You probably have tons of questions relating to finances and how to build your own wealth so you can enjoy a meaningful and comfortable retirement. And since 2011, The White Coat Investor has provided tons of answers to show you, to teach you, and to inspire you.
If you’re already somewhat familiar with the world of money, we’ve got you covered. If you know absolutely nothing and are starting fresh, we have you covered there as well. That’s why you should peruse the frequently asked questions below. They’ve all been asked hundreds of times by hundreds of people who were searching for the same knowledge that you are. Now, you’ll get to learn what they learned.
Then, head on over to our Personal Finance for Doctors page that will provide you with wealth-building resources and links to dozens of posts that will provide a solid foundation for your journey to financial literacy.
How much do I need to save for retirement?
A typical doctor can ensure a comfortable retirement after a 25- or 30-year career by saving 20% of their gross income for retirement. Saving for other goals (house down payment, new car, college, paying off student loans, etc.) is all in addition to that. If you are not saving that much, try to increase how much you save by 1% each year, and as you accomplish your other financial goals, redirect that income toward retirement savings.
Why do doctors need to budget?
A budget is a personal thing since it demonstrates where your priorities are. You might not think of it that way, but if your budget DOESN'T reflect your priorities, it's time to make a change. For example, some people may spend more on clothes, transportation, vacations, or their home. Others might direct a lot of money toward paying down debt or toward retirement. Still, others may give a lot to charity. Some may even be embarrassed to reveal they're spending most of what they make—or even more than they make. No wonder no one wants to talk about this.
It helps if you don’t think of the process of budgeting as constraining and boring but instead as a plan for financial independence. Many marriages break up over financial issues. Budgeting done properly can essentially eliminate relationship fights over money.
And remember, in a 2019 survey, it was revealed that about one-quarter of doctors who are in their 60s have a net worth of less than $1 million. If those docs had budgeted, those numbers likely wouldn’t be so high.
How do doctors build wealth?
The most significant wealth-building factor for most physicians and other high-income professionals is their earned income. If you carve out a significant portion of your earned income and invest it in some reasonable manner, you are highly likely to become wealthy over a two- or three-decade period.
A doctor willing to continue to live a lifestyle very similar to what they lived as a resident for just 2-5 years after residency will be able to pay off all of their student loans, save up a down payment on their dream home, and catch up to their college roommate's retirement savings accounts. The financial jumpstart created by living like a resident while earning as an attending is likely to result in a doctor becoming a millionaire less than a decade out of training, using nothing besides their earned income.
Should I pay off debt or invest?
Ninety-five percent of the time, there is no right answer, but 5% of the time there is. If you're giving up an employer match in your retirement account to pay off debt, you're making a mistake, basically leaving part of your salary on the table. If you're carrying 30% credit card debt in hopes that your investments will outperform it, you're making a mistake. But for just about everything else in between, I can come up with a situation where it might make sense to invest but where it could also make sense to pay off debt—no matter what kind of debt that might be.
How can I make more money?
To reach financial independence quicker than their salaries allow, many docs look for other sources of income. That could mean becoming an entrepreneur or simply finding a lucrative side hustle.
How should I save for childs college education?
With a high income, it probably will be difficult for a doctor’s child to qualify for student aid. But there are ways to save for your child’s education that can also provide you with tax breaks. For instance, 529s are a great resource. Opening a 529 allows you to use after-tax money that can grow inside the account tax-free, and if you use that money on legitimate college (or med school) expenses, it comes out of the account tax-free.
But when thinking about sending your child to college, here’s something else to remember: There is little reason for any student to have student loans when finishing a bachelor’s degree, especially the child of a physician. Certainly, there is no reason for the physician to take on additional debt to pay for school. If the college cost cannot be covered with savings and a 529, the earnings of the child, and the earnings of the parent, consider choosing a less expensive school.
What is the best way to give to charity?
Giving to charity should be one of the financial pillars of a high-income professional, and there are a number of ways to do it. You can use a Donor Advised Fund, you can open a private charitable foundation, you can endow a scholarship, and you can send money to charity through a trust. There are all kinds of tax benefits for giving to charity, but the most important element is that you’re actually doing it in the first place.
What types of insurance do doctors need?
For a typical doctor or other high-income professional, the financial catastrophes worth insuring against include disability, personal and professional lawsuits, death of a breadwinner, illness and injury, and loss of expensive property.
Physicians can insure against these risk with:
Why do I need disability insurance?
Disability insurance gives you an income to live on if you become so disabled that you can no longer work. Nearly every high-income professional in their first decade or two out of school should own a policy. For the one out of seven doctors who will actually use their disability insurance, buying it is the most important financial step they will ever take. Your most valuable asset is your ability to work. If you don’t own a disability insurance policy, you need to get one now.
What type of life insurance should I buy?
Why don’t doctors need whole life insurance?
For most cases, doctors should buy term life insurance. Whole life insurance does four things:
- Provides a death benefit in case you die while someone else depends on your income, but it is a very expensive way to provide that protection.
- Provides a death benefit when you die even if no one else depends on your income, such as in your 70s or 80s. This is unnecessary insurance.
- Accumulates a cash value that you can borrow against. While there are a number of uses for this cash value, it is generally inferior to other options that can accomplish the same purpose.
- Offers some unique business and estate planning uses you are unlikely to need.
There are a few rare exceptions where a whole life insurance policy can make sense. Being a doctor isn't one of them. These generally include some specialized estate planning and business purposes, where it can give asset protection for someone willing to give up higher investment returns in exchange for the asset protection.
How much life and disability insurance should I buy?
Deciding how much life insurance to buy requires you to do some rudimentary math. However, if you are like most doctors, the number you end up with will be between $1 million and $5 million.
- Monthly expenses × 12 months × 25
- Remaining mortgage amount
- Estimated college costs
- Large-ticket items
- Non-forgiven private student loans
- Current nest egg
- Current college savings
Then round up to nearest million.
Is the number between $1 million and $5 million? Good. Don’t worry about buying a little too much term life insurance. This stuff is cheap, and it is better to have a little too much than too little (especially when future inflation comes into play). Remember that life insurance proceeds are tax-free, so don’t worry about having to buy enough to cover a tax bill either.
Deciding how much disability insurance doesn't require any calculations. As a general rule, insurance companies will allow you to buy enough insurance to replace 60% of your gross income, up to about $20,000 a month. Since most high-income professionals are paying 15%-35% of their income toward taxes, 60% of your income is usually MORE than enough income on which to live so is an ideal amount to buy. Remember that disability insurance benefits, unless the premiums were paid for by your employer, are completely tax-free to you.
Where to get good insurance?
Life and disability insurance is best purchased from an independent insurance agent who can sell the best policy for you no matter which insurance company it may come from. Here is the list of insurance agents vetted by The White Coat Investor community. Literally, thousands of readers before you have used these agents and have had excellent experiences. Don't gamble on someone in your local area when this can be easily accomplished by phone and email.
Should I refinance my student loans?
If you are an attending (or a resident with contract in hand) and you will not be directly employed by a 501(c)(3) (and thus are ineligible for Public Service Loan Forgiveness) you should refinance your loans if you can get a better rate. The White Coat Investor has negotiated a special deal for you with these companies.
When deciding what refinancing terms to take, if you are fully committed to living like a resident for 2-5 years until your student loans are paid off (i.e., throwing a high four- to five-figure amount at them each month), then I recommend you use a five-year variable interest rate loan in order to get the lowest possible interest rate. In that scenario, you can afford to “self-insure” against interest rate risk. If you are not committed to this course, then you may wish to pay the bank to run that interest rate risk for you by using a fixed loan for a longer term. Be aware that almost every doctor I've ever run into has been glad they’ve paid off their loans ASAP, and the very few who were glad they stretched them out had fixed rates under 2%.
How should I manage my student loans?
First, you should know that the best student loan is the student loan you never have to take out. But if you do need student loans, take out as few as possible and lower your expenses as much as you can. You can manage that by attending the least expensive medical school you can get into (and there are actually some schools that are completely free), living frugally, or applying for scholarships.
Upon completion of medical school, it is best to divide student loan management into two categories—private loans and federal loans. With private loans, minimizing the interest that accrues is key. The best way to do this is to refinance those student loans as soon as you finish school.
For federal student loans, many borrowers enroll into a standard 10-year program for loan repayment—paying off your loan in 120 fixed payments over 10 years. These monthly payments, based on loan amount and interest rate, are much higher than what a typical low-income resident with six-figure debt can afford. That’s when income-driven repayment plans (like IBR, PAYE, and REPAYE) potentially come into play.
There’s also the potential of getting those student loans forgiven through Public Service Loan Forgiveness if you are directly employed by a 501(c)(3), which would be one of the best ways to manage federal loans.
Can I get my student loans forgiven?
Yes, it’s certainly possible, thanks, in large part to Public Service Loan Forgiveness (PSLF). By the beginning of 2023, more than 450,000 borrowers had at least some of their loans wiped away. That’s tens of billions of dollars that have been forgiven.
If you are directly employed by a 501(c)(3) and thus eligible for this government program, you should almost surely take advantage. PSLF offers tax-free forgiveness of any remaining direct federal loans after 10 years of payments have been made.
There are other federal programs, collectively known as the Income-Driven Repayment (IDR) Forgiveness Programs, which are primarily designed to lower the required payments on your student loans. They are very useful for residents and fellows, who literally cannot afford to make regular payments on their massive loans during their training periods. However, their use after training is often a sign of a bad investment—i.e., you borrowed way too much money to get your job. The programs also function as a bit of a mercy program, kind of like bankruptcy. Rather than putting you into debtor's prison, they let you off easy and you can get a new financial start in your life. Unlike PSLF, though, these kinds of loan forgiveness programs are NOT tax free, and they’ll still cause you to be in debt for 20-25 years.
If you want to go the military route, there’s also the Health Professions Scholarship Program (HPSP). If you get accepted, you would have to complete one year of military service for every year that you utilize the scholarship (which includes full tuition and fees for your school; plus you get a stipend and signing bonus).
What do I need to do to qualify for PSLF?
Public Service Loan Forgiveness (PSLF) requires you to make 120 qualifying monthly payments while directly employed by a 501(c)(3) (non-profit). Qualifying payment programs include ICR, IBR, PAYE, REPAYE, and the “standard” 10-year payment plan. You also need to have your employer certify you each year (this can be done retroactively, but I recommend you do it as you go along). The best way to maximize the amount forgiven is to enroll as quickly as possible in either PAYE or REPAYE, minimize your taxable income during your training years, and do as many residencies or fellowships as possible. The amount forgiven is generally the difference between the sum total of the “standard” 10-year plan payments and the sum total of your actual 120 payments, many of which will be tiny due to the income drive repayment program provisions.
When determining how long you should take to pay off your student loans, ask yourself how long you want to be in debt for. I generally recommend that physicians have their student loans paid off within 2-5 years of residency graduation. If you live like a resident while earning like an attending, you can do that.
Should I pay off my student loans or invest?
It turns out it can be a pretty personal decision, and there are a lot of factors that come into play, including loan interest rates, current interest rates and inflation, expected returns on your portfolio, current tax bracket, tax-sheltered accounts available to you, attitude about debt, and personal risk profile.
Use the following list of loan/investing priorities when deciding between paying down student loans and investing:
- Get your match. Be sure to put enough into your employer-provided retirement accounts to get your entire available match. That's part of your salary
- Decide how long you want to have student loans (generally 2-5 years). Figure out the minimum amount to pay each month to be done by that date. Additional payments toward this goal can be moved down this list depending on interest rate. Obviously, if you are going for PSLF or IDR forgiveness, don't pay extra on your federal student loans.
- Pay off high-interest debt. Any credit cards or consumer debt at 8% or higher should be paid off ASAP. Honestly, you should have never accumulated this. Live like a resident until it is gone. If you have 8%+ private student loans, refinance them ASAP and then you can move them down this list a bit.
- Invest in tax-protected accounts. If you are a resident, max out your personal and spousal Roth IRAs. If an attending, max out your 401(k), SEP-IRA, HSA, and any other retirement account that allows you full marginal tax rate deductions.
- Pay off non-deductible loans between 5%-8%, ie, graduate student loans.
- Consider investing in other accounts that offer a tax break, such as 529s (kid's college accounts), UGMAs, and Backdoor Roth IRAs if your circumstances merit.
- Invest in risky assets in a taxable account (stock mutual funds or investment properties).
- Pay off loans with after-tax rates of 3%-5%.
- Pay off loans with after-tax rates below 3%.
- Don't carry any debt into retirement. Losing the safety net of ongoing employment income makes this a risky affair. It's one thing to get foreclosed on when you're 30. It's entirely different when you're 70.
Should I buy a home during residency?
No. That doesn't mean you'll lose money if you do, but you probably will. It generally takes about five years for the appreciation on a home to make up for the heavy transaction costs, and since most residencies are five years or less, most residents lose money on a home.
When should I buy a home after residency?
Buy a home when you are in a stable job and social situation. It generally takes 6-12 months to know if you like your job and your job likes you. Remember that 50% of doctors change jobs within two years of residency graduation. Almost all of them lose money on that home. Renting a home during your first year as an attending allows you to get your financial foundation built before making the largest purchase of your life.
How much can I spend on a home?
Do not borrow as much as the lender will lend you. Just because you can make the payments doesn't mean you should.
A good rule of thumb is to keep your mortgage amount to no more than two times your gross income. In very expensive areas of the country, you may have to stretch that a bit (perhaps to 3-4X but not 10X). But realize that comes with very real financial consequences including working longer; having less in retirement or for college; and having less to spend on lifestyle stuff like vacations, automobiles, and toys. It is a very rare physician who cannot dramatically improve their financial situation by moving inland from the West or East Coast. Another good rule of thumb is to keep your total housing costs (mortgage, taxes, insurance, utilities, maintenance, etc.) to less than 20% of your gross income. Since doctors need to save 20% of gross for retirement and may pay 30% of gross in taxes, they cannot spend the 30%-40% of gross on housing that a bank will lend them and expect to live “the good life.”
What is the least expensive way to buy a house?
Paying cash for a house is the least expensive way, by far. With cash, you don’t have to pay interest or a large chunk of your closing costs, and you could end up with an even better deal on the purchase. That said, even a physician usually cannot do that with their first house. The next cheapest way to buy a house is to put 20% down on a 15-year mortgage and then pay that off over 5-10 years.
Should I use a physician mortgage loan?
If you’re getting a physician loan, you have to ask yourself whether you’re buying a home just because you can, not because you should.
If you’re a resident, there’s a good chance you’ll only be living in that area for a few years. It can take years to break even on buying a home compared to renting, so getting a loan (and then buying a house) might not be the best choice.
Physician loans are good because of their minimal down payments, but remember, owning a home comes with its own cash requirements. If the water heater breaks or if you need to replace the roof, repairs can easily run thousands of dollars. If you don’t have the cash on hand to make needed repairs, you could wind up with credit card debt or living in a less-than-comfortable situation.
What mortgage length should I take?
Unless you’re paying in cash, you’re probably going to have to decide whether to take out a 15- or 30-year mortgage.
A 15-year mortgage is probably the right choice if you can buy an inexpensive house relative to your income and if you can still fully contribute to your tax-advantaged accounts even with the mortgage payment. An especially stable job also is key. Though you’d pay more per month with a 15-year mortgage, your interest rate would be less than that of a 30-year mortgage, so you’d be making sure more of your money goes to the principal and not the interest on the loan.
A 30-year mortgage, with its lower monthly payment (but higher interest rate), would be more appropriate for just about everybody else. For most people (though not necessarily most physicians), the advantage of a lower payment outweighs the lower interest rate. Plus, if you’re looking to pay ahead on the loan, a 30-year mortgage provides more flexibility to do so than a 15-year might.
Should I pay off my mortgage early?
The truth is that most Americans probably shouldn’t be paying off their mortgage early. This is because they usually have a better use for their money. On the other hand, paying ahead on your mortgage is far more likely to be the right move for a wealthy, high-income professional who is already maxing out their tax-advantaged accounts.
Paying off your mortgage early could give you plenty of advantages. The first thing it is doing is saving you rent money. Since you own the home, you don't have to pay rent. The home provides free rent. The second way to look at this is simply to compare it to the mortgage that you could have on the property. If you have a paid-off home and the going 30-year fixed mortgage rate is 6.5%, you're earning 6.5% on your money that’s invested in the home.
Paying extra toward that mortgage doesn't reduce your monthly payment; it doesn't help your cash flow at all. However, it still provides a return. What is the rate of return? Precisely the same as the mortgage rate. As the principal is paid off, that principal no longer generates interest each month. If you pay extra one month, more of your next payment will go to the principal. That’s why it’d be a guaranteed 6.5% return.
Another great reason to pay off debt is that it increases your financial freedom and allows you to take risks and take advantage of opportunities you otherwise wound’t have..
When should I refinance my mortgage?
Refinancing your house means replacing your existing mortgage with a new mortgage that has new terms. People commonly do this to lower the interest rate of their loan, reduce their monthly payments, or take equity out of their homes.
If your credit is in a good place and you have a stable job, you can start thinking about why you want to refinance. Do you want to save money on a monthly basis by reducing your interest rate? Are you trying to turn a 30-year loan into one that has a 15-year term instead? Do you want to turn some of your equity into cash to put toward other purposes?
If you're thinking about refinancing, refinance fees should be part of your calculations to determine if it makes sense. The cost to refinance a mortgage will depend on a variety of different factors, including your home's location, value, and the lender that you choose. The average cost to refinance your home, including all typical refinance fees, could be anywhere between $2,500-$5,000.
A common rule of thumb is that it can be worth it to refinance for 1%—if you can drop your interest rate by at least 1%, it might make sense to refinance. You can also look at the payback period. If you will pay back your upfront refinancing costs in less than 2-3 years, that can be a good indicator that refinancing your mortgage will make sense for your specific situation.
How can I start investing?
Before you start on the journey toward financial freedom, you need to make a map for how to get there. In other words, you need a financial investing plan where you formulate your goals and set up a process for how to reach each goal. What's the best way to save for retirement? Do you want to help put your children through college? Do you want to figure out the best way to give to charity? All of those questions can be answered in your written financial plan.
Whether you use a financial advisor or want to take this on yourself—both ways have pros and cons—here are some good rules of thumb: don’t buy investments you don’t understand, limit speculation in your investments, you need to take some risk, diversifying your investments is key, make use of index funds, and stop playing when you’ve won the game.
What are the best accounts to invest in?
The best accounts to invest in are generally those with the lowest fees and taxes, as those are an investor's greatest enemies. A typical doctor may have access to some or all of the following tax-protected accounts:
- Health Savings Account
- Taxable account
- General Investing
- Taxable investing account
An employee ought to become an expert in the accounts their employer offers. The self-employed physician will generally want to use an individual 401(k). Most doctors will want to use a Backdoor Roth IRA. Those who are using a High Deductible Health Plan should take advantage of a Health Savings Account, which is a triple tax-free Stealth IRA. 529s are generally superior to an ESA due to their higher contribution limits and potential state tax breaks. If you have maxed out your available accounts and wish to invest more, you can invest an unlimited amount in a taxable account—which, despite its name, generally offers superior risk/return characteristics to many financial products such as cash value life insurance and annuities.
What should I invest in?
Aside from investing in retirement accounts, education, and healthcare, here are a list of some potential winners for high earners like physicians and dentists who already have a solid knowledge base of finance.
- Buying index funds
- Owning reasonably leveraged rental properties
- Investing in syndicated real estate
- Purchasing real estate debt funds
- Starting or buying into a medical practice or partnership
- Owning a medically associated building
- Paying off your student loans
Can I have more than one 401(k)?
Yes. But be sure you know the rules before you use more than one 401(k). Very few people, including those who work in HR and accountants, actually understand them.
What should I do with my retirement accounts if I change jobs?
If you have a 401(k) or a 403(b), you have a couple of different options. If you like the way your retirement account is set up at your former job, you can leave it in your former employment-sponsored plan. You could also take that account and roll it over into the sponsored plan offered by your new employer. Or you could roll over the money from the old account into an IRA.
If you have a 457(b), that question could become more complicated. The most important thing to know about your 457(b) plan is whether it is a “governmental” plan or a “non-governmental” plan. Your asset protection and, probably more importantly, your distribution options are significantly better with a governmental 457(b). A governmental 457(b) can just be rolled over into a 401(k) or IRA when you leave the employer. That makes using a governmental 457(b) a no-brainer most of the time. Some non-governmental plans have poor distribution options, such as requiring you to withdraw the entire 457(b) balance in the year you leave the employer. This can result in withdrawals being taxed at the same or an even higher tax rate than you had at the time of contribution.
Can I still use a Roth IRA as a high earner?
Should I invest in real estate?
Investing in real estate is not as simple as investing in publicly traded stocks, where the best solution is to buy them through a broadly diversified, low-cost index fund. There are many good ways to invest in real estate, and these range from publicly traded REITs—such as the Vanguard REIT Index Fund (the least hassle but the highest correlation with the stock market) to owning and managing the property down the street yourself (the most potential to add value and save on taxes but the greatest hassle). There are other ways to invest in real estate that fall in between these options, including private real estate funds and crowdfunded/syndicated investments.
Should I invest in bonds?
A portion of almost every investor's portfolio should be dedicated to the far less volatile but lower returning asset class of bonds. A bond is a loan to a company or a government, and it has low correlation with both stocks and real estate. Benjamin Graham, the mentor of Warren Buffett, recommended that an investor never have less than half of their portfolio in bonds. Use extreme caution disregarding that advice, especially before you've passed through your first bear market.
Do I need a financial advisor?
It depends. It could be argued that no one needs a financial advisor. With no shortage of books, blogs, online courses, and other resources available at your fingertips, many people could manage their own finances without having to pay someone to do it. Plus, there are several advantages to a DIY approach, including the money you save on fees while insuring that no one is ripping you off. But the reality is that not everyone has the interest or bandwidth to manage their own plan. There’s no shame in that either. Time is money, of course, and financial planning may just be something you’d prefer to outsource. We estimate that 80% of docs want and need a financial advisor. Most just aren't interested enough to do it well themselves.
How much do financial advisors cost?
We repeat this on the blog all the time, because it can’t be stressed enough: Make sure you find an advisor who gives good advice at a fair price.
While fees can vary across the board, a good rule of thumb is that an annual four-figure amount is a fair price to pay for financial advice. Let’s be clear—unless you’re just looking for someone to prepare your taxes or review your student loans, you won’t find decent advice for under $1,000 (and really, you probably wouldn't want that advice anyway!).
However, since most doctors can get high quality financial planning and investment management for less than $10,000 per year, it seems silly to pay more than that.
Beware of the financial advisor who charges you an Assets Under Management (AUM) fee. Instead, find a fee-only advisor who can give you that good advice at a fair price.
How do I find a good financial advisor?
That question is actually pretty easy to answer, thanks to the work we have done here at The White Coat Investor. We have maintained a list of recommended financial advisors for years now. Aside from the initial vetting we do (most applicants are turned down) via an application process, they are continually vetted by the white coat investors using them. If we get multiple complaints about an advisor, they are removed from the list. Yes, each of the advisors on the list pays advertising fees to be there, so we have a conflict of interest. But we have plenty of advisors; there is no need for us to lower our standards to get more on the list. FYI: All of the advisors on the list are fiduciary, fee-only advisors.
You could be paying a financial advisor a great deal of money over the years, so you should interview several before choosing one. Don't feel guilty about being assertive when establishing this business relationship. You want someone you'll be happy with for years to come. Below are only a few of the questions you should be asking before hiring somebody to manage your finances:
- How do you get paid?
- What designations do you hold?
- What kind of annual returns can I expect after taxes and fees by investing with you?
- What is your investment philosophy?
- Will you have a fiduciary requirement toward me?
- How often will we meet, and what reports will I receive from you?
Should I fire my financial advisor?
If the advisor charges too much or gives bad advice (or both, as is often the case), you should fire them. You can then either hire a good advisor or become your own financial advisor.
Here a few things to remember if you’re thinking about firing your advisor:
- For some reason, once people make the decision to fire an advisor, they seem to be in a big rush to do so. There's no reason to rush. If you spend a few months educating yourself, drawing up a financial plan, and writing an investment policy statement, that won't harm you. You simply won't spend that much on commissions or fees in just a few months. Take your time.
- Consider a lower-cost financial advisor. If you're just upset about the fees and feel like the advisor is ripping you off, then consider going with a lower-cost advisor. You can hire an hourly financial planner for an occasional financial checkup for a few hundred dollars. If you want asset management, you can get that for four figures a year.
- Negotiate with your advisor. How do you do that? In any negotiation, the person who wins the negotiation is the one with a better BATNA—Best Alternative to a Negotiated Agreement. Your BATNA is another advisor providing similar services for a lower price. The advisor's BATNA is that ENT at your hospital who has no problem paying them $20,000+ a year for services. Most financial advisors close their practices once they get 50-100 clients. If they're providing good service, the rate of attrition is pretty low, and it can be replaced just with client referrals. But they still don't want to see $20,000 walk out the door. They will likely offer you some sort of concession to stay.
- You don’t have to meet with the financial advisor to fire them. The physical process of firing a bad financial advisor is to simply contact the new custodian (such as Vanguard) who will send a form to the old custodian asking them to liquidate your retirement accounts and send them the money. You can request that taxable assets be transferred in kind. Your advisor will get the hint. If you're firing a fee-only advisor, a simple letter or email will suffice to terminate the fee arrangement. If your advisor has the right to place trades in your account, you'll also need to rescind that authority with a written notice.
Should I hire an advisor or manage my investments myself?
Eighty percent of doctors need, want, and should use a financial advisor and/or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it—just make sure you are getting good advice at a fair price.
Given the high costs of hiring a financial advisor, being your own financial advisor is almost surely the best-paying hobby you could possibly have. For the hobbyist, it is fun to learn about investments and to do the chores of financial planning and investment management. If the idea of rebalancing your own portfolio is appealing to you and if you have voluntarily read a dozen books about financial topics, this is probably a great option for you.
If you are going to be your own financial planner and investment manager (and there are good reasons to do so), put in the time, effort, and energy to learn to do it right on an ongoing basis. Realize this is not an either/or decision; you can hire an advisor to help you draft up the plan and then you can implement and maintain it. Or you can check in periodically with an advisor to make sure you're still on track for your goals. Just because you use an advisor sometimes doesn't mean you have to rely on the advisor for everything. Here are some reasons to consider functioning as your own financial advisor:
- It will save you a lot of money
- You won't rip yourself off on purpose
- You won't have to learn to recognize a good advisor
- You don't have to spend time looking for an advisor, evaluating your advisor, and finding a new advisor
- You won't have to spend time meeting with your advisor
- You only have to learn the stuff that applies to your life
- You don't have to prevent investment misbehavior
- You'll pay more attention to your financial life
How much do doctors really pay in taxes?
One of the most interesting phenomena WCI has noticed over the years is that most people don't actually understand how tax brackets work, and they routinely overestimate how much they pay in taxes. Remember that your marginal tax rate, or tax bracket, is the rate at which your next dollar earned will be taxed. Your effective tax rate is the total tax paid divided by your total income. Your effective tax rate is always less than your marginal tax rate.
Being in the 32% bracket does not mean you pay 32% in taxes on all of your income. You only pay taxes on the money in that bracket. You fill the brackets as you go. You pay 10% taxes on your income until you reach the threshold of the 10% bracket. Then, you pay 12% until you reach the threshold of the 12% bracket. Then, you pay 22% until the next threshold and so on and so forth.
How can I pay less in taxes?
Lowering your tax burden is more a function of changing how you live your financial life than preparing your taxes properly. The IRS smiles upon some activities (like marrying a stay-at-home parent, having children, getting a mortgage, giving to charity, earning a little bit of money, and saving for retirement) while frowning upon other activities (like marrying a high earner, investing in hard money loans in a taxable account, earning a lot of money, and buying expensive toys). The largest tax break available to most attending physicians in their peak earnings years is maxing out their available tax-deferred retirement accounts.
What are the best tax deductions?
The best tax deduction is a business expense that you would have purchased with or without the deduction. Business expenses don't even show up on the total income line of your taxes. The next best deductions are above-the-line deductions, such as self-employed health insurance, HSA contributions, and self-employed retirement account contributions. The “line” is Line 38 on Form 1040, or the bottom of the first page. You can still take the standard deduction in addition to these and they aren't phased out as your income climbs. Finally, below-the-line deductions—such as state income taxes, charitable contributions, healthcare expenses, mortgage interest, and property taxes—are the worst types of deductions. You spend more than you get back as a deduction, and you don't get the full value of the deductions due to the standard deduction on the low end of the income range and the Pease phaseouts on the upper end.
Which is better: a tax credit or tax deduction?
A credit is better than a deduction because it reduces your tax bill dollar for dollar. If you get a $200 credit, you pay $200 less in taxes. A deduction, however, only reduces the amount of money you pay taxes on. So, a $200 deduction may only reduce your taxes by $67 if you have a marginal tax rate of 33%.
How does the amount of tax I owe relate to my withholding?
Employers are required to pull a certain amount of money out of your paycheck each pay period and send it to the IRS. If you are self-employed, you are required to send in a “quarterly estimated tax payment” on April 15, June 15, September 15, and January 15 each year—which does the same thing. However, the amount of money withheld by your employer or sent in as your tax payment is not necessarily related to the tax you actually owe. Every April 15, these two amounts are reconciled. While a “big tax refund” is nice, it means you have really been loaning money to Uncle Sam interest-free all year. While nobody likes an April tax bill, savvy tax planners ensure they pay the IRS as little as possible until as late as possible without paying any penalties or interest. That does require a reasonable ability to forecast your tax bill along with the discipline not to spend it on something else. Be sure you understand the Safe Harbor rules to ensure you don't owe any penalties or interest come April.
What is the difference between marginal and effective tax rate?
Your marginal tax rate is the rate at which you will pay tax on the last dollar you earn. It is often as high as 30%-50% for a physician. Your effective tax rate is the total you pay in taxes divided by your total income. A typical physician may have an effective rate as low as 15% but rarely has a marginal rate higher than 40%. The difference between these two tax rates illustrates an important concept in the tax code. Although the code is progressive (meaning the more you make, the higher your tax rate), even high earners only have low tax rates applied to the first few dollars they make. When you get “bumped into the next bracket,” you only pay at the higher rate on the money you made above that bracket's lower threshold.
Should I use a tax-deferred or Roth 401(k)?
This question can be very complicated, and there are a lot of factors that go into it. However, a good general rule of thumb is to use the Roth option in any year when your income is significantly lower than your peak earnings years (think residency, fellowship, working part-time, sabbatical, etc.) and use a tax-deferred account preferentially during the peak earnings years.
What is tax-loss harvesting?
You are allowed to deduct up to $3,000 per year of a short- or long-term capital loss from your ordinary income on your taxes. Losses also offset gains. This all takes place on Schedule D of IRS Form 1040. These losses are so useful that investment advisors, tax preparers, and financial gurus the world over recommend you book them any time you can. However, taxable losses generally show up after an investment goes down in value, not exactly the time you would normally sell an investment. Buying high and selling low is a losing proposition most of the time.
Thus, the birth of tax-loss harvesting.
When tax-loss harvesting, you get to claim the loss without ever selling low. You do so by simply exchanging one investment for a very similar (but, in the words of the IRS, “not substantially identical”) investment. You're still fully invested (and so haven't “sold low”) but still get to use the loss on your taxes.
Should I do my own taxes or hire a pro?
There are three great reasons to do your own taxes. The first is you save money. The second is that it really doesn't take a lot more time to do it yourself since tax software can pull most of your information in from last year's return and download many of the accounts you would have to type in. But the most important is that doing your own taxes teaches you the tax code—at least the parts relevant to you—which causes you to make better tax decisions in the future. That said, any year your financial situation changes dramatically is a great year to have a high-quality tax accountant look things over to see what else you could do.
What is the best way to protect my assets against lawsuits?
Your first line of defense when it comes to asset protection is liability insurance. For a typical doctor, that means both professional malpractice insurance and a personal liability (umbrella) policy, both with limits of at least $1 million. You want the insurance company to be on the hook for enough money that it will produce a robust defense.
How much malpractice insurance do I need?
The usual recommendation on how much medical malpractice to buy is to carry the same amount as other doctors of the same specialty in your geographic area. That usually varies anywhere from a few hundred thousand to a couple of million dollars. Policies are usually described as $1 million/$3 million, where the first number applies to the amount per case and the second number is the total amount the insurance company will pay out per year.
There are generally no deductibles with malpractice insurance. While it would be nice to get a policy where the doctor pays the first $10,000 and the insurance company picks up the rest, that's not the way these policies are written. They generally pay from the first dollar and then cap the payout at a certain amount.
Whether you should buy more than the average doctor in your area is an open area of debate. Some malpractice attorneys (both on the plaintiff and the defense side) have told me no. Others have told me yes. There does not seem to be any consensus.
Many doctors worry a larger policy just makes them “deep pockets” and more likely to be sued. Legal experts seem to agree that is not really a concern. The key seems to be to have “enough” that a policy limits payout is enough to satisfy both the plaintiff and their attorney. They want to feel like they got “a lot” of money. One million dollars still seems to be “a lot” of money, so that is probably the most common amount carried by doctors.
How likely is it to be sued above my policy limits?
Doctors win the vast majority of lawsuits against them. Of those they lose, the vast majority are settled. Even if the doctor goes to court and loses, the award amount is still usually well below policy limits. Approximately 1 in 10,000 doctors per year are successfully sued above policy limits. Even in these cases, the majority are reduced to policy limits on appeal. As a general rule, it is very rare for a doctor to lose personal assets in a professional lawsuit. Keep that in mind as you weigh how much time and effort you wish to spend on asset protection plans designed against that remote possibility.
Which assets are protected from lawsuits?
Asset protection law is state-specific. It is important that you understand the asset protection laws in your state. You can look up your state laws here. As a general rule, retirement plans are almost always protected (with 401(k)s occasionally getting better protection than IRAs). Life insurance cash value is usually protected. And annuities might be protected. Your home equity may be completely protected, or it may receive little protection at all. You may wish to make different financial decisions in your life depending on your state laws. For example, if you are in a state where your home equity is well-protected, you may wish to pay off your mortgage sooner than you otherwise would. If your home equity is not well-protected, you may wish to max out your retirement accounts instead.
How should I title my home?
If you are married and your state allows it, you should title your home as “tenants by the entirety.” What this means is that you own your entire house and your spouse owns your entire house. If a lawsuit is just against you (like most malpractice lawsuits) and a judgement above policy limits is rendered, the creditor cannot take your house because your spouse owns the whole thing.
Can LLCs, Trusts, and Family Limited Partnerships help protect my assets?
An entity such as a trust, a limited liability company, or a limited partnership cannot be formed just for asset protection. It must have a valid business or estate planning purpose. The “C” in LLC stands for company. The purpose of the company cannot be just to protect your assets from creditors. It must actually be a viable business. As a general rule, putting toxic assets such as an individual rental property into its own LLC is a good idea. That way if the LLC is sued, the most you can lose is the value of what is in the LLC. In some states, creditors may be limited to a “charging order” against an LLC, which allows you to hold income in the LLC while forcing the creditor to pay the taxes on that income without ever receiving it.
Can I give my money or assets away if i’m sued?
No. That is a fraudulent transfer and will be reversed by the court. The court actually may even look back a year prior to the lawsuit being filed. Asset protection plans must be in place prior to being sued. On a related note, putting everything in your spouse's name may not be a great idea either. You are far more likely to lose assets to your spouse than you are to your patient.
What is the purpose of estate planning and who needs to do it?
The purpose of estate planning is three-fold:
- Make sure your minor children and your assets go where you want when you die
- Avoid the expensive, time-consuming public process of probate
- Minimize or eliminate estate and/or inheritance taxes
Just about everyone needs to do at least a little estate planning. Certainly, if you have acquired significant assets ($20,000+) and care about who they go to when you die, you need estate planning. Likewise, if you have even one child, you need to do at least some estate planning.
What is probate?
Probate, meaning the official proving of a will, is a legal process whereby the estate (property of the deceased) pays off its creditors and distributes the assets of the estate as specified in the validated will. It can be expensive and time-consuming, often consuming a significant portion of the estate in legal and administrative fees and lasting months or even years. Much of estate planning is geared toward avoiding this process as much as possible.
What documents will make up my estate plan?
- Living Will/Advanced Medical Directive/Medical Power of Attorney
- Durable Power of Attorney
- Letter of Intent
- List of important documents
- Revocable Living Trusts
- Irrevocable Living Trusts
- Other trust documents
- Guardianship designations
- Beneficiary designations
- Payable on death designations
Should I buy whole life insurance for estate planning purposes?
Probably not. This is a sales technique used by whole life salespeople to vaguely refer to some estate planning benefits of whole life insurance. While a whole life policy placed inside an irrevocable trust can help reduce the size of your estate (and associated estate taxes) and life insurance proceeds can help provide liquidity in the event you need some time to liquidate a farm or valuable business, here’s the bottom line: the vast majority of doctors will not owe estate taxes or have a significant liquidity need at death. The 2023 federal estate tax exemption limits are $12.92 million ($25.84 million married), and that figure is indexed to inflation. Most doctors simply don't make enough or save enough to have an estate tax problem. Most states don't have an estate tax, but the ones that do might have a lower exemption limit than the federal limit. These include CT, DC, RI, NJ, IL, MN, MA, MN, NY, OR, VT, or WA.
How can I set up my estate to reduce taxes?
Most estate tax planning revolves around maximizing the use of the federal and state estate tax exemptions. Ideally, good planning eliminates estate tax completely, but even if you have a very large estate, it can help to minimize how much is paid.
If, like most docs, your estate is worth less than the estate tax exemptions, there will be no estate tax due at all. You can help keep the value of your estate down by spending your money and by giving it away. You can give any amount to charity at any time, and you may even obtain some income tax benefits for doing so. However, you are only allowed to individually give $17,000 (2023 limit) per year away to anyone else before gift tax laws kick in. You can give more than that, but any amount above $17,000 per year requires you to file a gift tax return, and it starts eating into the estate tax exemption. Once it is gone, you start paying gift taxes, which is essentially the same as paying your estate taxes in advance. Keep in mind that you can give $17,000 to your child and $17,000 to your child's spouse, and your spouse can do the same. So, the two of you can give $68,000 away each year to your married children without having to hassle with the gift tax.
If an asset is likely to appreciate, it is better to give it away before it does so. That way all of that appreciation does not end up in your estate and would not be subject to estate taxes. This can be done directly, by simply giving the asset to the heir, or it can be done indirectly using irrevocable trusts, Family Limited Partnerships (FLP), or Family Limited Liability Companies (FLLC).
Roth conversions can also reduce the size of the estate since the IRS considers a pre-tax dollar and a post-tax dollar to be equivalent when assessing the size of your estate.
Should I incorporate if I moonlight?
Many physicians are under the misunderstanding that they can reduce their liability and lower their taxes by incorporating. What they do not understand is that malpractice liability is always personal, and incorporating doesn't protect against it. In addition, there are very few business deductions that a corporation can take that a sole proprietor cannot. It doesn't take anything to be a sole proprietor other than receiving earned income on a 1099 form. A sole proprietor can even open an individual 401(k), although they will need to spend two minutes obtaining a free Employer Identification Number (EIN) from the IRS before doing so.
How is an LLC taxed?
A limited liability company (LLC) can choose to be taxed as a partnership (sole proprietorship if only one partner) or a corporation. The benefit of choosing to be taxed as a sole proprietor is you do not have to complete a partnership or a corporation return. The benefit of being taxed as a corporation is you can subsequently choose to be taxed as an S Corporation and potentially save a few thousand in Medicare tax.
How do I know I’m ready to retire?
As doctors enter their 50s and 60s, many start dreaming about retirement. But, properly planning for retirement requires as much time and effort as planning a career.
Truthfully, the non-financial aspects of retirement are perhaps the most important. Unless your retirement is a “forced retirement” due to disability or job loss, you want to make sure you’re “retiring to” something rather than just “retiring from” something. But if you feel you’re ready, you need to make sure you have the financial end figured out.
To do so, ask yourself this: 1) Are your debts (student loans and consumer debt) paid off? 2) Is your mortgage paid off? 3) Are you comfortable canceling your term life insurance? 4) Are you comfortable canceling your disability insurance? 5) Do you have healthcare plan? 6) Do you have an income plan (just in case)? 7) Are your will and trust updated?
If you answered no to any of those questions, you might not be ready to retire.
And remember, just because you’re financially independent, that doesn’t mean you have to stop working completely.
How should I spend my money in retirement?
In many ways, spending down your assets efficiently is a lot more complicated than accumulating them in the first place. There are really three issues that retirees face when deciding how to spend in retirement: 1) Which accounts to spend from first, 2) Which assets to spend first, 3) How much to spend.
Here’s a brief synopsis of how to think about spending money in retirement:
- Spend income first, including pension distributions, interest, dividends, capital gains distributions, Social Security, and any Required Minimum Distributions.
- Consider your estate planning goals. Do you plan to “Die with Zero?” Do you plan to leave everything that is left to your children? What tax bracket will they be in compared to yours? Do you plan to leave everything to charity? Will you be splitting what you leave behind between heirs and charity?
The answers to those questions will determine when you should use an HSA, when you should cash your high-basis taxable assets, when you should cash your low-basis taxable assets, when you should cash your Roth assets, and if you should annuitize your money.
How should I invest during retirement?
There are three big issues to think about when investing in retirement.
- The sequence of returns issue. Basically, this is the fact that not only do your returns matter, but WHEN you get those returns matters. Dealing with this issue should be one of the biggest focuses in any type of retirement planning.
- Another major factor retirees need to deal with is the dragon of inflation. Far too few investors realize that their “opponent” in investing, both before and after retirement, isn't other investors or “Wall Street.” It's inflation, not inflation as measured by the government CPI, but their own personal rate of inflation.
- As a retiree, withdrawal rates become much more interesting, since your current lifestyle is dramatically affected by your selected portfolio withdrawal rate. Pick a rate too high, and you're likely to run out of money before time. Pick a rate too low, and you may unnecessarily impoverish your lifestyle just to leave more money to your heirs, charity, and possibly even the IRS. The classic Trinity Study gave us the often-quoted “4% rule” but it is important to understand where that rule came from and what it means.
Who writes this blog?
Many of the posts on this blog are written by Dr. Jim Dahle, a practicing emergency physician. WCI also has a team of columnists, most of whom are also physicians, who write about their own experiences in personal finance. We also publish approved guest posts. Be sure to read the guest post policy to learn more about requirements and the process to submit one.
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