish after years of delayed gratification and inevitably start spending a lot, and usually don’t think about saving, retirement or the impact of delayed investment.”
Both Dr. Rosen and Dr. Knabe agree that many physicians are extremely confident and while this may serve them well in medical practice — helping them make good decisions for patient, for example — overconfidence can be damaging financially. “They think that since they are knowledgeable in medicine, that knowledge translates into their finances, and are more apt to listen to and act on a locker room tip from a colleague regarding a hot stock, than actually do research, or even consult with a professional advisor,” says Dr. Rosen.
Important components for a physician’s financial success
Most financial advisors agree that physicians should put certain protections and plans in place to increase their chances of financial success. The following are some important components of a physician’s successful financial plan.
- Disability insurance: All physicians should invest in disability insurance to protect their financial future. “It is important to remember that as a cash flow business, a private medical practice builds little or no equity overtime,” notes Dr. Knabe. He says the value of future earnings is a young physician’s largest asset. Dr. Rosen notes that he has several colleagues who had to retire prematurely, and without disability insurance, they’d have been in “big trouble.”
- Medical malpractice insurance: A 2010 American Medical Association report found that among doctors over the age of 55, 61% had been sued for malpractice. And while 65% of the claims are dismissed or dropped, they still cost doctors money (an average of $22,000). If a claim does go to trial, the average cost spikes to over $100,000. Given this, physicians should be sure to purchase a good malpractice policy from a reputable insurance carrier
- Other appropriate insurance: Dr. Knabe points out that physicians have a one in five chance of being on the wrong end of a lawsuit that’s outside of their practice. “Unfortunately, our society views doctors as having deep pockets, so they are automatically more vulnerable to lawsuits,” he says. To minimize risks, physicians should make sure they are insured in all areas, “including a substantial umbrella policy.”
- An estate plan: Both Dr. Knabe and Dr. Rosen stress that setting up a proper estate plan is crucial for physicians. Make sure you have your will, trust, living will, and powers of attorney for property and healthcare in place.
- An experienced financial planner. Dr. Knabe suggests a fee-only advisor — “someone who only gets paid by the client, and is able to offer objective advice. Working with someone who is paid by commissions often results in the purchase of expensive products.” He also reinforces the importance of a financial advisor who works with physicians. “Asset protection is often an overlooked by those unfamiliar with the profession. Someone familiar with the profession should be able to recognize that malpractice is only one of many risks faced by physicians.”
Physicians may want to keep other pieces of information in mind when considering their financial futures.
- “It’s not what you make. It’s what you spend.” Rosen points out that “Doctors are a classic example of the logic in this statement. I work with many doctors who live paycheck to paycheck despite a healthy income. Your friends who are in law or business have had 10 more years than you to amass their material possessions. Don’t try and catch up overnight.”
- Don’t make assumptions about the length of your career. “Don’t assume that you will want to work as a physician into your late 60s or 70s or beyond,” Dr. Knabe advises. “I occasionally see doctors in their 50s or 60s who come in for advice and help, and tell me that ‘I planned to work forever. I loved what I do, so why would I stop? But now things have changed, and I want (or need) to stop working. How can I do that?’” Retirement — forced or voluntary — may come sooner than expected.
- A doctor’s finances can affect his/her patient care. Financial stress “leads to high stress, increased burn out rates, and less job satisfaction,” says Dr. Rosen. This is all the more reason to seek professional advice from a financial advisor.
- Consider the source of advice. Dr. Rosen cautions physicians about taking financial advice from fellow doctors, “as many doctors do not the greatest financial advisors make!”
For physicians who wish to make the most of their education and income, while juggling student loan debt and a later-age entry into the job market, a financial advisor who has experience work with doctors is an excellent idea, and paying special attention to the five financial planning components will help ensure success.