As advisors to young physicians across the country, we are often asked the question: “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”—yet, the application of this concept (foundation) is different for each physician. However, as with patients, we often see very common symptoms and can make some generalizations about what is involved in creating a ”financial foundation” for many young doctors. We will do that here in this article.
Foundation-building for any young neurologist will depend on where he/she is in their personal life (single, married, kids, etc.). Also, it can and needs to begin before the physician even leaves training because, like most things, establishing the right habits is a key to building a financial foundation. Most young neurologists 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 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.”
YOUNG PHYSICIANS’ GREATEST ASSET: FUTURE VALUE OF INCOME
The most important factor in the building of a foundation is to protect what the young physician has already built—before tackling the endeavor of building wealth. For many young neurologists with little savings and often large student loans debts, their 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 neurologist, it should not be surprising that the value of their future income is also significant.
For example, let’s say a neurologist is offered a starting salary of $300,000, including benefits. Assuming this physician plans on practicing for 30 years (and 3.5 percent inflation), the present value of this annual income is: $5,517,613, even if they never make 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 whom they are protecting it for—for just themselves or for others dependent on them. For both types of doctors, they need to protect their ability to earn this income in the future. That is why disability income insurance is so critical—and is tool #1 for young neurologists to implement.
PROTECTING FUTURE INCOME FOR THE PHYSICIAN & DEPENDENTS
Disability income insurance, conceptually, is straightforward: if one becomes disabled it will pay the disabled doctor. For young neurologists (and doctors typically into their 50s) this protection is critical because they have not accumulated the savings to support themselves and their families in case they cannot work as a doctor.
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/month, but an insurance salesman says you can get $5,000/month, you are over insuring yourself. While 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, 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 neurologists should also we beware of what is available through their employer. More often than not, a hospital will provide group disability income insurance at no or minimum cost to the physician. The issue with group insurance is that it is covering 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 cancelled 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 the hospital that allow a young physician to purchase individual disability income insurance at a discount, or with unisex rates. The unisex rate option is the most ideal and has the greatest impact on female physicians.
PROTECTING FUTURE INCOME FOR DEPENDENTS
For young neurologists with financial dependents—typically, children or spouses, but sometimes other family members —they need to focus on protecting their future income value not only against disability, but also against death. This is why life insurance is tool #2 which 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, 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 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 neurologists 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 career, we give a similar advice—“first, build your foundation.” This article explains two key first steps in that process. The authors welcome your questions.
For a free hardcopy of For Doctors Only: A Guide to Working Less & Building More, please call (877) 656-4362. If you would like a free, shorter ebook version of For Doctors Only, please download our “highlights” edition at www.fordoctorsonlyhighlights.com.
David B. Mandell, JD, MBA, is an attorney and author of five national books for doctors, 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 (www.ojmgroup.com, where H. Michael Lewellen, CFP® serves as Director of Financial Planning. They can be reached at (877) 656-4362 or email@example.com.
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