How smart doctors save for retirement

By Naveed Saleh, MD, MS
Published June 17, 2021

Key Takeaways

For most people, home ownership represents a significant investment. While shelter is a requirement for survival, and home ownership can be a component of any sound investment strategy, it shouldn’t be the only pillar supporting your retirement plans.

“While homes are not purely an investment, because of the ongoing tax and maintenance costs associated, they do present an opportunity for physicians,” said Anthony Watson, CFA, CFP, of Thrive Retirement Specialists. “Aside from needing someplace to live, a home still generally appreciates in value, and mortgage interest is still deductible on up to $750,000 of mortgage debt if purchased after December 15, 2017.  A home with equity also serves as a great reserve asset when planning for retirement.”

In addition to home ownership, we gathered other advice from certified financial planners (CFPs) about the best investments that physicians can make.

Municipal bonds

Physicians usually have higher annual salaries than the general population. As such, many of the best investments available to physicians lower taxable income, according to Watson. One example is municipal bonds.

“In taxable accounts, most physicians would benefit from holding municipal bonds rather than traditional taxable bonds. Municipal bonds pay rates of interest below that on taxable bonds, but their interest is not taxable. To make a comparison, you can figure out what is known as your taxable-equivalent yield,” he said.

“If a physician were in the 32% marginal income tax bracket, they would be better off with a tax-free municipal bond paying 3% than a taxable bond paying 4%. Computing the taxable-equivalent yield [3.00%/(1-0.32)] shows this person would be better served by holding the tax-free municipal bond because the taxable equivalent yield is 4.41%. The taxable-equivalent yield is what allows you to compare municipal bonds with taxable bonds on an apples-to-apples basis,” he added.

Health Savings Accounts

According to Watson, a Health Savings Account (HSA) can be another excellent way to lower taxable income and invest wisely.

“HSAs are funded with pre-tax contributions, like a 401(k). The funds can be invested, and the funds grow tax-free until they are eventually used to fund qualified medical expenses tax-free,” he said. “Physicians would be wise to pay deductibles out of pocket, let the HSA funds continue to grow tax-free, and treat these funds as another retirement savings vehicle.”

Roth IRAs

Most doctors realize that a 401(k) (or 403(b), if you work for a non-profit) is one of the best investments they can make, in light of employer-match provisions and pre-tax contributions. In addition to maxing out 401(k) investments, Watson also recommends making the most of the Roth IRA.

“Roth IRAs are fantastic investment accounts to take advantage of due to their unique tax treatment,” he said. “High-growth assets like stocks in a Roth IRA early in life can put people in a great position later in life by giving them a sizable tax-free income source to fund retirement. Physicians are quickly phased out of contributing to Roth IRAs given Adjusted Gross Income limits of $125,000 if single and $198,000 for couples. Fortunately, physicians can often still take advantage shortly after retiring with a properly structured Roth IRA conversion strategy. “

Index funds

Physicians are busy. Caring for patients and keeping abreast of the latest in evidence-based medicine require much dedication. In light of their professional duties, it can be difficult for some doctors to closely manage their investment portfolio. Thankfully, index funds make it easy for physicians to invest wisely.

“Low-cost index funds present excellent investments for physicians because they provide low-cost, tax-efficient, diversified exposure to an asset class while helping to impose better investor discipline,” said Watson. “Behaviorally speaking, it is much easier to buy and hold an index fund than an individual stock for most.”

Private real estate

In addition to home ownership, it may be a good idea to invest in other types of real estate, according to Lewis J. Altfest, PhD, CFP, CFA, CPA, PFS, at Altfest Personal Wealth Management.

“Think of private real estate,” he said. “It moves independent of stocks (a plus) when stocks get hit, as they did one year ago. Also, it typically is the best hedge against inflation, which has already started up in our country. Public real estate, such as REITs, aren’t nearly as good. 

Certain types of stocks

Investing in individual stocks can be risky. After all, if a company runs into trouble, its stock can tank. Altfest advises you to think carefully about investing in specific types of stocks.

“Allocate a substantial portion of your dollars into value-styled stocks. They aren’t as highly priced as technology ones and are more likely to benefit from the recovery in the economy,” he said.

He added, “Put a decent portion into health care stocks, which are not as cyclical as others. Besides, you may have some experience in identifying those that are making inroads, but stay away from ‘a wing and a prayer’ type speculative ones for substantial monies.”

Global investments

Who said that you only have to invest in American ventures? The smart investor has a global mindset.

“Add more international investments. They can guard against putting all eggs in the US basket,” Altfest said. “Using international investments surprisingly can reduce portfolio risk.”

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