Prescription for Retirement: Challenges and Recommendations for Medical Professionals
It’s easy to assume that doctors, dentists, and other medical professionals should have little problem in saving for retirement or other important financial goals. While it’s true that most earn a healthy income, they must finish medical school and complete their residencies first, both of which can take years.
But what many don’t realize is that doctors and dentists face unique challenges in connection with saving for retirement. For one thing, they tend to get a much later start than other professionals because they spend so much additional time in school. Also, they typically carry a much higher student debt load. So, while a typical MBA graduate may already have ten career-building years under his belt by the time he is 35, a physician of the same age may only be a few years out of residency—and carrying a bigger debt load.
Because they tend to get started later, it’s important for medical professionals to make smart decisions about saving for retirement, even as they’re just getting started on their own. According to recent studies, the average retirement age for physicians is 69, compared with the traditional retirement age of 65. Similarly, the retirement age of dentists has been steadily creeping upward for most of the last 20 years. This is partly due to their deep commitment to their work and the wellbeing of their patients, but it’s also for financial reasons: concern about their ability to maintain their accustomed lifestyle.
Early Career Professionals
At this stage, many young doctors and dentists are carrying multiple loads: education loans, responsibility for young children, buying a home, and building their practice. All these competing needs can make it hard to think about putting money away for retirement. However, for medical professionals employed by a hospital or other healthcare group, 401(k)s (or 403(b)s for non-profit entities) can offer an easy way to get started saving for retirement. Some employers may even offer matching funds that can help build your savings with “free money.”
For those who opt to start their own practice right out of med school or who may be employing a spouse, a single-owner 401(k), or “solo K” plan, can be a good option for putting away significant funds on a tax-favored basis. In 2023, you can contribute to a solo 401(k) plan as both employee and employer: up to $22,500 in elective deferrals (as an “employee”) and, in employer non-elective contributions (as an “employer”), up to 25% of compensation, not to exceed a total contribution of $66,000.
Mid-Career
As the practice grows, you will likely add employees and perhaps other physicians or dentists as partners. As a self-employed medical professional, you can still benefit from a 401(k), but it may be to your advantage to broaden your plan to include the needs of employees and associates (also potentially reducing the tax burden on your practice). Depending on your anticipated tax bracket in retirement, you may elect either a traditional or a Roth plan. Contributions to traditional 401(k)s provide a deduction to current taxable income. The funds in the plan grow untaxed until you begin making withdrawals in retirement, at which time they are taxed as ordinary income. A Roth plan does not provide a deduction when contributions are made, but funds grow tax-free, and withdrawals in retirement (as long as the funds have been in the plan five years or more) are not taxed as current income. As the employer and owner of the practice, you can also choose to make matching or non-matching contributions, both to your employees’ accounts and your own.
Glide Path to Retirement
Medical professionals who own mature practices and are in the final years before retirement may wish to consider a cash-balance defined benefit (pension) plan, perhaps in combination with a safe-harbor 401(k) plan. Cash-balance plans typically offer the highest available contributions, allowing the physician to boost retirement savings at a faster rate. Contributions are tax-deductible when made; distributions in retirement are taxed as ordinary income. Because contribution limits are based on the participant’s age, income, and desired retirement benefit, they are much higher than those for a 401(k) plan. Offering a cash-balance plan in combination with a safe-harbor 401(k) can allow highly compensated persons—such as self-employed physicians and dentists nearing retirement—to put away greater sums on a tax-favored basis while still offering other, less highly compensated employees a way to save for retirement that meets IRS requirements.
Whether you need to get started with building your retirement savings or to “supercharge” your retirement accounts in the final years before retirement, Savant Wealth Management has the expertise and experience to help you design a plan that can help you pursue your goals. To learn more, visit our website to read our article, “A Good Plan, or a Great Plan? What to Look for in Your 401(k).”
Savant is a Registered Investment Advisor. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.savantwealth.com. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant.
Patricia L. Hutchinson
Director of Retirement Plan Services
MBA