Written By Jared Costigan, CFP®
As a highly educated and caring medical professional, you’ve sacrificed your time, energy and work-life balance at times to pursue a career that you love. As an attending, you’re compensated pretty well for all of this sacrifice and delayed gratification that you’ve worked so darn hard for. Naturally, you might be curious about what’s next, including investing in your future self.
After all of that time spent getting to where you are now, you likely have a shorter time frame remaining until you reach retirement age. A professional with a bachelor’s degree might’ve started their professional career at age 23, whereas the earliest a physician in the US begins their attending position is about 30 years old. That’s with no fellowship or gap years between undergraduate and medical school.
With the rise in gap years, and considering that many physicians choose to take on a specialization, many begin their attending position in their mid- to late-30s. If you want to start investing some of your hard-earned doctor’s income for your future, you might have a substantial annual sum to contribute toward reaching this goal.
But where do you start?
The reality of “investing in what you know”
Many medical professionals want to follow the “invest in what you know” pathway. This includes looking at potential investments in a practice, becoming a partner in a private practice or entrepreneurial endeavors that involve investing in a broad portfolio of medical practices.
Buying into a partnership requires an investment of your time, a long-term commitment to the practice, increased liability and commitment of financial capital. This can be a great driver of wealth building, but it’s also worth acknowledging that this isn't the best path for every physician. It truly requires your blood, sweat and tears, and devoting a substantial portion of your work responsibilities away from patient care and medical practice and toward business management.
“Invest in what you know” carries a lot of value, and can generate very attractive financial returns on a successful practice. However, conventional investments, like publicly traded stocks and bonds, are perfectly adequate investment vehicles for the majority of physicians. Depending on your financial goals and risk tolerance, rental properties or real estate can also be considered as a piece of a diversified investment portfolio.
When considering the tradeoffs of having all of your time and a significant portion of your investment dollars intertwined, the simplicity of keeping work and investments separate can be appealing. It can lead to a “separation of church and state” when you work for your income and invest your dollars on your own for your future.
Learn more about investment basics in our course, Six-Figure Debt to Six-Figure Net Worth.
Case studies: Investment strategy for physicians
For physician financial planning, there are a variety of accounts that you can utilize to invest, with varying tax advantages (or disadvantages). Let's look at two physicians along different career paths.
Physician working at a public hospital
Anette is a pediatrician at a public hospital. Anette’s provides pediatric care at a public hospital. Anette’s employer offers a host of employer benefits that help her save for retirement and delay taxes until later in retirement:
- 403(b):This fund offers pre-tax or Roth contributions with a maximum contribution of $23,000 for 2024.
- 401(a): Anette’s employer contributes 5% of her salary to this account for her benefit; Anette doesn’t contribute to this account.
- 457(f): Anette’s employer contributes a variable, discretionary amount to this account annually for her benefit; Anette doesn’t contribute to this account.
- 457(b): Anette can make a contribution up to $23,000 for 2024. This account is subject to the hospital’s creditors, but provides a tax deduction for contributions and has fewer restrictions on age of distribution.
If Anette takes advantage of all these employer benefit retirement accounts, she can contribute $46,000 toward retirement. This reduces her taxable income by $46,000 this year. Additionally, her employer contributes additional funds each year to her 457(f) and 401(a) plans.
From the plan’s available investments, Anette can choose how much of her investments are allocated to stocks and bonds. This is a very passive, hands-off and tax-effective way to save for retirement.
Outside of her employer-provided retirement accounts, Anette can use the following asset allocation to invest additional funds:
- Backdoor Roth IRA: Allows for a maximum contribution of $7,000 for 2024. Its growth and distribution are tax-free.
- Brokerage Account, no contribution limits: Growth and qualified dividends are taxed at capital gain rates (which is lower than her ordinary income tax rates). Interest and ordinary dividends are taxed at ordinary income tax rates. There are no restrictions on when Anette can buy, sell, or access.
- Real estate: Anette can use her taxable dollars to purchase investment real estate. This requires expertise, time, and the risk/return is often leveraged with a mortgage. Learn more about investing real estate and physician mortgages.
- Private equity, venture capital or small companies: For more sophisticated investors, additional risk can be taken with smaller companies and more concentrated exposure. This type of investment carries significantly more risk than diversified stock market investing and should be considered for “qualified investors”.
Related: What Physicians Should Do With Retirement Accounts From an Old Employer
Partner at a private practice
Chrislyn is a partner at a private practice, and has a stake in the type of retirement plans offered to employees. A balance is needed between the practice’s retirement contribution expenses, while also maintaining employer contributions for key employees and owners’ retirement accounts.
Her group of five partners landed on the following retirement benefits for their company:
- 401(k): Chrislyn can contribute $23,000 toward her retirement for the 2024 tax year. The company contributes a 3% salary safe harbor amount to every employee.
Although Chrislyn can benefit from additional tax deductions that come with being a business owner, her pre-tax contributions to employer plans are limited to $23,000. Chrislyn can also choose how much of her investments are allocated to stocks and to bonds, based on the 401(k)s available investments.
Outside of her employer benefits, Chrislyn invests on a regular basis into the practice. She’s funded this investment over the past five years and has contributed $250,000 toward it, and devotes 30% of her work time to managing the business.
Chrislyn cares deeply about the practice and the patients it serves. She expects that this investment will yield her returns greater than what she would earn investing in a traditional diversified stock portfolio. However, for better or worse, her income and invested dollars are directly linked to the success or struggles of the business.
Outside of her partnership equity and qualified accounts, Chrislyn has all of the same options to invest in as Anette:
- Backdoor Roth IRA
- Brokerage account
- Real estate investment
- Private equity, venture capital, small companies
An investment in a practice can provide appetizing returns. When taking this route, it’s important to assess the level of risk that you’re taking alongside other investments in your portfolio. Consider investment diversification across stocks, bonds and other asset classes.
Related: How to Start Investing While in Medical School
Nurturing your career and self
Another way to “invest in what you know” is continuing what you’ve been doing all this time in preparation for becoming an attending – investing in yourself! Continue to specialize, attend conferences and spend time researching to increase your expertise and future earning potential.
Similarly, taking care of your well-being can be an investment in yourself. As a doctor, you risk experiencing burnout and missing time from work. You can protect yourself from some of unknown risks to your work, including mental health-related absences due to burnout, with proper disability insurance.
Taking a vacation, getting a gym membership, or taking time off to relax with family counts as an investment. Think about all of the times that you recount memories from that vacation you took after medical school — the cultures you experienced, the food you ate, and most importantly, the time spent with your travel companions. You’ve earned an “experience dividend” by investing money in your enjoyment.
The bottom line
With a short-term timeline between starting as an attending and retirement age, reaching the same milestones by retirement age requires either greater contributions toward retirement savings or earning a higher return.
Although there’s a place for high-risk, high-return investments in an otherwise diversified portfolio, focusing solely on outsized returns exposes you to a greater risk of volatility. Remember, the goal is to align your finances in a way that you can enjoy more of the life you love — feeding your desire to help others, learning more, and spending time with loved ones.
Ultimately, how much you save over the course of your career is most important. Our qualified financial planners at SLP Wealth can help you determine which investment vehicles can help you build wealth while best aligning with your personal goals and values.
