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Best Ways for Doctors to Manage Wealth

Building and protecting wealth is an ideal strategy for doctors. But as a physician, you likely don’t have extra time to worry about investment strategies for your finances. Working with a financial advisor is a great way to manage your wealth, protect your assets, and attain your future goals. These goals can include opening a new practice, paying off medical school debt, and eventually retiring.

After spending years in training, many doctors may want to reap the benefit of their rewards prior to eliminating debt. While there is no right way to invest, working with a financial advisor can help you get out of debt and enjoy a comfortable future.

Why Is Building and Managing Wealth Important?

Building and managing your wealth is an important piece of financial stability. While everyone might have their own personal reasons to want to build wealth, the one thing that remains underlying is that wealth provides you with freedom.

By beginning the process of building your wealth, you’re creating a long-term goal that generates income through multiple sources. This allows your hard work to continue to pay off for your future. Building and managing wealth is vital to paying off debt, having a funded emergency fund, saving for retirement, acquiring assets, funding your future children’s education, and having financial freedom.

Disclaimer: Debt and Student Loans

Student loans and other debt is something that many physicians face. On average, recent medical school graduates report an astounding $170,000 worth of debt. Addressing this debt should be a large part of your financial management strategy for many years to come.

Set Your Financial Goals

Proper financial planning and wealth management starts with goal setting. This includes both short-, medium-, and long-term goals. Most people start with the end in mind, planning for future retirement. While you just spent years establishing your dream career, thinking of retirement may be the last thing on your mind. But, planning your future retirement and having shorter-term goals, will help you utilize your money for the future.

Financial advisors have found that 77% of their medical clients don’t have enough time to dedicate to their financial plan. If you fall into this category, you should work with a financial advisor to allow them to do the heavy lifting for you. They will initially work with you to determine your current financial status, future financial goals, and gauge your risk tolerance. Beyond that, they can begin the roadmap for how to utilize your wealth for future financial freedom.

Strategies to Preserve Wealth

Wealth preservation requires a diverse portfolio and a trusted preservation strategy. With all investment options there is a level of risk.

Cash Balance Plans

A cash balance plan is a type of pension plan that is ideal for doctors with their own practices. It is an IRS-qualified retirement plan that helps increase tax deductions and has a savings rate that is 4 times higher than a 401(k) plan.

Backdoor Roth IRA

People with high annual incomes, like physicians, do not qualify for Roth individual retirement accounts (IRAs). Because doctors’ earnings are typically above income limits, a backdoor Roth IRA conversion can be a great option.

If your income disqualifies you from accessing a Roth IRA, this strategy can help you save for retirement. How the process works is by opening a traditional IRA, making nondeductible contributions, and then converting it to a Roth IRA. You still must follow annual IRA contribution limits, but this is a solution that will help you reach your retirement goals. You will want your financial advisor or brokerage firm to help you with.

Trusts

Creating a Wealth Preservation Trust is a way for physicians to preserve their wealth and protect it from lawsuits that might occur in the future. High wealth individuals should consider this type of trust to protect your legacy for your loved ones. While no one wants to fear a lawsuit, the unfortunate reality is that lawsuits typically targeted toward high wealth targets.

If you are in the midst of a lawsuit, it is too late to create this type of financial protection. However, if you are a physician who wants to protect your wealth from future creditors, a wealth preservation trust is a powerful tool.

One thing to note, wealth preservation trusts do require you to concede control to a certain extent, so before moving forward speak to your financial planner.

Family Limited Partnership

Another way to protect your wealth and assets is to create a Family Limited Partnership (FLP). A FLP is a great way to protect your assets and personal wealth from future creditors. The assets can include your home, business interest, real estate investments, intellectual property, cash, bank accounts, brokerage accounts, jewelry, and other investments.

Family limited partnerships allows physicians to give their relatives interest in their estate, while allowing you to retain complete control over the partnership.

529 Saving Plan

529 Savings Plans are ways for individuals or couples to save for their children’s future education. Doctors can contribute up to $30,000 annually to this savings fund and can contribute a maximum of $150,000 total per child. College savings plans provide physicians children a tax-advantaged account well before they might need it. They are an excellent way to pre-fund a portion of your children’s forthcoming education.

Health Savings Account

Tax-advantaged savings vehicles are a great way for doctors to make tax-deductible contributions while enjoying tax-deferred growth. The tax-free distributions can be then utilized for qualified medical expenses.

Contributions on health savings accounts change annually with inflation, but as of 2021 individuals can contribute up to 3,600 and couples can contribute up to $7,000.

Retirement Plans

Doctors at hospitals likely are employees and not running their own practice. If you work within a hospital or medical group, you will have retirement plan options through your employer. You will likely have access to either a 401(b) account or a 401(k) account. Utilizing retirement accounts allows you to elect to have a portion of your paycheck withheld and deposited into the retirement account.

There are contribution limits for retirement plans. If your employer-sponsored retirement plan does not allow you to hit your financial targets, reach out to your financial planner to help guide you to other investment options.

Actions to Avoid When Managing Your Wealth

The most common mistake that doctors make when it comes to managing their wealth is simply not paying attention. Working with a financial advisor can help you manage your earnings and support you to ensure you are profitable long after you stop working.

Other actions you should avoid is spending too much money too early in your career. After spending years in residency, you are used to living below your means. If you spend too much money right out of the gate, you will miss an opportunity for compound interest for future wealth.

Last but not least, one of the biggest mistakes you should avoid when managing your wealth is trusting the wrong person. Not all financial advisors are created equal. The best advisor will have numerous physician clients that understand your unique financial situation. Take time to put in your research before blindly selecting who to trust to handle your hard-earned money.

How Much You Should Save 

While there is no hard-fast rule, it is typically recommended that doctors save at least 20% of their income for retirement and wealth building strategies. Having a diversified, developed portfolio can provide a comfortable future.

If you are a more established physician who is closer to retirement and has not saved as diligently as you would like, you will find that putting more toward your retirement savings is beneficial.

Know What Is in Your Limit

As a high wealth individual, you might have a different strategy than your friends, family, and patients. Understanding what is within your retirement account limits will help you and your financial advisor create strategies that ensure financial freedom well into your retirement.  

Avoid Putting Off Financial Planning Strategies

The American Medical Association found that only half of young physicians (below 40 years of age) work with a financial advisor. While it is understandable that you will continue to have a busy schedule, setting aside time to seek guidance can help doctors of any age establish wealth while managing their finances.

If you are not currently established with a financial advisor, you can find one nationwide that has the experience and comprehensive knowledge to help you. They will work with you to get out of debt, set up financial targets, and reach a comfortable retirement.