Financial Planning Focus: Physicians - Part III: The Prime Time

After the financial foundation has been set in the first five years after residency, there may be lifestyle adjustments to make for some. Now that your loans are paid off, you are saving adequately for retirement and you are properly insured, you might find yourself with some extra income and looking for answers as to what to do with it.

1. Lifestyle Adjustments

As you have worked your butt off for the past 15 years in school, residency, and paying off loans, you should now have the resources to splurge a bit. A growing family may cause you to settle into a larger home or generate interest in a vacation property. Even if you have the resources to pay cash for either, it would be wise to consult a financial advisor on how much to put as a down payment due to the low interest rate environment that we live in. With a low interest rate and the tax deductibility of interest, it might make more sense to carry a mortgage and invest any extra earnings as opposed to paying the house off outright.

2. Education Savings

If you plan on paying for all or part of a child’s education (private primary, private high school, or secondary), it would make sense to start a 529 Education Savings Plan. The benefits of a 529 plan include tax sheltered investment earnings, a possible state tax deduction for those who contribute to it and a vehicle to accept gifts from parents, grandparents, godparents, etc. The funds and investment earnings in the account can be withdrawn tax free if used for primary, secondary and graduate education expenses such as tuition, fees, books, supplies, computer-related expenses and even room and board for someone who is at least a half-time student. It is a fairly flexible account in terms of beneficiary designation, which allows for it to be used for various family members and can be a great estate planning tool for parents and grandparents in terms of gifting.  

3. Investing Excess Reserves

After maxing out your 401k and making back door IRA contributions (See Part II for details), it is important to consider taxes when investing any remaining savings. There are numerous techniques that financial advisors may implement to reduce your overall tax liability when it comes to investments. A few to mention would be AMT efficiency, minimizing fund distribution exposure, tax loss harvesting, capital gain management, investing in tax-exempt securities (municipal bonds), and asset location strategies. If your current advisor doesn’t implement some or most of these strategies for you, it may be wise to seek out a Certified Financial Planner™ (CFP®), with the proper education and background to help you invest in a tax efficient manner. 

4. Alternative Investments

In this stage, it is important to understand that after you have built a solid financial foundation and have some excess earnings available to be invested, you have access to some investments that the common person doesn’t have access to. Alternative investments are a financial industry term that includes investments in private equity, hedge funds, managed futures, real estate, commodities and derivative contracts. Most of which are foreign language to the common investor, however due to certain income and net worth requirements, doctors and other high earning occupations have access to these investments that most do not. They are not available to the average investor because they carry more risk, and as the saying goes, with more risk there should potentially be more return. It may make sense to allocate a portion of your overall portfolio to alternative investments in order to enhance your overall return. For those do it yourselfers, these types of investments are typically only offered through registered financial firms and you would want to consult a financial advisor to help you choose the right investment for you in this case.

With the ability to earn more money, there comes additional financial responsibilities, all of which become more complex and complicated. There is no template for physicians telling them what to do. However, I hope you’ll find the principles and explanations in this series of articles will help you make some of those decisions.

The topics discussed above are generic in nature and are provided for educational purposes only. This paper does not consider or address any individual’s actual facts and, as such, it is not individual advice. You must always consider and apply your unique set of circumstances within these broader topics. All-Pro Advisors is not an accounting or law firm, and does not provide accounting, tax, or legal advice. If you need accounting, tax, or legal advice, please contact a qualified accountant or lawyer.