Six Common Physician Retirement Planning Mistakes

For many physicians, the best way to accumulate wealth is through the early and regular funding of their retirement plan.  I’ve seen many expensive mistakes in this process and would like to share some of them with you.

1. Using an insurance or brokerage-based plan. Often these plans are “free” to the plan sponsors. I have never seen a single such plan that is worthwhile. In my opinion, these plans tend to be loaded with both covert and overt expenses, and they tend to be crammed full of fund choices that are literally terrible in terms of cost and performance.  Additionally, if you have employees, these plans are usually quite inflexible in taking advantage of designs that reduce overall costs and employee costs.

2. Not using a customized plan with an independent third-party administrator and fiduciary investment adviser.  I believe this is a very expensive mistake. Some of the large “low cost” fund families, such as Fidelity and Schwab, offer a decent customized planning process, with controlled costs and better choices, than you will ever get with an insurance company or brokerage.

3. Not funding a pretax-retirement plan early and aggressively.  Starting early will allow literally decades of tax-deferred earnings.  Since you are deducting the contributions when your taxes are high, and you will most likely take out distributions in a lower tax bracket, you will experience some powerful advantages.

4. Not considering a defined benefit plan if you are older than 45 and in independent practice.  These plans allow six figure contributions in addition to a traditional defined contribution plan, such as a 401K.  Not every practice can use this plan in a cost effective manner, but not at least considering such a plan is a mistake.

5. Using a SEP IRA instead of a 401K if you have employees.  A SEP IRA mandates a fixed percentage of contributions for all participants.  Using 401K plans almost always allows higher physician contributions with significantly lower employee costs.

6. Converting to Roth IRAs or funding a Roth 401K during your high income years.  I noted above that the arbitrage of deducting contributions in a high bracket and taking distributions in a lower bracket is one of the more powerful features of a retirement plan.  If you are making after tax conversions to a Roth IRA or a Roth 401K when you are in a high bracket, I’d argue that you are rowing upstream.  Every choice is individual, and there are other advantages to the Roth vehicles, but this must be carefully thought out.