Because of practice management costs and high income taxes, many physicians find themselves struggling financially when retirement approaches. Recent studies have looked at the various strategies physicians can consider when managing their retirement savings and investments.
“Deferred compensation is good when doctors have surplus income that they don’t need to live off of today,” said Keith Mohn, a financial consultant with the Benefit Solutions Group. But traditional deferred compensation really has no place in medical professions, he said, because no tax breaks are offered.
“When you have a situation where a doctor owns his own business, traditional deferred compensation doesn’t offer benefits because there is no compensation that can be deferred,” said Mohn. Physicians should therefore consider the benefits of non-traditional deferred compensation strategies, he said.
Non-traditional approaches are unlike normal deferred compensation and retirement plans in that when the money comes in at retirement, it won’t be taxed at normal income tax rates, he said. Such strategies allow a business to move the money out of the corporation so that the doctor can get at it later, with the reduced taxation.
“When you defer money in a pension plan until a point in time when the tax rate is going to be higher and the value of the dollar is going to be down, it doesn’t make sense,” Mohn said.
Nick Fabrizio, a consultant with the Medical Group Management Association, said there is a host of financial difficulties that many physicians face in their retirement.
“Some of it is living beyond one’s means, paying for kids’ educations, and trying to maintain the same lifestyle that they have enjoyed as a practicing physician and realizing that in retirement, it is very difficult to live the same life that one had in the prime working years,” he said.
Different financial strategies apply to physicians based on factors such as age, debt load and practice specialty, said Fabrizio. “I don’t think that deferred compensation is the answer in itself,” he said.
Physicians should consider their personal investment strategies and tolerance for risk, he added. “I think the best advice is for them to get with a certified financial planner that they know and trust and develop a long-term relationship.”
Mohn said today’s practice management costs place a considerable burden on physicians’ financial health, while factors such as lower reimbursements and higher malpractice rates make it difficult to practice in a business model that is decades old.
“Doctors are looking for efficiency in every aspect of their business,” he said. “That’s why they’re spending a lot of money on practice management – for the hope of efficiency to be gained.”