Where Should Physicians Invest Extra Money?

Plenty of financial obstacles await physicians in 2014.

While average salaries ticked higher last year, pay will be increasingly tied to performance metrics and reimbursements are declining due to the Affordable Care Act. GlaxoSmithKline made headlines last year when it ended the practice of paying doctors to promote its products, and observers expect other pharma companies will follow.

And that's just the top line. High-income earners are bracing for 2013's tax bill in April, which will include the new Medicare surtax for couples earning more than $250,000. The same upper income taxpayers are bracing for the new 3.8 percent tax on net investment income.

Even worse, the juicy gains in recent years from stocks, bonds, and even farmland,  are looking long in the tooth. (Midwestern farmland values have increased more than 20 percent each year for the last three years, suggesting very difficult comparisons, and farm incomes are projected to drop this year, according to reports from the Federal Reserve Bank of Kansas City.)

Meanwhile, investor advocates nervously await potential fallout from the 2012 Jumpstart Our Business Startups law, which loosened restrictions on how fledgling companies raise money from so-called accredited investors (generally with incomes above $200,000). The fear: that affluent but time-strapped professionals (hello, doctor?) will succumb to pitches for highly speculative investments when they could be locking in financial security for the future.

Are you wondering how to avoid minefields and put your money to work? Here are five ways to invest your money this year:

1. Buy some peace of mind

Few physicians get out of residency without being approached with a confusing array of life insurance investment ideas.

If you have only $1,000 to $1,500 in "extra" cash to invest this year, consider applying it toward hiring an independent insurance expert to evaluate your current coverage or a new policy you've been pitched.

An insurance consultant can help clients blend term and whole-life policies to get the maximum coverage and investment earnings at lower commission cost, says Peter Katt, a fee-only insurance consultant in Mattawan, Mich.

Glenn Daily, a New York-based fee-only consultant who also blends clients' term and whole-life policies, says he often encounters physicians who don't fully understand their own policies and why they have them.

While certain whole-life insurance policies can be defended as a fixed-income investment in portfolios, Daily says, investors often don't understand that the rate of return can be unattractive, considering how long their money is tied up in the product.

To figure out how much insurance you need in the first place, check out www.esplanner.com, which offers suggested amounts based on your financial circumstances.

2. The best offense - pay down debt

Chances are you've refinanced your student and home loans in the last few years, so you might assume your low fixed rates are a great investment, especially as interest rates start climbing.

If you have a large percentage of the remainder of your savings in even lower-earning certificates of deposit or bonds, however, you might consider putting extra money into paying off or paying down the mortgage. Of course, make sure that move fits with your overall tax planning.

3. Going long - medical startups

With more physicians eschewing private practice for employed positions at hospitals - not to mention the growing scrutiny of side investments and outside consulting pay from drug companies - finding investments within the medical field has grown more complex.

Enter the JOBS Act, which loosens restrictions on so-called accredited investors who want to get in on the ground floor of a startup company.

Not surprisingly, consumer advocates worry that affluent but not necessarily savvy investors will lose a lot of money on startups, which have a high failure rate.

Around the country, business "incubators" are popping up in the healthcare field, competing for dollars from so-called angel investing groups and individuals.

"It's easier than ever to be an angel investor and that can be risky," says Nate Gross, cofounder and medical director for Rock Health, a San Francisco technology incubator for medical startups.

Acknowledging the risk factors inherent in putting up seed money for private startups, Rock Health hosts periodic workshops for prospective investors, where they talk about risks and potential pitfalls, says Priyanka Agarwal, a practicing hospitalist who also works as a strategist for Rock Health.

She advises physician investors to start with what they know, investing in companies that address their own practice area.

"At our workshops we cover the healthcare landscape, the mechanics of angel investing, typical deal structure, and due diligence," Agarwal says. "We help [potential investors] find mentors and colleagues to share ideas and use each other as sounding boards. There can be a lot of concerns about deal structure and investors getting unfavorable terms."

Websites like http://angel.co are also good resources for investors wishing to arm themselves with information, she says.

4. Stocks and bonds for the short run

After an impressive runup for stocks in 2013, market prognosticators are calling for more gains this year, albeit smaller ones, on a percentage basis.

Since year-end, market observers have been advising clients to bet on developed foreign stocks and U.S. cyclical, or economically sensitive, industries.

As for fixed income investments, with interest rates edging higher, experts say, stick to shorter-duration bonds and sacrifice credit quality for better yields.

5. Rethink your tax strategy

Another way to "invest" this year will be to keep more money away from the tax man, no small feat for higher-income taxpayers reeling from the new Medicare surtax and net investment income tax that began for 2013.

"In the past we would plan with about a three-year window. Now we're looking at things over a 10-year to 15-year horizon," says Robert Keebler, a tax adviser and partner with Keebler & Associates in Green Bay, Wis.

As mid- and late-career physicians look toward retirement, he says, they'll need to manage their income by "using up" their highest marginal tax rate each year - a process he calls bracket management. This avoids a big tax hike once clients turn 70½, when they must begin taking required minimum distributions from their tax-deferred retirement plans.

Keebler is advising clients to consider municipal bonds, life insurance (keep in mind the aforementioned caveats), rental real estate, and oil and gas investments, which can fly under the radar of some of the newest taxes on high earners.

Any individual investment needs to make sense for you, for other reasons besides taxes, Keebler says, but paying attention to some of these financial-planning tips could pay dividends by year-end.

Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. She holds a bachelor's degree and master's degree from the Medill School of Journalism at Northwestern University. She can be reached at editor@physicianspractice.com.

This article originally appeared in the March 2014 issue of Physicians Practice.