Retirement Planning for Doctors: Why It’s Tougher Than You Think

8 steps you should be taking to retire on time with the lifestyle you desire

It may be hard to believe that retirement planning can be tough for doctors – after all, the medical profession is one of the most lucrative careers one can choose. But there are more than a few sob stories of doctors who retired and then were forced back into practice by unforeseen financial difficulties.

Here’s why: Despite their high income, many doctors don’t max out their retirement plans and save enough for the future. Since physicians don’t typically hit their earning stride until their mid-30s, many get a late start on retirement saving. And during their first 10 years of practice – when compound investment growth makes the biggest impact on retirement accounts – doctors are burdened with student loan payments, the cost of establishing a practice, childcare expenses, and mortgage payments that make maximizing contributions to retirement plans a challenge.

After years of low-income internships and residencies, many doctors also feel entitled to big rewards when they finally start earning an attending’s salary. But overspending on fancy cars, big houses, and the latest gadgets drastically impact what’s left to sock into retirement accounts.

At the same time, it can be hard for young doctors – fresh from their residencies and excited about their new careers – to recognize the potential for future burnout that causes more than half of physicians to chase early retirement and wish they had saved more. A Becker’s Hospital Review report asserts that doctors are 15 times more likely to suffer burnout than any other profession.

But no matter the reason for not saving enough, the clock is still ticking. Let’s take a look at eight steps doctors should be taking to ensure they’re ready to retire on time while maintaining the lifestyle they desire.

1. Set a realistic goal. It may be hard to envision retiring from a job you just worked so hard to land. But in order to retire in the manner you choose, you need to set a date so you can understand how much you need to save to meet it. That means thinking through the where what, and when of retirement. If, later on, you decide to work for longer, your savings will simply err on the right side of the equation.
2. Track your monthly spending. A surprisingly large number of new retirees have never used a budget or measured what they spend. But knowing how much goes out every month isn’t just important – it’s essential. Keep a spending journal or use software like Mint.com to track monthly spending. Remember to include what you spend on credit cards and all the personal expenses you run through your practice, from medical insurance to cell phone bills. Chances are you’re going to be surprised to discover what you actually need to maintain your lifestyle – and it’s better to be surprised when you’re still working.
3. Consider other factors that will drain your savings. Now that you know how much income you’ll have and what you’ll spend, you’re all set, right? Wrong. If inflation is only 3 percent, your cost of living will double during the first 25 years of your retirement. The deferred taxes on IRAs, 401ks, and annuities may also gobble a third of what you withdraw from your retirement accounts. Long-term care is another added cost that’s important to consider. All of these factors should be included in your retirement plan.
4. Erase your debt. Debt-free except for your mortgage is still a lot of debt. Your retirement income may vary from year to year, but your mortgage remains constant – and that can lead to trouble. Refinancing a mortgage – or getting a new one if you move – can be tough after you retire. Choosing to drive your debt to zero before you retire is always a wise course of action.
5. Review the cost of running a practice. If running your practice is draining your finances and making it hard to save, it’s time to see where you can cut back. Perhaps a smaller space can help the practice justify its costs. Merging with another medical professional in the community is also an avenue to consider, as splitting the cost of running the business will let you save more.
6. Plan for family emergencies. Of course, you want to be there when your family needs you – and there’s a good chance that at some point, aging parents or adult children may call for help. By carefully considering what support could be needed for both generations of your family in advance and padding your nest egg accordingly, emergencies will be less likely to knock your retirement off track.
7. Don’t let a broken promise change the game. If you intend to rely on income from sources other than your own savings for retirement, you need to plan for the possibility that they may not come through as expected. Changes can be made to Social Security and Medicare, and financially-strapped organizations may fail to deliver the full pensions they promised. Your retirement planning needs to ensure that a broken promise doesn’t leave you in financial straits.
8. Focus on long-term benefits. If you don’t have time to keep track of the market, individual stock trading and high-risk investments aren’t the best fit. Instead, invest as much as you can into available retirement accounts, such as 401(k)s, health saving accounts (HSAs), and individual retirement accounts (IRAs) where you can choose options that offer long-term gains. Automating payments into these accounts eliminates the temptation to spend the money instead of saving it.

Of course, a successful retirement plan not only helps you save money but saves on taxes as well. Here are five tax-savvy options for doctors to consider that can form the foundation of a solid retirement plan:

• Tax-deferred retirement plans for doctors who are employees. Doctors who receive a W2 showing wage or salary can defer income by maximizing contributions to a workplace retirement plan, such as a 401(k) or 403(b). These plans allow account balances to grow tax-deferred and qualified distributions are taxed as ordinary income when withdrawn during retirement – when the doctor is most likely in a lower tax bracket.
• Tax-deferred retirement plans for self-employed doctors. Self-employed doctors and doctors who receive income reported on Form 1099 – including those who moonlight – have other options for retirement savings. These include SEP-IRAs, which enable participants to contribute more tax-deferred income to a traditional IRA than they could outside the plan; and one-participant 401(k) plans, which mirror traditional 401(k)s but are for single-owner practices or practices that only employ an owner and spouse.
• Tax-qualified pension plans for physician employers. Doctors who are self-employed may establish defined benefit (DB) plans, and doctors who are employees may be fortunate enough to work for an organization that offers one. Traditionally known as pension plans, DBs offer a fixed, pre-established benefit for retirement. Layering a defined benefit plan on top of a defined contribution plan like a 401(k) can enable doctors to substantially increase their own ability to save for retirement while costing little in additional contributions to other staff.
• Tax-advantaged personal retirement accounts for doctor families. Doctors who receive earned income from employment and their spouses who are younger than 70 ½ may contribute to an IRA. Keep in mind, however, that contributions may be non-deductible or partially deductible if the doctor or spouse are covered by workplace retirement plans as well.Options for tax-advantaged personal retirement accounts include traditional IRAs, spousal IRAs, and HSAs. Many doctors exceed income limits for Roth IRAs, where earnings and withdrawals are tax-free. But they may be able to make backdoor contributions by first contributing to a traditional IRA and then converting it to a Roth IRA, although that requires careful planning to avoid unnecessary taxation.
• Tax-efficient investments in taxable accounts. Doctors who max out contributions to their tax-advantaged retirement accounts can continue to invest in securities that are inherently tax-efficient. That includes tax-exempt bonds that can be federally or doubly tax-free if owned by a doctor who lives in the state where the bond was issued, as well as low-cost index funds, mutual funds, and stocks from U.S. corporations and certain foreign corporations that are taxed at favorable capital gains rates.

Practicing medicine is rewarding, challenging, and, in many cases, exhausting. Prioritizing savings today ensures that you can retire when you feel ready without making major adjustments to your lifestyle. A certified public accountant can help a physician design and execute a plan for a sustainable, secure, and comfortable retirement that helps them enjoy their golden years.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact on their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning, and to find out how we can help your business exceed your expectations.