A variety of factors over the last decade have changed how physicians view their careers in medicine. Now physicians may look at their practice as a vehicle for achieving financial independence rather than primarily as a life-long calling. Financial independence for most physicians means having the resources to allow you to choose the age to retire and to have a comfortable life style in retirement.
Start With a Plan
Ideally physicians should begin to plan for retirement as soon as they join a practice. Many times, though, raising a family, purchasing a home and starting a career get higher priority.
Whether your retirement is two years from now or two decades, planning for it should be at the top of your priority list. Without a clear goal and a plan to guide you toward that goal, you’re less likely to make smart decisions with your money. Where should you start in developing your plan for the future?
Your first step in the planning process is to find out exactly where you are now. Set some time aside to list all of the assets and liabilities you current have including cash, real property, investments, life insurance, mortgages, school loans and credit card debt.
Next determine your current annual income from your practice, from a spouse’s earnings and from investment income. Find out exactly how much you are spending each year for taxes, personal expenses, children’s education, debt service, etc.
After you know exactly where you are now, then make some reasonable guesses about future income, spending, investment returns and life expectancy for you and your spouse. At this point, after you’ve gathered your current income and expense information and your best guesses about the future, you should consult a financial planner to help you determine what income you will need in retirement and how much you will need to save to reach your goal. If that financial plan shows that you are currently not setting aside enough money for retirement, then it’s time to start making some changes. The most important thing, though, is that you will now have a plan.
You may need to consider delaying the time of retirement or delaying large purchases. Perhaps you need to review investment return and risk on the money that you are setting aside for the future.
Take a close look at your personal expenses to see where the money is going–maybe you can find some low-hanging fruit that you can cut out of the budget. Families should set up an annual expense budget just like businesses. We recommend that families keep track of their spending and prepare budgets by using software such as QuickBooks, Quicken or Peachtree. This software is relatively easy to use and will provide you with a framework and historical information to help you reach your goals.
Financial Planning Best Practices
Now that you know how much you need to set aside every year, and you have a plan to get there, there are a few best practices that can help you reach those goals.
- First, use discipline at the practice level. Annually review practice expenses and compare them, particularly your largest expenses for staffing and office space, to those of your peers. Determine what expenses could be reduced and prepare an annual budget to measure how the practice is doing in relation to the budget in holding down expenses.
If your medical practice isn’t already proactively setting aside funds for the annual retirement plan contributions, you may find that meeting that year-end liability requires some serious year-end scrambling. Your practice should save for those contributions during the year on a monthly basis.
- Max out your individual 401(k). In a tax-deferred retirement plan, such as a traditional 401(k), every dollar that you put into your plan grows tax-free until you withdraw that money during retirement and you achieve current year tax savings as well.
- Set aside money for Uncle Sam. Tax planning is an important component of financial planning. The goal is to have enough money available at year-end to pay your tax liability in full every year. Since interest rates in savings accounts are low right now, it would be better to withhold the maximum federal and state income taxes from your paycheck rather than face the possibility of having to pay interest and penalties if you can’t pay off the tax bill. Your accountant can help you plan for the amount of tax that you will need to withhold each year.
- Anticipate the unexpected. Most of us expect to work full time until we are ready to retire. But what if something happens—such as a disability—that makes that impossible? Adequate insurance coverage (disability, life and liability) is essential to provide the income that you and your family will need to make it to retirement if the unexpected happens.
Do you have questions about your personal financial plan or don’t know where to start planning for the future? Stockman Kast Ryan + CO can help you develop a road map, so please give us a call and get started with a plan for your financial future.