Physician Retirement Planning 101

Physician retirement planning is essential for ensuring that the future you've always envisioned becomes a reality. Practicing medicine can be exceptionally rewarding, holistically fulfilling, and...utterly exhausting. So when you're ready to hang up your stethoscope and move into the next phase of life—whether it’s traveling the world, spending time with family, or embarking on extreme fly fishing—it's critical to take the right steps today to prepare. Proactive planning is key to achieving your ideal retirement.

Your plan for retirement should include much more than simply saving. To help you confidently do just that, the team at the MB Group have outlined a few tips physicians can use to plan for retirement. Continue reading to learn more about:

• When Do Physicians Retire?
• How Much Should Physicians be Saving for Retirement?
• What is the 4% Rule?
• 7 Retirement Savings Plan Options for Physicians
• Taxable Investments for Physicians
• 5 Tips for Physicians Looking to Maximize Their Taxable Investment Accounts
• What is the Best Retirement Plan for Doctors?
• How to Start Saving: Work with an Experienced Planning Professional
• Contact the MB Group

When do Physicians Usually Retire? 

Most physicians typically retire between the ages of 60 and 65, although some choose to continue practicing beyond that. The amount of money physicians retire with can vary significantly, often depending on factors like specialty, years of practice, and savings habits. On average, many physicians aim to have retirement savings in the multimillion-dollar range to maintain their desired standard of living.

Fortunately, physicians have numerous options for building their retirement nest egg, including 401(k) and 403(b) plans, traditional and Roth IRAs, investment portfolios, and even specialized retirement accounts designed for high-income earners. With careful planning and the right financial strategies, physicians can secure a comfortable and fulfilling retirement.

How Much Should Physicians be Saving for Retirement?

Physicians should be saving diligently throughout their careers to ensure a comfortable retirement, typically aiming to set aside 15-20% of their annual income. Given their often delayed start in high-earning years due to extended schooling and training, it’s crucial to maximize savings opportunities as soon as possible. 

Financial experts often recommend that physicians have savings equal to at least 3-6 times their annual salary by age 50 and continue to grow their retirement accounts to reach a goal of at least 8-12 times their annual income by retirement. Contributing to tax-advantaged retirement accounts, diversifying investments, and consulting with a financial advisor can help physicians stay on track to meet these savings targets. By prioritizing their financial future early, physicians can ensure financial stability and peace of mind in retirement.

What is the 4% Rule?

The 4% rule is a widely used guideline in retirement planning, including for physicians, to help determine a sustainable withdrawal rate from retirement savings. According to this rule, retirees can withdraw 4% of their total retirement savings in the first year of retirement and then adjust that amount annually for inflation. 

For physicians, who often accumulate substantial savings to support their accustomed standard of living, the 4% rule serves as a helpful benchmark to ensure their funds last through a potentially long retirement. However, individual circumstances such as healthcare costs, investment performance, and lifestyle goals can impact the rule’s effectiveness. Physicians should work closely with a financial advisor to personalize their withdrawal strategy and ensure they maintain financial security throughout retirement.

7 Retirement Savings Plan Options for Physicians

Here are seven retirement savings account options for physicians:

1. 401(k) or 403(b) Plans: Offered by many hospitals and healthcare organizations, these tax-advantaged accounts allow physicians to contribute pre-tax income, with potential employer matching. Contributions grow tax-deferred until retirement.
2. Traditional IRA: An individual retirement account where contributions may be tax-deductible, and investments grow tax-deferred. Physicians can contribute up to annual limits set by the IRS, with taxes paid upon withdrawal in retirement.
3. Roth IRA: Unlike a traditional IRA, contributions to a Roth IRA are made with after-tax income, but qualified withdrawals are tax-free. This is beneficial for physicians who expect to be in a higher tax bracket during retirement.
4. Health Savings Account (HSA): If paired with a high-deductible health plan, an HSA allows for tax-free contributions, growth, and withdrawals when used for qualified medical expenses. It can also serve as an additional retirement savings vehicle, especially since funds can be used for non-medical expenses after age 65 (subject to tax).
5. Defined Benefit Plans: These pension-like plans provide a fixed income in retirement based on salary and years of service. They are less common but can be advantageous for physicians with high and consistent earnings who want a more predictable retirement income.
6. SEP IRA: For physicians who are self-employed or have their own practice, a Simplified Employee Pension (SEP) IRA allows for significant contributions—up to 25% of compensation or a set annual limit, whichever is lower. Contributions grow tax-deferred until retirement.
7. Cash Balance Plans: A type of defined benefit plan that acts similarly to a 401(k) but allows for higher contribution limits. These plans are ideal for high-income physicians seeking to save large amounts for retirement on a tax-deferred basis.
   
   

Taxable Investments for Physicians

Taxable investments can be an important component of a physician’s overall financial strategy, complementing tax-advantaged retirement accounts. These investments are funded with after-tax dollars, and any earnings—such as interest, dividends, or capital gains—are subject to taxes in the year they are realized.

Despite the tax implications, taxable investment accounts offer flexibility and liquidity, making them useful for goals beyond retirement, such as:

1. Funding a child’s education
2. Purchasing a second home
3. Building wealth for future opportunities

Examples of taxable investments include:

• Stocks: Shares in individual companies that can generate returns through price appreciation and dividends. Dividends may be taxed as ordinary income or at a lower capital gains rate, depending on whether they are qualified.
• Bonds: Debt securities issued by governments or corporations that pay periodic interest, which is generally taxable as income. However, municipal bonds offer tax-exempt interest at the federal level and sometimes at the state level.
• Mutual Funds and Exchange-Traded Funds (ETFs): Pooled investment vehicles that may distribute taxable dividends or capital gains to investors. The tax efficiency of ETFs is often higher due to their unique structure.
• Real Estate: Property investments that can provide rental income, which is taxable, and potential appreciation in value. Real estate also offers tax benefits, such as depreciation, which can help offset some taxable income.

Physicians can also take advantage of strategies like tax-loss harvesting, where investment losses are used to offset gains and minimize their tax burden. A well-balanced approach that includes both taxable and tax-advantaged accounts can help physicians achieve long-term financial stability and greater control over their investments.

Read More: Tax Loss Harvesting for High-Net-Worth Individuals

5 Tips for Physicians Looking to Maximize Their Taxable Investment Accounts

Physicians looking to maximize their taxable investment accounts and overall financial strategy can employ a variety of techniques to enhance returns and minimize tax liabilities. Here are some useful tips:

1. Invest Tax-Efficiently

• Choose Tax-Efficient Funds: Opt for index funds or ETFs, which tend to generate fewer taxable capital gains compared to actively managed funds.
• Hold Investments Long-Term: Aim to hold onto investments for over a year to qualify for long-term capital gains tax rates, which are typically lower than short-term rates.
• Consider Municipal Bonds: These bonds provide tax-free interest income at the federal level and may also be tax-free at the state level if purchased from your state of residence.

2. Utilize Tax-Loss Harvesting

• Offset Capital Gains: Use investment losses to offset capital gains, potentially reducing your taxable income.
• Carry Losses Forward: If your losses exceed gains, you can carry them forward to future tax years, helping to lower your taxable income over time.

3. Strategically Place Investments

• Hold High-Tax Investments in Tax-Advantaged Accounts: Investments that generate a lot of taxable income, like REITs or actively managed funds, should be placed in retirement accounts to defer taxes.
• Place Tax-Efficient Investments in Taxable Accounts: Stocks, index funds, and municipal bonds can be better suited for taxable accounts due to their favorable tax treatment.

4. Plan for Charitable Giving

• Donate Appreciated Stocks: Instead of cash, donate appreciated stocks or assets to avoid capital gains taxes and still receive a tax deduction for the full market value.
• Set Up a Donor-Advised Fund: This allows you to make a large charitable contribution in one year for tax purposes and distribute the funds to charities over time.

5. Stay on Top of Tax Planning

• Work with a Financial Advisor: Collaborate with a professional who understands tax-efficient investing and can tailor strategies to your specific financial situation.
• Review Your Portfolio Regularly: Ensure that your investment strategy and asset placement are optimized for current tax laws and your evolving financial goals.

By implementing these strategies, physicians can maximize the potential of their taxable investment accounts, manage their tax burden, and work toward a more secure financial future.

Read More: Tax Deductions for Physicians

What is the Best Retirement Plan for Doctors?

There isn't a one-size-fits-all solution when it comes to the best retirement plan for doctors. The ideal retirement strategy depends on various individual factors, such as your current financial situation, long-term goals, tax considerations, and practice structure. Some physicians may benefit more from maximizing contributions to 401(k) or 403(b) plans, while others might find greater value in setting up a Cash Balance Plan or investing in a combination of taxable and tax-advantaged accounts. 

Given the complexity and the need for tailored strategies, it's crucial to partner with a tax and financial advisor who can evaluate your unique needs and guide you in creating a comprehensive retirement plan that works best for you.

How to Start Saving: Work with an Experienced Planning Professional

Undoubtedly, one of the most important steps you can take to plan for retirement is to partner with an experienced tax and accounting professional. In addition to changing tax laws, there are a number of factors that should all be monitored and considered. Most physicians simply do not have enough time to perform their life's work and plan for the future they have always envisioned. Fortunately, you're not alone.

At the MB Group, we are a team of experienced CPAs, financial advisors, and retirement planning specialists. We offer decades of experience helping doctors, physicians, and medical professionals achieve their goals. We will work closely with you to take a holistic view of your future and ensure you understand the steps you need to take today to walk into the retirement you deserve. 

Contact MB Group to Create or Revise Your Plan for Retirement

Contact the MB Group today to take the first step in your retirement planning journey. Or if you already have a plan, the team at MB Group can offer you a second opinion and pressure test your strategy for your goals.

Read More: How High Net Worth Individuals Can Plan for Retirement