From Residency to Retirement: Financial Planning for Physicians

Physicians typically have a bad reputation in business matters. I believe this is largely undeserved. Successful physicians make critical decisions about the well-being of their practice every day. You do this because you have defined your goals and objectives, have developed a strategy for achieving them, and have created a competent team to implement the visionary decisions.

However, in talking with many physicians, it is surprising how many have not taken the same approach with their personal finances. If you have not developed a strategy for achieving your personal goals and objectives, you can become vulnerable to promotions and pitches from salesmen whose interests are not always aligned with yours. Physicians are not bad at business - but we are, in many cases, hurried, uninformed and overly trusting.

Whether you are working with a financial advisor or have a do-it-yourself approach, there are a number of questions you should ask to determine if your planning process is in order:

1. Where am I financially? It is hard to chart a course if you don’t know your starting point. This includes a summary of your investment assets, life insurance policies, real estate holdings, and personal assets; it also includes an understanding of income from all sources and a listing of major expenses. In fact, the exercise of compiling this information is a huge step in becoming more financially organized.

2. What is my income tax situation? A detailed review of your recent tax returns can be very informative. The complicated tax code, with phase-out rules and the alternative minimum tax structure, can create situations where active intervention throughout the year is required. Everyone is entitled to take advantage of the tax code to minimize tax liability.

3. What are my costs of investing? This seems like a simple question, but in reality there are a number of obstacles to understanding what financial advice and investment management are actually costing you. Commissions, referral fees, the 12b-1 fees of mutual funds, and bid-asked spread can all be a drain on your final investment return. Investment costs can be controlled even though the markets cannot.

4. Is the advice I am receiving in my best interest? As physicians, we have an obligation to suggest the best treatment available for our patients, seeking informed consent before moving forward. A financial advisor who is a fiduciary (not all are) is held to the standard of placing your interests first. If there are any doubts - ask.

5. How much risk do I need to take? Academic research has shown that investment risk and return are related. It has also been shown that the past performance of a particular security, a market sector, or an active money manager is of little use in predicting the future. Using that research, it should be possible to develop investment portfolios that produce market rates of return while reducing portfolio volatility through broad global diversification. It should also be possible to tailor the expected risk of a portfolio to your needs and desires.

6. Do I have the necessary documents in place? It is surprising how many successful physicians do not have estate plan documents that reflect their current desires or needs. A will is simply not enough. The proper documents are important to ensure that your financial matters remain private, that your assets are transferred in an efficient manner to your heirs, and that estate taxes are minimized.

7. How much do I need for retirement?For my children’s education? To build that dream house? There are no standard answers to these types of questions. They can be addressed only after carefully considering the factors specific to your situation, such as current and future income, spending habits, and expected investment return. Financial projections that rely on averages or age are doomed to failure. You don’t consider yourself average, do you?

It takes time and expertise to develop a strategy to address the issues raised by these questions. Even busy physicians who do have the interest to self-manage should carefully consider whether their time is best spent trying to deal directly with these issues.

For most, it would be more efficient and effective to refer that job to a consultant who deals with these matters daily. Consider the approach of working with a financial planner who can provide objective information and suggestions while coordinating the work of your entire team of professionals. It might be the best way to allow you to better enjoy your family and free time.

Robert Tucker, MD, MBA, is an accredited investment fiduciary with Plancorp, a St. Louis-based financial planning and management firm. Tucker practiced orthopedics for more than 25 years while overseeing operations, strategic planning, and retirement plans. E-mail him here.