Attention Doctors! Are You Making These Financial Mistakes?

Stop being like most other doctors. Fitting in with the crowd is normal for most, but not for you. Doctors represent a very unique segment of the population. As such, the financial challenges medical professionals face can be complex and intimidating. We’ve uncovered five common financial symptoms to look out for. Become better educated and regain control of your financial future.

1. Stop Trying To “Fit In” With The Crowd

Smart doctors understand they are quite different from the average American household. The Census bureau analyzed the average American household income and found that the average American household earns about $48,000 annually. About 80% of average American households earned less than $104,000 annually and the highest earning 1/5th of the population earned approximately $176,000 per year. If you consider that the average physician household earns well above $200,000, it’s fair to assume that physician families likely earn more than 95% of American households. If so, should your planning strategies be similar to those of the average American household?

In addition, the endless options of mass market financial advice via periodicals, publications, and online sources, has led many doctors to embrace a “do it yourself” mentality. Smart doctors however, understand that the mass media creates content targeting the demographics of their readership. A quick look at the audience income demographic for some of the top financial media publications would show that most popular publications have core audiences households earning under $90,000 annually.

With mass media generally catering to non-affluent audiences to generate ad revenues, how can doctors realistically expect to receive customized and comprehensive advice from popular magazines, newspapers, and websites?  By understanding the differences and unique challenges doctors face relative to the “average American household”, it should become clear that “fitting in” may not be the best plan for you.

2. Ignoring Advisor Coordination

Assuming you’ve already employed a team of experienced advisors in the tax, legal, insurance, and investment management fields, your financial plan may still have unforeseen risks. The collaboration by your professional team members is a critical function when implementing comprehensive financial plans. Over the years we’ve seen common symptoms associated with a lack of proper coordination by doctors’ professional advisors. Paying attorneys to create living trusts without properly changing asset title, uncombined life insurance policies and trusts, investment account strategies that ignore taxation are some signs your team may not be collaborating effectively on your behalf.

How often does your CPA, attorney, financial and insurance specialists meet to discuss your planning initiatives? Once per year? Once per month? Never? If you’re a doctor and exhibit some of these symptoms, a change may be in order. Without effective team member collaboration, optimizing the various facets of your financial life becomes increasingly difficult. Ask yourself, do you have a team that proactively communicates and collaborates on your behalf?

3. You “Think” You’re Adequately Protected

We’d all like to think we’ll live a long, healthy life. In a perfect world, we all will. The reality however, paints a slightly different picture. The Census Bureau’s statistics show there is approximately a 1 in 24 chance that you’ll die from a stroke and a near 5% chance you’ll die from an accident or adverse actions caused by another. Total it up and there’s an almost 10% chance you’ll die from an unexpected or unforeseen event. Many smart doctors understand the importance of protecting against the risk of income loss and/or estate loss. However, creating a plan that adequately protects your family in the event of your death is not as simple as it may seem.

Consider this. The present value of a family that earns $50,000 annually for 20 years is approximately $710,000. Financially speaking, this family would be on equal footing if they had $710,000 in lump sum today or 20 years of income. Now lets analyze a doctor’s condition. For a physician family earning $350,000 annually, the present value of 20 years of lost income is approximately $4.98 million. If a doctor earns $1 million per year, the present value is about $14.2 million.

The implication here is that the average physician family needs well above 10 times the annual income to replace 20 years of lost wages. And these estimates don’t adjust for inflation. In addition, lost income doesn’t include other estate preservation issues such as income in respect of decedent (IRD) tax, estate taxes, and liquidity issues many doctors may face. Developing appropriate strategies to protect against unexpected and premature death is a critical planning component for most doctors.

4. Ignoring Tax Reduction Opportunities

Tax efficient investment strategies have helped affluent families to build significant wealth over the years. Taxes on investment gains can take a big bite out of your long term appreciation potential. Depending on your income level, investment gain taxes can potentially reach over 42% of your short and almost 25% of your long term investment growth. To see how small differences in after tax returns can impact your overall growth consider the “rule of 72.” It states that dividing 72 by your expected after tax return will show you the amount of years it would take for your investment to double.

Consider the following hypothetical example. Under the rule of 72, an investment earning 9% per year would double about every 8 years. In 24 years, a $100,000 investment growing at 9% would be worth around $800,000. What if taxes weren’t closely watched, would there be much of a difference? A $100,000 investment earning an annual 6% (1/3 of the 9% pretax gain goes to taxes), would take about 12 years to double your money. After 24 years, you’d have about $400,000, half as much money accumulated. Keep in mind that the rule of 72 is simply a mathematical concept and does not guarantee investment results nor does it function as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.

Smart doctors understand the significance of after tax returns. This is one of the several strategies they’ve employed to accumulate so much wealth. There are several strategies that deal with tax efficiency. Tax exempt vehicles, tax efficient investments, and offsetting gains, are just some of the many examples. Have you analyzed the tax efficiency of your plan? How much can ignoring tax efficiency affect your long term accumulated wealth?

5. Using “Joint Ownership” For Asset Protection

Joint tenancy may be the most common form of ownership for married couples. Though common, this form of ownership can cause unintended consequences and give rise to potential risks for doctors and their families. Joint ownership can leave your assets unprotected from lawsuits and also create unexpected estate planning problems.

While joint ownership allows assets to bypass the will and probate by automatically passing to the surviving owner, it also takes precedent over any living trust or estate planning that may have been previously completed. If you’ve created living trusts and designated beneficiaries, the joint ownership structure may potentially override your original asset transfer objectives. This often overlooked symptom can not only create disinheritance risk but may also leave assets exposed to creditors after you pass away.

Most doctors are well intentioned with their planning initiatives. These consequences result not from ill will, but lack of appropriate advice. Do you have a large amount of assets held in joint tenancy? Have you considered these risks? Now is a great time to ask these important questions.

Regain Control Of Your Financial Future!

We hope you’ve found these tips helpful and will encourage you to analyze your current financial philosophy and planning process. We’ve helped many doctors identify and improve their retirement, investment, insurance, and estate plans. Taking the steps to incorporate appropriate changes to your family’s plan may seem overwhelming. But remember, most successful families faced similar challenges and realized their opportunity for leveraging wealth.

If you’re displaying one or more of these symptoms or are just finding it hard to get started, take action now! We’ll be happy to help you elevate your plan to the next level. Create your new prescription for financial health. Simply call us at 561-961-5418 or enter your name and email below. Someone from our office will reach out to schedule a complimentary consultation at a time that’s convenient for you!

The information contained herein is not intended as financial, tax, or legal advice. Consult a qualified financial, tax, or legal professional for such advice.