What’s your retirement plan?

When it comes to retirement, you either outlive your assets or they outlive you. The deciding factor is whether you have a formal, comprehensive plan.

By James McNaughton | Financial Fitness | Spring 2018

 

Glasses and clock on the business paper. Report chart

When it comes to retirement, you either outlive your assets or they outlive you. The deciding factor is whether you have a formal, comprehensive plan.

Depending on your specialty, you just spent the last 12 to 15 years of your life preparing for your “real job.” While your friends from undergrad have been in the workforce for 10 years, you have been increasing your debt load during medical school while working for a fraction of your worth during residency. You have given up one of the most important components of investing: time.

Fortunately, physicians can earn a higher paycheck than most. Unfortunately, the temptation to purchase items that were unrealistic during residency (luxury cars, large houses) can be overwhelming.

The good news is that, by exercising some common sense and creating a formal plan, accumulating the assets needed for your “work optional” lifestyle is not as difficult as it seems.

Create a budget beyond student loans

Creating a budget is a great idea for two reasons. First, it will give you an idea of how much you spend on necessities, the things you need to live. Secondly, it will determine your discretionary income, or surplus, after you cover the necessities.

From this discretionary income, you can determine how much you need to invest to achieve your target retirement age. There will be non-investing factors, such as the cost of setting up a practice or running expenses for a clinic. There will also be investing factors to consider, such as contributing to a taxable account vs. retirement accounts.

Start saving early

Once you decide on a “work optional” age, you’ll need to calculate how much to invest each year to accomplish your goal. You will also want to choose a hypothetical rate of return determined by your risk tolerance.

Everyone’s risk tolerance is different. If you are able to tolerate volatility and have a long-time horizon, a portfolio weighted more heavily in equities may be suitable for you. If market volatility gives you sleepless nights or you have a shorter timeline, a balanced portfolio consisting of equities and fixed income may be more suitable. Be sure to consult a financial professional if you are unsure of your risk tolerance.

Inflation is another factor to consider when creating a financial plan. Inflation is the rate at which the general level of prices for goods and services increases over time. Consequently, inflation can erode purchasing power, something to consider when building your portfolio.

Consider Dr. Jones, 30, fresh out of residency. She would like to have a “work-optional” lifestyle at age 66. She desires to withdraw $8,000 per month from her retirement accounts, adjusted for inflation. Using 3 percent inflation, Dr. Jones will need to withdraw roughly $24,000 per month at age 66 to maintain the same purchasing power as today. At a 4 percent withdrawal rate, she would need a retirement account of over $7 million!

Fortunately, time is a great ally for young physicians. What may seem daunting fresh out of residency can be achievable with some planning and discipline.

Don’t get caught up comparing numbers, as everyone’s situation is different. There are many factors that can influence your plan. Social security benefits, pensions, private business interests, liquidating shares of a surgical hospital or selling a practice can all impact your situation. The important thing is to be proactive and work with a qualified financial professional.

Establish an emergency fund

It’s recommended to have three to six months of expenses in a liquid, low-volatility account. If you are the primary income source in your household, six months should be the target. If your spouse is also a high earner, you could reduce your fund to cover three months.

Look for an FDIC-insured, high-yield savings account. As interest rates have gone up, so have the yield on these accounts. It’s best to avoid investments with volatility, such as individual stocks or equity funds. Think of this money as an emergency fund only, not a slush fund for entertainment purposes!

Work with a professional

Similar to the medical profession, the financial industry offers an array of designations. The term “financial advisor” can be used to describe a very diverse field of individuals. It is in your best interest to form a relationship with someone who can represent and work with several companies or investment products. Even as a resident or newly practicing physician, you need to be proactive with your retirement plan. Your financial numbers need to be monitored and reviewed just like your personal health. If you don’t like your current financial situation, it is much easier to make changes in your 30s and 40s than it is in your 60s.

James McNaughton, CFP, is a partner at Siouxland Investment Group, LLP, and financial adviser for Premier Physician Agency, LLC, a national consulting firm specializing in physician job search and contracts.

(Disclosure: James McNaughton is a registered representative and a registered investment adviser of Hilltop Securities Independent Network Inc. a registered broker-dealer and a registered investment adviser that does not provide tax or legal advice. Views and opinions expressed herein are solely the author’s, and not Hilltop Securities Independent Network Inc. member of FINRA and SIPC and a wholly owned subsidiary of Hilltop Holdings, INC. (NYSE: HTH), with headquarters at 1201 Elm Street, Suite 3500, Dallas, TX 75270 (214-859-1800). Premier Physician Agency, LLC is not affiliated with Hilltop Securities Independent Network Inc.)

 

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4 Bases to Cover in Your Compensation Arrangement

Your employment contract will spell out your base salary, bonus opportunities, loan repayment and noneconomic benefits. It’s up to you to understand them.

By Bruce D. Armon | Fall 2017 | Financial Fitness

 

Business woman standing in front of a blackboard with a financial chart

“A nickel ain’t worth a dime anymore.” –Yogi Berra

Yogi Berra was a great catcher for the New York Yankees. He was an 18-time all-star, a 3-time MVP, won 10 World Series, and was elected to the Major League Baseball Hall of Fame. He was the ultimate winner in a team sport.

Most physicians, too, are valuable players on their teams. And for physicians, the most significant way to be rewarded for a job well done is through their employment contracts.

If you have a great year, there are upside opportunities that can be included in your contract to reward those successes. And just like a major league baseball player who has a guaranteed contract, a physician with a multi-year deal may have protections in an “off” year as well.

The four bases (baseball pun intended) of a physician’s compensation arrangement are base salary, bonuses, loan repayment (particularly for more junior physicians) and noneconomic benefits.

Base salary

“You better cut the pizza in four pieces because I’m not hungry enough to eat six.” –Yogi Berra

For most physicians, the base salary—the amount you’re paid annually over the contract term—will be the predominant source of income communicated in the employment contract. Before signing a contract with a base salary included, make sure you understand how the salary was determined. Is there independent verification of its appropriateness? When (if at all) will the base salary change, and under what circumstances? How frequently will you get paid: weekly, bi-monthly, monthly?

No physician wants to be or believe they are not being paid as competitively as their peers in the same geographic region with comparable experience and job responsibilities. Independent salary statistics, such as those from the Medical Group Management Association (mgma.com) or the Association of American Medical Colleges (aamc.org), can help you get a ballpark figure.

Bonuses

“When you come to a fork in the road, take it.” –Yogi Berra

Most physician bonuses are based upon some element of productivity. Productivity is often measured in cash. How much a physician personally produces will dictate the bonus threshold. An employer may state that a bonus can be achieved based on some multiple of your base salary, e.g. 1.5, 2 or 3 times. Some employers use wRVUs as the bonus threshold to avoid the variances from the payer’s reimbursements. Understanding reasonable wRVU thresholds (how many wRVUs you must produce to earn the bonus) is essential to making sure the bonus is not illusory and out of reach. An employer may do a combination of your productivity versus overhead to determine if a bonus is earned. It is important in this scenario to understand how overhead is calculated. Is each physician responsible for the same overhead? Is it based on your actual expenses? In any cash-basis bonus, it is important to understand whether trailing collections for payments received after termination or expiration of your employment agreement are included as part of the bonus calculation.

Loan repayment

“It ain’t over till it’s over.” –Yogi Berra

An employer willing to pay some or all of your loans can be a wonderful perk, but you must understand the conditions for payment. Some employers require you to be employed and in good standing at the end of each contract year before the loan amount is paid. Others may provide loan repayment on a monthly basis. An employer may “cap” the amount of the loan to be paid over the life of the contract. Or, there may be other conditions, such as a certain amount of productivity or attending a certain percentage of committee meetings.

Noneconomic benefits

“The towels were so thick there I could hardly close my suitcase.” –Yogi Berra

Salary, bonuses and loan repayments are wonderful benefits —but noneconomic perks can also have significant value.

Imagine deciding between two contracts. One contract pays $35,000 more annually. The higher-paying contract provides you with individual health insurance and a claims-based professional liability policy that requires you to pay the cost of the “tail” policy upon your departure for any reason.

The contract with the lower annual salary provides family health insurance, life insurance for you, 401(k) match, occurrence professional liability coverage that does not require you to pay for a “tail,” $5,000 annual CME allowance, payment for licenses and dues for professional societies, the ability to moonlight and retain that compensation, a signing bonus and reimbursement for moving expenses.

When viewed in the entirety, the contract with the lower base salary may actually be a much better option.

“You’ve got to be very careful if you don’t know where you are going, because you might not get there.” —Yogi Berra

When these four compensation components of the employment contract are coordinated, you can hit a professional home run. If one or more of these elements is missing or incomplete, you may strike out and feel the need to move on to the next job.

Bruce D. Armon is a partner and chair of the law firm Saul Ewing’s health care group—and a baseball fan. Bruce has helped hundreds of physicians and employers with contracts and all participants in the health care delivery system with health care transactional, regulatory and compliance matters.

 

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Budgeting for your job-search expenses

To make the job-search process easier on both you and your wallet, anticipate and budget for these potential expenses—and ask your employer what’s covered.

By Jeff Hinds, MHA | Financial Fitness | Spring 2017

 

As you embark on your job search, it is important to be aware of the potential personal expenses that may arise throughout the process. Though it is not uncommon for employers to cover some of these expenses, you should familiarize yourself with them at the onset of your search so that you know what to expect down the road.

Site Visits / Interviews

Ideally, any expenses associated with on-site interviews will be covered by the employer upfront or reimbursed later on. However, that is not always what happens. It is not unheard of for employers in highly competitive areas to expect out-of-town candidates to cover their own costs if the employer has other local options. Before you make a site visit or interview trip, make sure to confirm with potential employers who is responsible for the costs if it’s not made clear upfront. These may include airfare, gas, rental car, hotel and food costs, all of which could be rather expensive depending upon the location and travel distance.

Immigration Assistance

International Medical Graduates who have yet to obtain permanent resident status or citizenship may require the assistance of an immigration attorney both when exploring the potential restrictions associated with their job searches and when filing documentation after successfully securing a job. In many instances, the employer will have a pre-existing relationship with an immigration attorney for you to use and/or may agree to cover all associated immigration costs if you already have an immigration attorney. This, too, however, will vary by employer and is something that you should take into consideration and prepare for as you assess your potential job-search expenses.

Contract Review

A professional contract review should be considered a necessary expense for all physicians. Beyond the compensation package (which tends to get the most attention from physicians), there are many legal provisions within a contract that have a substantial impact on you both professionally and personally even beyond the terms of the agreement. Because of this, it is highly important that you have an attorney (one with significant experience in reviewing physician contracts) conduct a full legal review of your contract before you sign it.

In addition to the legal review, some groups will also conduct a compensation analysis and provide negotiation assistance to physicians. Consider your options, do due diligence in determining your needs, and confirm the total cost for the review—it will vary significantly depending on the scope.

State Medical Licensure

If you are taking a position in a state where you do not already possess a permanent medical license, this may be an additional expense to expect as part of your total job-search costs. Again, this may be an expense that your employer commits to cover in your contract; however, that is not a given for all employers. It is yet another item you need to take into consideration (and eventually confirm with your future employer) as you assess your expected expenses.

Relocation Expenses

The largest potential expenses of your job search are those associated with relocation. These may include the costs of selling your current house, purchasing or renting a new house and hiring a moving company.

This is an expense many employers are willing to assist with in the form of reimbursement up to a certain dollar amount, which should be outlined in your contract. Seek quotes from moving companies to confirm that the total cost will be reimbursed by your employer.

Jeff Hinds, MHA, is president of Premier Physician Agency, LLC, a national consulting firm specializing in physician job search and contracts.

 

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How physicians get paid

Before you can evaluate your offers, you need to understand the lingo used.

By Matt Wiggins | Fall 2016 | Financial Fitness

 

“Why is it that so many of us think that compensation is only about numbers?” asked one internal medicine resident recently. I stared, not knowing how to immediately answer. After helping thousands of physicians with their contracts through the years, I should have a great answer. Then it struck me!

My answer: Most doctors are led to believe that their struggles through training are due to a number, their training program salary, and that everything will be solved by a new number, their attending income.

This means that many physicians probably focus on the numbers in their contracts without understanding the legal apparatus around them. After all, won’t it be the attending income number that helps you pay off your debt? Won’t it be the sign-on bonus number that allows you to cover the expenses during your transition into this next (or first) job?

Compensation types

The best place to start is by understanding the different types of compensation.

Sign-On Bonuses. A true sign-on bonus is given to you within a short amount of time after you sign the contract. A commencement bonus is given to you within a short amount of time after starting your work with the new employer. A sign-on bonus is often preferred as it may give you some cash during a period when you may not be earning any money. A commencement bonus is often preferred by employers since they don’t have to pay it until you are actually working. If you find yourself negotiating between the two, you may have to compromise and take half after you sign and half once you start.

Guaranteed Salary. When it comes to physicians and finances, this is one of the all-time favorite word combinations. Think about it: You have the word “salary” preceded by the word “guaranteed.” Both are good words, and both connote “security.” This is simply a number that is guaranteed by the employer to be paid to you over the course of the contract. Once the contract is signed, it typically can’t be altered by performance or changes within the employer for the duration of the contract. As specialization increases, it seems that guaranteed salaries are less prevalent. Family practice and general internal medicine doctors will most likely see this type of compensation while interventional cardiologists and neurosurgeons will most likely see the next type of compensation: productivity-based.

Productivity-Based Salary. This is when compensation gets exciting and scary altogether. If you are or will be working for an employer that pays you based on your production, you may have the ability to make more money than if you were on a guaranteed salary. However, you also have more risk. If your production is higher than expected, you will be compensated for it and earn more than some of your guaranteed-salary counterparts. If your performance lags behind expectations, so will your income. The most common metrics for evaluating performance are net collections and RVUs although other models, such as capitation methods, are also used.

Productivity Bonuses. By now, some of you are probably thinking that productivity-based income sounds scary and complicated and you will be glad to not have to keep up with such a thing. However, even those of you on guaranteed salaries may have bonuses tied to some production metric. These bonuses are similar to the salary formulas above in that you will only be paid a bonus if your production exceeds the expected metric and covers the base guaranteed salary you are being paid.

Traps and Pitfalls to Avoid

Now I’ll share with you some of the frequent compensation traps and pitfalls we find in physician contracts.

Repayment Obligations. Several years ago, a doctor came to us and told us a story that should cause trepidation in every physician. He had signed his first contract out of training and was looking forward to moving back to his hometown and working as an orthopedic surgeon with the only practice in town. His salary was stated as $500,000 a year. He thought it was a fair offer and signed without much analysis. However, during the course of his first year in practice, some unforeseen matters arose, and he was unable to work as much as was expected. He kept getting paid his salary, for which he was very grateful. However, at the end of the year, the practice sent him a notification that he owed them $300,000! His salary had a repayment obligation on it and, at the end of the year, they would pay him or require from him a surplus or shortfall based on his production. He did not have $300,000 in his checking account and had to borrow the money on top of his already burdensome student debt.

This story is not uncommon and applies to salaries, bonuses and other benefits. Anything you receive from the employer could be required to be paid back in part or full if you are unable to satisfy certain terms of your contract. It’s worth noting that this doctor was savvier than most we encounter and still made this mistake.

Not Knowing or Tracking the Metric. One of the necessities of all sporting events is that the score be kept by an impartial observer or equally by a party from each participating person or team. In the case of production-based salaries or bonuses, many doctors allow one team, the employer, to make the point system and keep score without the doctor, or a representative of the doctor (CPA, attorney, etc.), understanding the system or keeping score simultaneously. One of the top reasons physicians leave their current employers is due to unmet expectations. One of the most prevalent unmet expectations is income and comes from physicians not understanding or keeping track of the variable parts of their compensation.

Assuming the Best. We all know what assuming does … and it can be costly when it involves physician compensation. Don’t assume anything when it comes to your compensation. There is much more than just numbers that impact your income. Miss those items, and your bank account may have the right to sue you for financial malpractice.

Matt Wiggins (mwiggins@oncalladvisors.com) is the lead advisor and partner at OnCall Advisors, which helps physicians educate themselves on the non-clinical aspects of their lives. For more information like this on other life in medicine topics, check out their “Attending Life” online video curriculum.

 

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Your nose, your tail, and what’s in between

A malpractice insurance primer for job-seeking physicians

By Colin Nabity | Financial Fitness | Winter 2017

 

They may sound a little off-the-wall, but the terms used for medical malpractice insurance were designed to help professionals easily remember which types of coverage relates to which period of time. You only need one—nose or tail—and the main difference relates to whether the coverage for prior acts is purchased from your new insurance provider or your old one.

Your nose: Purchased from the new carrier

Nose coverage refers to the period that you were covered under a claims-made malpractice policy that was terminated at the same time a new policy with a different carrier was issued. With this coverage, incidents that occurred during the nose period (your prior policy), but were not reported until the new policy started, are covered by the new carrier.

This coverage is needed since the typical professional liability policy is issued on a claims-made rather than an “occurrence” basis. This means that coverage must be available when the claim is reported instead of when the claim occurred. When it comes to medical malpractice, it is not unusual for an incident to be discovered years after a procedure took place.

If you decide to change insurance carriers, your new carrier is going to require a list of all procedures performed before the requested issue date of the new policy. They will ask for loss runs from the prior carrier to determine if any prior claims are open or have been closed. If you want your new carrier to offer coverage for your nose period, be prepared to provide a lot of information about your practice during that time.

Your tail: Purchased from the old carrier

Tail coverage is important because claims may be reported long after a procedure or service. The tail option in your liability policy allows you to extend coverage from your old carrier for a number of years when you cancel your insurance because you are closing your practice or switching employers.

When applying for coverage, it is critical to determine what tail coverage options are available, especially when it comes to the cost of coverage and the time limit available. Your tail coverage provides protection if there is an incident related to a procedure or service you performed during the policy period, but a claim was not filed until after the policy period. Tail coverage is typically required when you are closing or selling your practice.

Example 1. You have decided to retire and close your practice that has been in business for 30 years and has been insured the entire time. However, you are still liable for all procedures performed during those 30 years (depending on your state’s statute of limitations) and must remain covered for as long as possible after you close your practice. With the appropriate tail coverage, any claim brought for past procedures will be covered under the last carrier that provided your malpractice insurance.

Example 2. You have decided to retire and sell your practice. The buyer has requested that you provide tail coverage for three years so that your patients can be transitioned into the new practice. Even if the buyer doesn’t require the tail coverage, you should ask for tail coverage just in case you are named in a malpractice suit so you will have defense costs coverage available.

Lapse in coverage

A lapse is a period when you continue to provide services without being insured under a professional liability (malpractice) policy. This is not only financially dangerous to your practice, but will also cause problems when you do get a policy in place. Since the insurance carriers have no way of properly underwriting for the period of lapsed coverage, they will typically not offer coverage for that period, or they will apply a significant surcharge.

Know if your defense costs are inside or outside

Your malpractice coverage will pay for defense costs, settlement costs and judgments awarded by a court. It is important to know whether your defense costs are inside or outside the policy limits.

Inside the policy limits: Defense costs inside the policy limits are deducted from your policy limit first and can significantly reduce the amount left over to pay judgments and settlements. These costs include attorney’s fees and general court costs that occur before a judgment or settlement is reached. You should consider that your defense can be the costliest part of a malpractice claim.

Outside the policy limits: With defense costs paid outside the policy limit, the significant cost of defending your case will not impact the limit available for settlement costs and judgments.

Your malpractice insurance can stand between a claim and financial devastation. It’s extremely important to make an informed decision before committing to a purchase rather than at the time of a claim.

Colin Nabity is the founder and CEO of LeverageRx, an online financial help desk for physicians, dentists and other medical professionals looking for personal financial guidance.

 

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Which employer type is best for you as a physician?

Trying to decide which interviews to pursue, which to take and which to turn down? One way to narrow your focus is to evaluate employer types and determine which one is best for you.

By Matt Wiggins | Financial Fitness | Summer 2016

 

Residents and fellows come in two breeds: Those who, after training, pursue the job they want and those who take what comes their way. After years working with OnCall Advisors to help thousands of physicians transitioning from training to practice, I am convinced of one thing: A passive approach toward interviewing leads to problematic employment situations, discontentment on the part of both the employer and the physician, and early termination.

Of the physicians we’ve worked with, most who’ve faced the early demise of their first practicing positions don’t completely understand what happened. How did these jobs they’d worked toward for so long go so badly? What happened after they were hired that caused such rapid deterioration of their situations?

The truth is that the fissures probably didn’t start after they were hired. Most likely, the problems started during the interview process. These physicians weren’t actively engaged in determining where they wanted to work, so they failed to identify potential problems that should have steered them away from specific employers. Therefore, a mismatch was more likely, and the groundwork for a career detour was laid.

But you’re not destined to make the same mistake. In fact, one way to avoid it is to understand some of the basic differences among employer types. I’ve written an overview that will give you a good starting point to identify which employers would be a good fit for you. This overview provides a framework within which to evaluate them. Once you know more about each type, you will be able to seek and take interviews with the employers whose opportunities would most likely result in a successful fit.

Understanding the employer types

I caution you against viewing this as an absolute benchmark for all similar employers. Each employer is different, and you will need to evaluate each on its own. Also remember that there are other criteria to evaluate, such as average turnover, technology and flexibility.

Small Private Practices. First, allow me to state the obvious: There is a wide range of private practices, and they are as unique and varied as physicians in a practice. I will merely point to common financial strengths and weaknesses across most small private practice situations without addressing the myriad other differences and nuances.

Small private practices tend to offer the most potential financial rewards, opportunities for partnership, fewest bureaucratic speed bumps, and greatest flexibility for schedules and workplace autonomy. They also, however, come with the greatest degree of potential risk. Because they don’t have the protection of large institutions or corporations, any problems, even small ones, could wreak havoc on the practice. A few years ago, for example, we worked with a small private practice that went out of business simply due to basic financial mismanagement by a key partner. In this case, one of the strengths of small private practices, less bureaucracy, also led to a single person’s actions taking the company down. Therefore, if you are risk-averse, this may not be the route to go. If you can tolerate more risk for more potential rewards, however, you may want to pursue interviewing with small private practices.

Large Private Practices. Large private practices have some of the same dynamics as small private practices but lack the extremes. Due to their size and numbers, these large groups can offer better benefits and pose less risk, but they also offer slightly lower potential for financial reward. Your salary may be competitive, and you may be offered a small stake as a minor partner, but your chance for dynamic income growth is lower than it would be in a smaller group that could double its revenue in any given year. If you like the idea of small private practice but want lower risk and better benefits, you may want to interview with large private practices.

Hospitals. On the risk scale, hospitals are far from almost any type of private practice. This will vary greatly due to the size and location of each hospital, of course, but hospitals are typically slower-moving and prone to fewer big mistakes. The day-to-day changes don’t normally have drastic effects on your employment. Also, turnover can be lower because you may receive less individualized attention on a month-to-month basis. In general, however, pay is lower in hospital settings than in private practices, and benefits are average.

Government. Being employed as a physician by the U.S. government is the ultimate safety play. There is no threat of the government going out of business, and it has taxing authority, if necessary, to raise revenue to pay your salary. The tradeoff is often a significantly lower salary. The government does, however, typically offer a slate of fairly good benefits, and if you remain in government employ until you retire, or if you suffer a catastrophe or disability, the government will take good care of you. For these reasons, if you want very little risk and can live with less pay and pretty good benefits, you may want to interview for a government-employed physician position.

Applying the evaluations

After reviewing the evaluations of each option, I trust you will be more informed about some of the benefits and drawbacks of these major types of employers. If you feel that one is better suited for you than others, pursue employment with that type of employer and minimize the amount of time and focus you give to the others. If you’re still unsure, begin considering other factors like location, schedule autonomy and career advancement opportunities, and other preferences like your desire to do research, have your own practice or see patients in only one location.

I hope that by being judicious in whom you interview with in the first place, you will land in a more favorable position and will experience longer-lived success in your next or first job!

Matt Wiggins is the lead advisor and partner at OnCall Advisors, which helps physicians educate themselves on the non-clinical aspects of their lives. For more information like this on other life in medicine topics, check out their “Attending Life” online video curriculum at AttendingLife.com/PracticeLink.

 

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Is it time for a financial self-exam?

Use your last year of residency or fellowship to develop a game plan for your financial future.

By James McNaughton, CFP | Financial Fitness | PracticeLink Tips | Spring 2016

 

Contract negotiations. Family considerations. Personal finances. Your anticipation of the end of residency can easily be stymied by the overwhelming stress of finding a job and all that it entails.

Understanding the basic financial planning concepts for physicians will arm you with the knowledge you need to conduct an efficient interview with a financial professional and hopefully minimize any mistakes or unnecessary products or fees. In this Financial Fitness article, we’ll touch on some general concepts of retirement planning, life insurance, disability insurance and recommended estate documents.

Retirement planning

There are three phases of an individual’s financial life cycle: asset accumulation, conservation or protection, and distribution.

For most professionals, asset accumulation begins in their early- to mid-20s and tends to last 25 to 30 years. Physicians start their asset accumulation phase much later than the average person—in some cases as late as their mid-30s. To overcome the late start, it is important to understand the value of compounding interest over time. Allow yourself to reap the rewards of your hard work, but understand that time is your best asset.

Most people will require 60 to 80 percent of their preretirement income to maintain a similar lifestyle in retirement. Work with an adviser who will assist you in calculating your future nest egg, and remain proactive with your plan. At a minimum, request annual or semi-annual meetings to review performance. It is much easier to alter your plan early in your career than a few years before retirement.

Life insurance

One of the most common questions I encounter from young physicians is, “How much life insurance do I need?” Unfortunately, there is no simple answer to that question. The amount of coverage needed depends on factors such as income or cash flow needs; expenses and debts; and spousal or dependents’ needs.

One of the most popular approaches used to determine an amount is the capital retention approach.

This method provides a death benefit amount that, along with other assets, is sufficient in providing a level of investment income that covers the projected needs of the family without invading the death benefit principal. If other income-producing assets are available, this would reduce the required death benefit.

“Term” is usually the most appropriate type of life insurance for young physicians, as it allows you to purchase the most death benefit while minimizing your premium. For example, if you purchased a $2.5 million term policy and your spouse could safely withdraw 4 percent ($100,000) without invading principal, would this amount of income be adequate to maintain a comfortable lifestyle? The ability to communicate between spouses regarding a gloomy topic is important.

Disability insurance

Disability insurance is a way for you to insure one of your most valuable assets: your income. After years of medical education and training, you now have the ability to maximize your income.

Disability insurance will pay if you meet the insurance company’s definition of disabled. This is very important for a young physician who has not had the time to save for retirement.

As you interview for jobs, your prospective employer may or may not offer disability insurance. Most employer-offered policies are “plain vanilla” policies that may not contain language needed for your specialty.

For example, if you’re interviewing as an orthopedic surgeon and your employer does not offer an own-occupation disability policy, it may be in your best interest to purchase one. This will allow you to receive benefits if you are no longer able to perform the duties of an orthopedic surgeon but still earn income while working in another occupation or medical specialty. Generally, disability insurance should replace 60 to 70 percent of your gross income.

Estate documents

One of the most overlooked aspects of financial planning is the creating or updating of simple estate documents, all of which can be drafted by an attorney. Three documents to consider are:

Wills. This is a legal document that provides the will maker (the “testator”) the opportunity to control the distribution of property. This document is extremely important for young families as it can name a guardian for minor children.

Living will or advance directive. This document can be drafted when in full capacity, giving personal directions to a physician regarding health care in the event of being severely disabled or suffering from a terminal illness.

Durable power of attorney for health care. This is a written document executed by one person (the principal) authorizing someone else to make medical decisions on the principal’s behalf. This power takes effect when the principal cannot give informed consent to a medical decision and not just in the event that the principal has a terminal illness.

Before you leave residency, examine your existing situation to establish a starting point. Educate yourself on the products and services you’ll need, and find an adviser who can help guide you through these decisions.

James McNaughton, CFP, is a partner at Siouxland Investment Group, LLP and financial adviser for Premier Physician Agency, LLC, a national consulting firm specializing in physician job search and contracts.

(Disclosure: James McNaughton is a registered representative and registered investment adviser representative of SWS Financial Services, Inc., a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Views and opinions expressed herein are solely the author’s, and SWS Financial Services, a member of FINRA and SIPC and a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH), with headquarters at 1201 Elm St., Ste 3500, Dallas, TX 75270 (214-859-1800). Premier Physician Agency, LLC is not affiliated with SWS Financial Services, Inc.)

 

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Do you qualify for student loan forgiveness?

Determine your eligibility to participate in Public Service Loan Forgiveness programs.

By Joy Sorensen Navarre | Financial Fitness | Winter 2016

 

Student loan debt is like an iceberg that has the potential to sink physicians financially unless they figure out how to manage it. Public Service Loan Forgiveness (PSLF) is a radar-like management tool for physician borrowers.

PSLF is a free federal program that started in 2007 and allows certain federal student loans to be forgiven after 10 years of on-time monthly payments, often at a reduced monthly payment amount, for physicians employed by nonprofit or public health systems.

In order to gain a better understanding of the program and how it works, here are the most common questions we receive from new physicians when they are deciding if PSLF is a fit for them.

How can I find out if my hospital qualifies?

The first thing to do is to identify who is paying you—are you an employee of the hospital or another entity? Some physicians are employees of the hospital. In many cases, physicians are employed by a physician group or a university. Your most recent IRS Form W-2 will identify your employer.

Second, determine the nonprofit status of your employer. Hospitals and physician groups may be nonprofit or for-profit. In some cases the status is unclear. Last year, a prestigious and profitable hospital told us their physician group was a for-profit entity. When we asked for confirmation, we learned their legal tax status was actually nonprofit. In order to figure out tax status, ask for the federal Employer Identification Number (EIN). By obtaining this information you can determine if the group is nonprofit and qualifies you for PSLF—or privately owned or for-profit, which would make you ineligible.

Will Congress change the program in the future? Or, if Congress changes it, what happens to me?

Because PSLF can be changed through an act of Congress, we find that physicians have questions about the future of the program. There are a few reasons why we recommend physician borrowers consider PSLF as a viable option now for loan forgiveness.

First, experts believe that the high cost of medical education and the growing physician shortage create compelling public policy reasons to continue the program into the future. In addition, the original purposes of the law still exist. PSLF was created by The College Cost Reduction and Access Act of 2007 to protect borrowers from excessive student loan repayment burdens and to encourage employment in the public and nonprofit sectors. The Act cut subsidies to private student loan lenders estimated to cost U.S. taxpayers $87 billion. Those savings are redirected to programs to help borrowers.

Second, precedents exist for extending benefits to current participants in the event of future changes. According to university financial aid officers, when changes are made to federal student loan programs, existing participants have been grandfathered in.

Finally, a borrower ultimately remains responsible for the repayment of student loans, so we recommend that our clients work with a financial advisor to establish and make regular contributions to a contingency fund to serve in the case of adverse changes.

I heard there is a $57,000 cap on amount forgiven. Is that true?

No. There is no cap on forgiveness with PSLF. This figure was proposed in President Obama’s 2015 budget proposal as a possible cap, but Congress took no action.

I made payments during residency. Do they count toward the 120 required for forgiveness?

The earlier physicians start repayment, the more benefit they will attain. However, many residents and fellows don’t have the time to fully understand the options. Recently a physician finishing her training told us, “We are dying for good information on student loan forgiveness. You made it easy.”

If the payments were made after October 1, 2007, on Federal Direct Loans where the location that the residency occurred is a qualifying public service organization and payments were made under a qualifying repayment plan, then they qualify.

Should I consolidate my loans?

This depends on the loans you have. If some or all of your loans are not eligible for PSLF and you wish to participate in the program, you will have to consolidate into a Direct Consolidation Loan. Only loans received under the Direct Loan Program are eligible for PSLF. If you have loans from programs that are not eligible, such as the FFEL Program or Perkins Loan Program, you can consolidate them into a Direct Consolidation Loan in order to qualify for PSLF.

It’s our goal to raise awareness about Public Service Loan Forgiveness. When early-career physicians understand their student loan forgiveness options, they feel equipped to make informed decisions and avoid financial icebergs.

Joy Sorensen Navarre is the president and founder of Navigate LLC, which has helped hundreds of early-career physicians understand their student loan repayment options, evaluate the results and make solid decisions. She can be reached at (612) 209-2382.

 

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Key items of an employer’s benefits package

Understanding the basics of your benefits can help you prepare for interviews and contract negotiations.

By James McNaughton, Financial Advisor | Fall 2015 | Financial Fitness

 

The financial planning principles that make up an employer’s benefits package simply are not a part of the education or training that you have received.

However, these items will be a vital part of your contract and may be discussed in-person by your potential employer. It’s important that you arrive to your interviews or negotiations with a basic understanding of the following terms so you can fully evaluate opportunities from a financial perspective.

Retirement savings plans

When it comes to retirement planning, a young physician’s best ally is time.

As you come out of residency, you may have a 30- to 40-year timeline before retirement, so take advantage of any employer-offered plan and supplement that plan according to your needs or goals.

The most common retirement plans among employers are 401(k)s and 403(b)s. For 2015, an employee can make a maximum contribution of $18,000. Those over age 50 can make an additional catch-up contribution of $6,000.

Find out when you are eligible to participate. If you need to fulfill one year of employment before becoming eligible, you may consider doing some type of retirement planning on your own that first year. Some employers may match your contributions into these plans while others may make no contribution at all.

These are details for which you need answers. If your prospective employer does contribute, ask if a vesting schedule and terms exist for you to see.

Most importantly, be proactive in your retirement planning and take advantage of any employer benefits.

Disability insurance

Young physicians should give disability insurance extra scrutiny. Not only does it protect the investment and sacrifices you’ve already made, but it also protects your future income potential.

Many employers will offer some variation of short- and long-term disability. Will your employer pay the premiums? Find out when your coverage starts and what elimination period you must fulfill. Ask what triggers a benefit and the amount paid for a monthly benefit. To what age is the benefit payable? Do they also include “own occupation” language? Many employers offer group policies that may not include this language. Investigate to see if these policies would fulfill your “risk” need. Alone, these policies may not be sufficient, and a supplemental policy may be necessary. Calculate your needs and do what is best for you and your family.

Life insurance

In most cases, term insurance is the best recommendation for young physicians. It is inexpensive and can be purchased for a specific term (such as a 30-year term policy). This makes term insurance ideal for covering debt such as mortgages or business loans. Your employer may offer life insurance that is one or two times your salary, or instead offer a flat amount. More than likely, this may not be adequate coverage for you and your family. Before purchasing supplemental life insurance through your employer, shop rates with other companies for the most cost-efficient policy. Also ensure that beneficiaries can be named for any employer-paid life insurance policy.

If you remain unsure about the packages or policies offered by an employer and whether they meet your needs at this stage of your career, or wonder if you should consider the procurement of additional coverage, seek the opinion of a licensed financial advisor with experience in working with other physicians.

James McNaughton is a partner at Siouxland Investment Group, LLP and Financial Advisor for Premier Physician Agency, LLC, a national consulting firm specializing in physician job search and contracts.

(Disclosure: James McNaughton is a registered representative and registered investment adviser representative of SWS Financial Services, Inc., a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Views and opinions expressed herein are soley the author’s, and SWS Financial Services, a member of FINRA and SIPC and a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH), with headquarters at 1201 Elm St., Ste 3500, Dallas, TX 75270 (214-859-1800). Premier Physician Agency, LLC is not affiliated with SWS Financial Services, Inc.)

 

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First, build your foundation

Your future income is your greatest asset. Here’s how to protect it.

By David Mandell, JD, MBA and H. Michael Lewellen, CFP | Financial Fitness | Summer 2015

 

As advisors to young physicians across the country, we are often asked, “What is the most important thing I should be doing financially in the first years of practice?”

Our answer is simple: You need to build a solid foundation. But the application of this concept is different for each physician.

Foundation building for young physicians depends on where they are in their personal lives (single, married, kids, etc.). Also, ideally it begins before you even leave training because, like most things, establishing the right habits is a key to building a financial foundation.

Most young physicians will see a significant increase in their incomes when they begin their practice. Up to this point, they have typically been living paycheck to paycheck, and a jump in income by five-fold or more can be a bit euphoric. With a “spend now and plan later” attitude, many young physicians will indulge a bit and make large purchases. Often taken too far, they find themselves once again living paycheck to paycheck. The attitude then becomes, “Once I make partner in a few years, I’ll address my financial plan.”

Though some splurging is in order, we try to get our young clients to focus on getting into the right habits and shielding what they have already built.

Young physicians’ greatest asset

The most important factor in the building of a foundation is to protect what you have already built. For many young physicians with little savings and large student loans, the question is often, “What have I built? I am in severe debt!” The answer is that they have actually built a significant asset that needs protecting: the value of their future income.

Given the significant investment made to become a practicing physician, it should not be surprising that the value of your future income is also significant.

For example, let’s say an orthopedic surgeon is offered a starting salary of $300,000, including benefits. Assuming this physician plans on practicing for 30 years (and 3.5% inflation), the present value of this annual income is more than $5.5 million—even if that physician never makes more than $300,000 per year, including inflation.

Most people would think an asset this valuable is worth protecting.

What is needed to protect this asset? That depends on who they are protecting it for, if it’s for just themselves or for others dependent on them. For either scenario, physicians need to protect their ability to earn this income in the future. That is why disability income insurance is so critical, and is tool number one for young physicians to implement.

Disability insurance

Disability income insurance conceptually is straightforward: If you become disabled, it will pay you. For young physicians (and on into your 50s), this protection is critical because you have not accumulated the savings to support yourself and your family in case you can’t work as a physician.

When looking at purchasing individual disability income insurance, physicians need to determine what their true need is, not how much they can get. If monthly expenses are $3,000 a month, but an insurance salesman says you can get $5,000 a month, you are over-insuring yourself. Though having more coverage than what’s needed is not always wrong, controlling expenses in order to build the proper foundation is more important.

Physicians will also want to make sure they’re purchasing adequate coverage. The definition of disability should be occupation-specific; thus a physician cannot be forced to go back to work in another field. Residual or partial disability rider is another important part of the contract, which in case the physician suffers a partial disability, they can still work part-time in their occupation. Typically there has to be an income loss of 20 percent or greater. Also, in the event of a long-term disability, having a cost-of-living rider as an inflationary protector is important.

Young physicians should also beware of what is available through an employer. The issue with group insurance is that it covers the masses. This can lead to coverage that is not occupation specific, has short benefit periods, does not have a partial or inflation protection rider, and can be canceled at any time. While that is not the case with all hospitals, generally group insurance is not adequate for a young physician.

Often, there are discounts in place that are connected to hospitals that allow young physicians to purchase individual disability income insurance at a lower rate or with unisex rates. The unisex rate option is the most ideal and has the greatest positive impact on female physicians.

Life insurance

Young physicians with financial dependents—typically children or spouses, but sometimes other family members—need to focus on protecting their future income value not only against disability, but also against death. This is why life insurance is tool number two that we typically recommend.

Much like disability income insurance, you need to first determine what your need is from a death benefit perspective to make sure you are being cost efficient. The way to determine your need is to decide what expenses would need to be covered. For example: mortgage, education funding for children, car loans and other debts and income support for spouse.

Young physicians in a position of purchasing life insurance should probably consider term insurance as their best option.

Term insurance is inexpensive and provides a death benefit for a period of time (10, 20, 30 years). This does not mean term insurance is the only or best type of insurance; it is generally best for a young physician who has a specific need. Permanent life insurance can be a very tax efficient saving vehicle that provides tax-free growth and tax-free distributions, if structured properly, and can provide great asset protection depending on the state of residence. For these reasons, permanent (cash value) insurance is often selected even by young physicians as a wealth accumulation and protection vehicle.

At the outset of their medical career, physicians in training are told “first, do no harm.” As advisors to young physicians nationwide who are at the outset of their financial careers, we give similar advice: “First, build your foundation.”

David B. Mandell, JD, MBA, is a former attorney and author of 10 books for physicians, including For Doctors Only: A Guide to Working Less & Building More, as well a number of state books. He is a principal of the financial consulting firm OJM Group where H. Michael Lewellen, CFP serves as director of financial planning. They can be reached at (877) 656-4362.

 

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