Physician retirement planning tips

Especially in uncertain tunes, it is crucial for physicians to build a plan that protects their financial future.

Creating a solid retirement plan can build peace of mind as you navigate the challenges of practicing medicine today. So what should you be doing?

Medical Economics® sat down with Joel Greenwald, M.D., CFP, president of Greenwald Wealth Management in St. Louis Park, Minnesota, to discuss important tips for physician retirement planning. This interview has been edited for length and clarity.

Medical Economics®: Why do many doctors seem to have trouble saving for retirement?

Greenwald: I would say that is multifactorial. First off, I don’t think that difficulty saving for retirement is limited to physicians. There are certainly plenty of other highly paid folks who don’t do a good job of saving for retirement. Spending money is fun. You know, having a big beautiful house is fun. Driving a fancy car is more fun than a run-of-the-mill car. Eating out is a big expense that we see. And the even bigger one is travel, travel to Europe, travel to Asia. So spending a lot and not being a good saver is just, I think, part of our culture.

Maybe something that’s unique to physicians is the pent-up demand after all the years of training. You know, the four years of medical school, at least three years of residency, possibly more fellowship. Doctors come out with the desire to keep up with their peers who maybe didn’t go to medical school. Or after making $55,000 a year in training, now they go up to a salary that’s four, five, six times or more than they were making as a resident. They want what’s due to them.

Part of it for physicians, and Americans in general, is we don’t do a good job in this country of providing financial education. And it doesn’t get any better in medical school or in residency or fellowship. Doctors just don’t learn this stuff.

Another thing that plays into it is that medicine is a helping profession. For some reason, the idea of helping people and thinking that money is important seem to be contrary ideas. And so a lot of physicians say to themselves, “I went into this to help people. And I’m going to ignore the money side.” It doesn’t mean that they need to be greedy, but certainly one should understand what’s going on with their money.

I would say another thing that plays into this, and, again, it’s not unique to physicians, is family of origin. We see people who grew up without a lot of money; they can take one of two paths forward. One is that they’re good about saving, maybe they don’t even spend enough. On the other hand, some people make up for the fact that they had deprivation when they were growing up.

Maybe the last thing is that saving money takes hard work. And the hard work that it takes is understanding where your money goes. A lot of doctors just don’t bother to take the time to understand where their spending is going. And they figure it’ll take care of itself or they’ll just continue to make a nice income. So they think there will never be a day of reckoning. And obviously, the day of reckoning is the day that they decide maybe they want to cut back. Maybe they don’t want to practice anymore. Maybe they’re not able to practice anymore. If they haven’t been doing the savings, that’s going to come back to hurt them.

ME: What percentage of their work income should doctors aim to replace when they retire?

Greenwald: What we look at is how much a physician wants to be able to spend in retirement. And I would break this into two different cohorts. The first cohort is young and mid-career physicians. It’s very hard for those folks to get a handle on how much they want to be able to spend in retirement. If you were to ask a 40- or 45-year-old doctor, “How much do you want to be able to spend in retirement?” they don’t have a clue, nor really should they. That’s why at our firm, we use the 20% of gross income rule. As long as our clients are saving 20% of their gross income, we’re confident they will be on track to retire.

I’ve been doing this for more than 20 years. So I’ve had a chance to see how some of this stuff turns out, you know, the doctors who saved 25, 30, 35%, they’re in great shape. They can cut back when they want, they can retire when they want. The ones who were saving 10% don’t get to retire.

As far as the replacing income idea, sometimes we’re asked, “What number do I have to accumulate and then I can be done working?” And that obviously varies for everybody. We have clients who spend $4,000 a month in retirement, and they’re perfectly happy. And when we point out to them, “You could afford to spend a lot more than that,” they say, “No, we’re doing all the things we want to do, we’re enjoying life, spending more money would not bring us greater joy.” We have other clients who spend $20,000 a month.

Once people get closer to retirement, then it’s possible to run accurate retirement projections, because they have a good sense of what their baseline spending is. On top of that baseline spending, we break out health care as a separate expense, because we want to inflate that faster than regular inflation. We usually set aside a vacation bucket that runs until age 80. In our experience, a lot of our clients have pent-up desires to travel, and then at age 80 that gets cut back.

SoI guess it varies based on where they are in their life cycle. For younger doctors, saving 20% is good. If they’re behind on their retirement savings, then it should be more than 20%. And for those closer to retirement, we can run a real robust financial plan to tell them where they are.

ME: What are some of the savings plans that are available
to doctors?

Greenwald: Most doctors are going to be familiar with the 401(k) or the 403(b) plans that they have at work. For those under age 50, they can put away $19,500 a year. And for those 50 and older, they can put in $25,000, All doctors, in my opinion should be maxing out their retirement savings vehicle.

One thing that we’ve been seeing is more and more retirement plans are allowing after-tax contributions to the 401(k) or 403(b).Traditionally, it was only pretax money you could put in, but now you can put in after-tax money. For younger physicians, who are under 40, we have them do after-tax Roth contributions to the 401(k). So no tax advantage now. But on the back end, they don’t have to pay any tax.

ME: Are you finding clients talking about retirement at a younger age?

Greenwald: No. I know we all read about burnout and discontent. I don’t see people trying to get out early. What I will say is, I sometimes will have a client say to me, I need to be done at 60, and the numbers just don’t work in their case. What is very common in those cases is they work full time until 60. And then they cut back to 80% or 60% of an full-time equivalent. They try to workin the areas of their practice that they like better, and get rid of the parts they don’t like.

Doing that for three or five or seven years is incredibly powerful in that they’re happier. And they’re continuing to build their nest egg.

I have a client who has been working with me pretty much since I started in this practice. And at age 50 she went to half time, and now at 60 she just recently retired. And she told me the best thing she ever did was going to half time because she’s been able to do all the things that she wanted to do. I can tell you, my clients who go even to 90% of full time, they are so much happier. Their lives are much more their own.