Retirement Planning for Physicians

Retirement planning may be an essential step in securing a comfortable future, but for physicians, the path to retirement can require careful consideration of their unique financial situation. Doctors face challenges such as late entry into high-earning years, significant student debt, and extended training periods—all of which affect their retirement timeline and savings strategies. These challenges may make it critical for doctors to implement a well-thought-out financial plan early in their careers.

Physicians are often busy juggling long hours, patient care, and the demands of a healthcare career. As such, planning for the future can sometimes take a backseat to daily responsibilities. However, failing to develop a strategy for retirement can have long-term consequences. This article aims to provide physicians with an overview of various retirement planning options, tailored to both employed doctors and practice owners. We will explore some of the advantages and challenges of each option, helping you make informed decisions as you work toward securing your retirement future.

Whether you’re an employed physician, a practice owner, or a self-employed specialist, this article is designed to help you navigate the retirement planning landscape, to assist making the process more manageable.

Unique Financial Considerations for Doctors

Extended Education and Student Debt

One of the most significant factors affecting physicians’ retirement plans is the extended period of education required to enter the workforce. Medical school, residency, and fellowships often result in years of deferred income and substantial student loan debt. Unlike professionals in other fields, doctors typically face a delayed entry into their high-earning years, which may significantly impact their ability to accumulate retirement savings.

Medical training can last well over a decade, during which doctors are often living on limited stipends and deferring savings. As a result, many physicians find themselves starting their careers in their 30s or later, with substantial student loan debt and little or no retirement savings. However, these challenges don’t mean that retirement savings are out of reach—I think it may be crucial to start as early as possible, even during residency or early career stages. The earlier physicians begin saving, the more time they have for compounding growth, which may help towards securing a financially stable future.

If you’re carrying student loan debt, it can be important to balance paying off loans with saving for retirement. Although student loans may feel like a priority, deferring retirement contributions can cost you in the long run. To strike the right balance, consulting with a financial advisor can be beneficial in making sure you’re not sacrificing your retirement savings for short-term financial obligations.

High-Income Tax Brackets

Physicians are often in the highest tax brackets due to their substantial salaries. While this can be rewarding in terms of income, it also presents an opportunity to maximize tax-efficient retirement savings strategies. Doctors may need to be proactive in utilizing retirement accounts that offer tax advantages to mitigate the impact of their higher tax rates.

Many physicians are also at risk of “lifestyle inflation”—the tendency to increase spending as income rises. While it’s natural to enjoy the rewards of a successful career, it is important to keep your financial goals in mind. Failing to plan for the future can lead to missed opportunities for retirement savings and tax efficiency.

When planning for retirement, I think it’s important to understand the implications of taxes on your savings. For example, contributing to a traditional 401(k) allows you to defer taxes until retirement, which is particularly valuable for high-income earners. In contrast, contributing to a Roth 401(k) or Roth IRA may be beneficial if you expect your tax rate to be lower in retirement than it is during your high-earning years.

Tax Disclaimer: We do not provide tax advice, it’s essential to consult with your tax professional regarding the tax implications of your retirement savings strategy. Tax laws change frequently, and a tax professional can help you optimize your strategy.

Lifestyle Costs and Practice-Related Expenses

Physicians are often managing significant personal lifestyle expenses alongside practice-related costs, especially if they own their practices. Private practice owners are faced with numerous business expenses, such as overhead costs, employee salaries, medical equipment, and insurance premiums. This may require careful financial planning to ensure that retirement contributions are prioritized, alongside these essential costs.

On top of practice-related expenses, doctors must also consider their personal lifestyle, including housing, family expenses, and savings goals. For physicians who are balancing both personal and professional expenses, finding a way to save for retirement can be challenging, but may be critical for long-term financial security.

Whether you are employed in a healthcare system or running your own practice, a solid financial framework can be essential. Working with a financial advisor who understands the unique needs of physicians can help you develop a retirement strategy that accounts for both personal and professional responsibilities.

Retirement Plan Options for Employed Physicians

Employer-Sponsored 401(k) or 403(b)

For many physicians employed by hospitals or healthcare systems, 401(k) or 403(b) plans are common retirement options. These employer-sponsored plans allow for tax-deferred growth on contributions, meaning that the money you contribute is not taxed until you withdraw it in retirement.

• Maximizing Contributions: Many physicians may benefit from maximizing contributions to their 401(k) or 403(b), especially if their employer offers a matching contribution (The contribution limit is $23,000 for 2024). Matching funds can help accelerate retirement savings.
• Roth vs. Traditional 401(k): Many plans offer both Roth and traditional 401(k) options. A Roth 401(k) allows for tax-free withdrawals in retirement, but contributions are made with after-tax dollars. In contrast, contributions to a traditional 401(k) are tax-deductible, but withdrawals in retirement are taxed as ordinary income.
• Vesting Schedules: Some 401(k) plans may include vesting schedules, meaning the employer’s contributions become fully owned by the employee after a certain number of years. It’s important to understand your specific plan’s vesting schedule to take full advantage of this benefit.

Tax Disclaimer: Please consult with your tax professional regarding the tax implications of 401(k) or 403(b) contributions and withdrawals. Your tax situation may influence which type of plan—Roth or traditional—is more advantageous for your circumstances.

457(b) Plans (For Public or Non-Profit Institutions)

A 457(b) plan is another option for employed physicians, especially those working in public or non-profit institutions. The 457(b) plan functions similarly to a 401(k) but has unique benefits and restrictions.

• No Early Withdrawal Penalty: Unlike traditional 401(k)s, the 457(b) plan allows for penalty-free withdrawals upon leaving the job, even before reaching the age of 59½. In this context, penalty-free means you can withdraw funds without paying the 10% early withdrawal penalty typically charged by the IRS for other retirement accounts. However, income tax still applies to the amount withdrawn.
• Contribution Limits: 457(b) plans have the same contribution limits as 401(k) plans, but some plans allow for additional “catch-up” contributions, which can benefit physicians looking to accelerate their savings.

Tax Disclaimer: Please consult with your tax professional regarding the tax implications of 457(b) contributions and withdrawals.

Defined Benefit (Pension) Plans

Defined benefit pension plans are becoming increasingly rare in today’s healthcare systems but may still be available to physicians employed by large hospital systems or academic institutions.

• How It Works: A pension plan typically provides a guaranteed income stream in retirement based on factors such as years of service and salary. While pensions are not as common as 401(k) plans, they can offer a level of security for physicians who work for institutions that still offer them.
• Contribution Limits: Unlike defined contribution plans, pension contributions are not made by the employee but are funded by the employer based on actuarial calculations. The IRS limits the annual benefit a participant can receive—currently up to $275,000 per year in retirement (for 2024), which indirectly limits how much can be contributed each year. These limits are typically more generous than those of defined contribution plans.
• Integration with Other Plans: A pension plan may provide some guaranteed income, but it’s still important to consider additional retirement savings options—such as a 401(k) or IRA—to help ensure adequate income throughout retirement.

Tax Disclaimer: Please consult with your tax professional regarding the tax implications of pension plan benefits and distributions.

Roth IRA and Traditional IRA

In addition to employer-sponsored plans, physicians can also consider individual retirement accounts (IRAs) to enhance their retirement savings.

• Traditional IRA: Contributions to a traditional IRA may be tax-deductible, reducing taxable income in the year of contribution. However, withdrawals in retirement are taxed as ordinary income. The annual contribution limit for 2024 is $7,000 (or $8,000 if age 50 or older), subject to income limits for deductibility if the individual or their spouse is covered by a workplace retirement plan.
• Roth IRA: Contributions to a Roth IRA are made with after-tax dollars, but withdrawals in retirement are typically tax-free, as long as certain requirements are met. Roth IRAs have income phase-outs, but high earners can utilize the backdoor Roth IRA strategy to bypass these limits. The same annual contribution limit applies—$7,000 for 2024 (or $8,000 if age 50 or older).

Tax Disclaimer: Please consult with your tax professional regarding the tax implications of Roth and traditional IRA contributions, withdrawals, and the backdoor Roth IRA strategy.

Retirement Plan Options for Self-Employed Doctors and Practice Owners

Solo 401(k) (Individual 401(k))

For self-employed physicians or practice owners, a solo 401(k) is a powerful retirement savings tool. This plan allows physicians to contribute both as an employee and an employer, maximizing the amount they can save.

• Contribution Limits: The contribution limits for solo 401(k) plans are higher than for traditional IRAs and 401(k)s, making them an attractive option for high-income earners. As an employee, a physician can contribute up to $22,500 (as of 2024), and as an employer, they can contribute up to 25% of their compensation, bringing the total contribution to over $60,000 in some cases.
• Roth Option: Solo 401(k)s also offer a Roth component, allowing physicians to choose between making traditional pre-tax contributions or Roth after-tax contributions.

Tax Disclaimer: Please consult with your tax professional regarding the tax implications of solo 401(k) contributions and withdrawals.

SEP IRA (Simplified Employee Pension)

The SEP IRA is another retirement savings option for self-employed physicians or small practice owners. While it offers simpler administration than a solo 401(k), it has lower contribution limits.

• Contribution Limits: The SEP IRA allows contributions of up to 25% of a physician’s compensation, up to a maximum of $66,000 (as of 2024). While the limits are lower than a solo 401(k), the SEP IRA is an easy-to-set-up option for those with variable income or smaller practices.

Tax Disclaimer: Please consult with your tax professional regarding the tax implications of SEP IRA contributions and withdrawals.

SIMPLE IRA (Savings Incentive Match Plan for Employees)

A SIMPLE IRA is a retirement plan designed for small businesses and self-employed individuals with fewer than 100 employees. While it may be easier to manage than a solo 401(k), it has lower contribution limits and mandatory employer contributions.

• Contribution Limits: For 2024, employees can contribute up to $16,000 annually, with an additional $3,500 catch-up contribution allowed for those age 50 and older. Employers are required to either match up to 3% of an employee’s compensation or contribute a flat 2% regardless of employee participation.
• Employer Match: In a SIMPLE IRA, employers are required to either match employee contributions up to 3% of salary or make a fixed contribution of 2% of compensation. While this option is less flexible than a SEP IRA, it may work well for smaller practices with fewer employees.

Tax Disclaimer: Please consult with your tax professional regarding the tax implications of SIMPLE IRA contributions and withdrawals.

Defined Benefit and Cash Balance Plans

Defined benefit and cash balance plans might be excellent options for physicians with high earnings who are looking to “catch up” on their retirement savings. These plans may provide significant tax deductions and can be tailored to individual needs.

• Contribution Limits: These plans allow for significantly higher contributions than defined contribution plans. For 2024, the annual benefit that can be funded under a traditional defined benefit plan is capped at $275,000. Contribution amounts are actuarially determined and depend on age, compensation, and years until retirement. Older physicians can often contribute well into six figures annually.
• Cash Balance Plans: Cash balance plans function similarly to traditional defined benefit plans but are more flexible. They allow for larger contributions, which may make them ideal for doctors who want to save more in their later years of practice.
• Traditional Defined Benefit Plans: While more complex and costly to administer, traditional defined benefit plans typically provide guaranteed retirement benefits based on a predetermined formula.

Tax Disclaimer: Please consult with your tax professional regarding the tax implications of cash balance and defined benefit plan contributions and withdrawals.

Additional Savings Strategies (Beyond Retirement Accounts)

Taxable (Brokerage) Accounts

Once physicians have maxed out their contributions to tax-advantaged accounts, they may need to turn to taxable brokerage accounts to continue growing their wealth.

• Benefits: Taxable accounts offer flexibility, access to funds, and fewer restrictions on withdrawals. However, they are subject to capital gains taxes on investments, so it’s important to manage taxes strategically.
• Capital Gains vs. Ordinary Income: Physicians can reduce their tax liability by holding investments for over a year to qualify for long-term capital gains rates, which are typically lower than ordinary income tax rates.

Tax Disclaimer: Please consult with your tax professional regarding the tax implications of taxable accounts and capital gains.

Health Savings Account (hsa)

HSAs are another valuable tool for physicians, especially those with high-deductible health plans (HDHPs). HSAs offer a “triple tax advantage”: contributions are tax-deductible, earnings grow tax-deferred, and withdrawals for qualified medical expenses are tax-free.

• Contribution Limits: For 2024, individuals can contribute up to $4,150, and families can contribute up to $8,300. An additional $1,000 catch-up contribution is allowed for individuals age 55 or older. Contributions must be made while enrolled in an HSA-eligible high-deductible health plan.
• Retirement Benefits: Physicians can also use their HSA as a secondary retirement vehicle by investing the funds and using them for healthcare costs in retirement. After age 65, HSA funds can be withdrawn for any purpose without penalty (though non-medical withdrawals are taxed as ordinary income).

Tax Disclaimer: Please consult with your tax professional regarding the tax implications of Health Savings Accounts (HSAs).

Crafting a Comprehensive Retirement Strategy

Combining Multiple Accounts

To maximize retirement savings, physicians often combine several accounts, such as a 401(k), Roth IRA, and cash balance plan. Each of these accounts has its strengths, including tax deferral, tax-free growth, and liquidity, which may allow physicians to create a diversified, balanced retirement portfolio.

Diversification and Asset Allocation

Diversifying investments across various asset classes-and different investments can help avoid over-concentration. Physicians, who often have limited time for active management, should consider working with a financial advisor to periodically rebalance their portfolios.

Planning for Shifting Career Phases

As physicians progress through their careers, their financial needs and goals will evolve. It’s essential to revisit retirement contributions during key career milestones, such as completing residency, joining a practice, or nearing retirement age.

We Specialize in Retirement Planning for Doctors

At Capital Formation Group, we understand the unique financial challenges faced by physicians. Our team specializes in creating tailored retirement strategies that account for factors such as high income, student debt, and professional milestones.

We offer a full range of services, including complex tax planning, cash flow analysis, and customized investment strategies. We believe our knowledge and guidance can support you in making informed decisions throughout your retirement planning journey.

Disclosures:
This material is not intended to provide and should not be relied on for tax or legal advice. Any information contained herein is of a general nature. You should seek specific advice from your tax or legal professional before pursuing any idea contemplated. All examples are hypothetical and for illustrative purposes only; individual results will vary. The material is for informational purposes only and is not intended to provide specific advice or recommendations for any individual, nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. Diversification cannot ensure a profit or guarantee against a loss.