Best financial investments for physicians: Prioritize now to enjoy your retirement

Physicians spend many years in school and training only to come out saddled with student debt. By the time that most physicians start saving for retirement, they are in their 30s, making it more challenging to accrue enough money to meet retirement goals.

“Physicians are behind in not having anything saved up to that point,” said Anjali Jariwala, CPA, CFP^®, and founder of FIT Advisors in an interview with MDLinx. “Someone who is 22- or 23-years old coming out of college…starting to put money into a 401(k)…they may be ahead of a physician who is 35.”

To comfortably enter retirement, it’s imperative that physicians prioritize what they invest in. Jariwala underscored the importance of pre-tax savings for physicians who are in high-tax brackets or live in states with high income taxes and high costs of living.

“I want them to take advantage of any deferral vehicle that they have available,” she said. “Any type of investment that comes out pre-tax.”

Three tax-deferred buckets

Jariwala likens the three most important tax-deferred retirement vehicles to “buckets” that should be filled using pre-tax earnings.

The first bucket is the employer’s retirement plan—either a 401(k) or 403(b)—with a maximum employee contribution of $18,500 for 2018.

The second bucket, which is not offered at all health-care institutions, is the employer’s tax-deferred compensation plan, or 457(b). These vehicles also max out at $18,500 per year.

The third bucket is the health savings account (HSA), which can be used to pay for current or future medical expenses that accompany retirement (and older age). The maximum yearly contribution is $3,450 per individual or $6,900 for a family.

Backdoor Roth IRA

Although physicians typically aren’t eligible for Roth IRAs because of lower income requirements, doctors can fund an IRA, not take a tax deduction, and convert it to a Roth IRA—a practice also referred to as the “backdoor Roth IRA.”

Jariwala recommends that her physician clients take this approach and invest an additional $5,500 a year ($6,500 a year starting age 50).

If a physician has any other types of IRAs, then these investments should be rolled over into the employer retirement account before setting up a backdoor Roth IRA to avoid taxes on the conversion (also known as the pro rata rule).

Diversification with index funds

Retirement savings are meant for the long term, and as with all long-term investments, diversification is key. Nearly as important is minimizing the fees charged by financial advisors.

“In the employer retirement account, I pick the index funds with the lowest cost options to give [my clients] a diversified portfolio,” said Jariwala. “I don’t believe in active management—especially on the retirement account side. The data show that only 14% [of money managers] can outperform the market and it’s usually because of their fee. So that’s a game not worth playing.”

Additional investments

Once a physician has made the most of employer retirement offerings, Jariwala recommends that her clients consider passive income investments, such as rental property, if they can afford it.

“People want an income stream that they can use currently and in retirement,” she said.

Angel investing is an option that Jariwala reserves for physicians who have higher risk tolerance. She cautions that start-ups have a 90% chance of failure. Nevertheless, physicians are often privy to exciting angel investment opportunities in medical devices and technology.

“Angel investment is really risky,” said Jariwala. “If someone is barely managing, and there’s not enough for retirement, and they want to throw $100,000 into an angel investment, that’s not something that I’d recommend.”

Finally, Jariwala stressed that before pursuing additional investment opportunities beyond employer retirement plans, it’s necessary that physicians create an emergency fund with enough money to cover 3-6 months of living expenses. After all, it’s best to be prepared.