It's no secret that physicians generally are well paid and often have the means to live comfortably. More and more find themselves willing and able to retire early--or so they think.
Frustration with managed care adds urgency to the situation as more doctors look for a way out. A survey last year of 300 practicing physicians age 50 or older by Merritt, Hawkins & Associates, a physician recruiting firm in Irving, Texas, found 38% plan to retire within one to three years and 48% of those looking to make any career or lifestyle change called managed care a significant factor or the most important factor in their decision. Fifty-six percent identified managed care as their "single greatest source of professional frustration."
Whatever the reason for wanting to leave the working world, financial advisers generally agree that Americans of all socioeconomic levels, physicians included, don't start their planning early enough to ensure a secure retirement.
"All people who have higher income have to start thinking about retirement," says Robert Doyle, an accountant and financial planner with Spoor, Doyle & Associates of St. Petersburg, Fla. "And the people who need to think about retirement need to start young."
Starting young means developing fiscal discipline even at a high salary to avoid sacrificing upon retirement the standard of living many physicians enjoy.
"Physicians are not alone here, but a lot of people overlook the need to put some money away each year," Doyle says. "I'm not telling anyone to live at 60% of their income. Live at 90% of your income. But a lot of people want to live at 110% of their income."
Doctors aren't alone when it comes to living beyond their means, but they are different in that they start careers later in life than other professionals and often are saddled with a heavy debt load. For the 83% of 2000 medical school graduates who received student loans, the average debt load was $93,000, according to the Association of American Medical Colleges. That's more than triple the average of $29,943 in 1985.
The tendency to retire while relatively young creates another wrinkle: Doctors may end up not working for more years than they actually worked.
A typical physician does not enter the professional world until at least age 30. If a doctor plans to quit practicing at 55 after a 25-year career, he or she may have to sock away enough cash to live another 25 or 30 years, based on current life expectancies.
There's also the issue of finding ways to keep busy for all those years. "Many people find that retirement is death on the installment plan," says Steven Camp, a Fort Lauderdale, Fla.-based author and certified financial planner. "You have to make sure in retirement that you are happy with your lifestyle."
An investor who saves $10,000 a year in a tax-deferred 401(k) plan beginning at age 30 will have $250,000 in principal by age 55. Assuming 8% annual interest and compounding, the account will be worth $1.08 million. But to amass the same nest egg starting at age 40, the investor has to contribute $31,000 a year for 15 years.
Doyle believes that physicians often delay retirement planning at the start of their careers because of their debt from student loans. He recommends a balance between debt repayment and investment for the future. "Do whatever you can to start funding your retirement as early as possible," he says.
Camp endorses this strategy. "The key for retirement (is) you have to pay yourself first. And the earlier you pay yourself, the more it grows because of compounding," he says.
To younger physicians, Doyle advises: "You've got an excellent opportunity in front of you. Start now. Develop a habit." Otherwise, he says, "We would need to look at some aggressive planning to make up ground."
And aggressive planning carries with it higher risk. This ugly truth became apparent following the dot-com bubble burst. The technology-laden Nasdaq stock market lost 39.7% last year and dropped by 60% from April through December.
"A lot of doctors have really gotten a rude awakening, a painful awakening, more so than the rest of us," says Camp, author of Money Rx for Physicians: Secrets for Building Wealth.
During the bull market, Camp says thousands of physicians made more money through investments than with earned income, but their portfolios tended to be highly leveraged. When the markets started to drop, lenders quickly called in those IOUs.
"Margin calls ate up everything," Camp says.
Physicians turned to capital markets in part because payers have squeezed reimbursement rates in recent years. "While this was going on, investments were a consolation. They were relying on their 401(k)s for retirement. Now it's more like a 201(k)," says Camp.
"Doctors make some big mistakes in investing," Camp says, sometimes buying a stock because they like a company's products, even if it is not a particularly good investment, and often failing to diversify their portfolios.
"Many of these doctors up until about a year ago thought they could be portfolio managers," Camp says. He also believes physicians sometimes get burned by their desire to be in control. "Doctors have to control things, and markets can't be controlled." He advises, "Do what you do best and hire the rest."
What's worse, some doctors and other highly paid professionals tried their hand at day trading, thinking they could make a quick buck, says Gerhard Harms, a retired dentist from Rapid City, S.D., and co-author of the book Wealth Building For Professionals. "I see it in dentistry," he says. "Physicians are equally guilty."
Another mistake that Harms sees is overestimation of potential returns--investors assuming their retirement plans will earn 8%, 10% or more in annual interest.
Also, Harms says, "One thing (physicians) never consider is inflation." For example, a physician who made $200,000 in 1980 needed to make $400,000 in 2000 to maintain the same standard of living.
"The other thing they never consider is taxes," Harms continues. A traditional individual retirement account is tax-deferred until it's withdrawn at retirement--and then it's taxed as income rather than as capital gains.
"If you don't have a tax strategy, you don't have a strategy," Harms says.