Prolfic Solutions NY - Financial Planners for Physicians
FUNDAMENTALS

Retirement Planning for High-Earners and Physicians

Retirement planning involves determining:

qualitatively: how you would like to spend your time during your ‘non-working’ years

quantitatively: backing into the saving requirements, time horizon, expected returns and strategies (and subsequent tactics and economic environment) needed to achieve those goals while factoring in short and long-term expenses.

retirement planning for physicians

Generally speaking, retirement planning includes pinpointing and optimizing income sources, determining lifestyle expenses, ascertaining emotive and aspirational goals (for both you and your family), employing an investment and tax minimization strategy, and effectively managing overall assets and risk.

In other words, retirement planning can be defined as the continuation of the lifestyle you’ve attained during your active earning years and paying for those accompanying expenses built throughout your life (along with additional expenses older age usually requires to live comfortable when you no longer work) to provide the income necessary.

Despite conventional wisdom, retirement planning with ‘rule of thumb’ cookie-cutter advice is simply too generalized to be effective, especially in the case for high-earning households.

Spending habits vary, family dynamics are different and health challenges during retirement may completely change your situation, especially if you are blindsided by poor health or experience a critical accident.

Granted there are best practices when it comes to retirement planning, but the overarching strategy should be highly customized based on your preferences, parameters, unique circumstances and most importantly: where you envision yourself in the future. Net net, your situation will dictate the type of tactics you include in your retirement planning mix.

Important to note: your lifestyle during your active earning years will directly impact the complexity of your retirement planning.

TL;DR

Due to the compounding effect of money, retirement planning (agnostic to complexity level) is best addressed earlier in one’s career

Many popular investment vehicles, such as employer-sponsored plans (ESP) i.e. 401(k)s, 403(b)s, etc. allow individuals to grow their money with tax advantages

Retirement planning takes into account not only assets and income, but also future expenses (static, periodic or dynamic), liabilities and mortality / morbidity.

Specific to high-earners and physicians, retirement planning can be much more complex:

High-earners tend to spend more of their discretionary income and naturally have the ability to create larger lifestyles due to their higher earning potential over the years.

Frequently, they often lack the time nor have the inclination to become personal finance experts. They tend to focus on enriching their professional skills, which often grows their income and wealth, but not necessarily pragmatic, personal financial literacy.

Hyper-specific to physicians, they generally start careers later than other high-earning professionals. In addition, physicians often have accrued more educational debt and fewer years to accumulate adequate assets to sustain a lifestyle during their retirement years.

There is an inherent temptation, after meager earnings during training, to indulge in an overly lavish (and what may seem like an overdue) lifestyle upgrade. In turn, this may also make future retirement more costly and perhaps jeopardize your retirement lifestyle.

An oversimplified example: if you make $1M a year and spend half ($500K on lifestyle); you will need to accumulate enough money to maintain $500K of active lifestyle expenses during retirement, after taxes.

As a point of reference, that would require approximately $5M at 10% interest per year or approximately $6.1M planned bankruptcy after 25 years at $500K per year to continue that same income stream, not taking into consideration inflation and other factors.

High-earners and physicians come to realize that with wealth comes complexities. Even for retirement planning, there is a downstream effect: insurance planning and risk management, trusts and estate planning, tax mitigation and investment management becomes correlated in terms of complexity.

Tax mitigation planning becomes critical in order to:

  • maximize your income earned
  • maintain purchasing power to anticipate inflation
  • make use of every legal tax loophole within the tax code
  • remain agile in an always-shifting political climate

Insurance planning and risk management need to cover larger losses of life or income if unforeseen events occur and you cannot self-insure.

Trusts and estate planning must take into consideration withdrawal rate in retirement (decumulation), estate tax funding at the Federal and / or State tax level, and understanding of the tools that are legally available for you to utilize and mitigate you and your family’s overall tax exposure while potentially still retaining control.

RETIREMENT PLANNING STRATEGY

Think of these phases as the 'lens' to view retirement planning. Consider your current career lifecycle (and future trajectory) to build your retirement timeline:

ACCUMULATION

In this stage, you’re actively saving for retirement and building your net worth by utilizing investment strategies and intelligent budgeting. This is your plan: make sure it reflects all your and your family’s goals and aspirations for your retirement. Develop a trusted financial planning team. Your fiduciaries should assess your risk tolerance level using a specific questionnaire. From there, your ideal strategy can be built to reflect your ideal level of risk and return.

CONSERVATION

You have passed the accumulation stage and have acquired a substantial amount of retirement savings and wealth. In this stage, the strategy shifts to protect your earnings while allowing you to save more. You are closer to retirement and have an understanding or a good idea as to what your yearly retirement income needs to be to sustain your lifestyle. Your financial planning team needs to maximize assets, leverage every advantage and utilize every tax break available. As you move closer to retirement check your course: does the team need to adjust any part of the plan to account for changes in your needs? Do you have a good idea as to what your retirement lifestyle looks like? These are the types of thought starters your financial planning team should help you uncover the answers to.

DISTRIBUTION / DECUMULATION

A well-structured distribution / decumulation strategy is just as important as the accumulation phase. You have successfully accumulated your target retirement assets across various accounts and need to have a plan in place to properly utilize your earnings and maintain your pre-retirement lifestyle.

Retirement Planning Tactics

Quick Wins Framework

Explore tax-advantageous 'savings' then expand

Understand how much you need to save based on lifestyle expectations, then start with tax-favorable saving (i.e. max out 403(b), 401(k), etc.). Note: be wise about other early needs i.e. purchasing a home, education funding for children, etc.

Establish behavioral finance foundations

Start small; try putting away 20% of
your income post taxes, but before spending on lifestyle

Tax and interest 'savings' are just as important as ROI

Determine if you have outstanding loans, how to optimize payments or to refinance so that you may optimize your cash flow and redirect money to better uses, lifestyle and future

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Physicians are not your average working professionals.

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