Physician Retirement Planning as an Owner Versus as an Employee

Looking Down the Road

By Doug Wheat

The new Physician Practice Benchmark Survey released by the American Medical Assoc. (AMA) in May indicates that, for the first time, fewer than half of physicians have an ownership stake in their practices.

This data reflects trends that we have seen locally with multiple practices joining Baystate Health, Trinity Health Of New England, and Cooley Dickinson Health Care. While there are many reasons for this trend, physicians should take note of the differences in retirement planning if they are an employee rather than a practice owner.

As practice owners, physicians have the opportunity to contribute significant portions of their income on a tax-deferred basis to a retirement plan through 401(k) profit-sharing plans. In practices both small and large, physician owners work together to maximize their total retirement contributions.

For a physician who is under 50 years old, his or her maximum employee contribution to a 401(k) plan is $19,000. But it is possible for an additional $37,000 in profit sharing to go into the 401(k) plan, bringing the total contributions for a physician up to $56,000 in 2019.

Many practices now use the ‘new comparability’ formula in combination with a safe-harbor plan to give them greater freedom to calculate the portion of profit sharing that goes to non-physician employees. Self-employed doctors without employees, a group that might include many psychiatrists, also have the ability to save $56,000 per year in a solo 401(k) retirement plan.

Saving $56,000 per year in your 401(k) is a substantial retirement contribution and, over a career of 30 years, can provide much of what a physician might expect for income in addition to Social Security benefits. For example, if you save $56,000 per year in a retirement plan and earn a 7% rate of return, reinvesting all dividends, after 30 years the balance may be approximately $5.7 million, which is around $2.2 million in today’s dollars after discounting for inflation. Depending on the structure of the practice, it is also possible for a group of physicians to create their own defined-benefit plan, which would potentially allow an additional $225,000 tax-deferred savings for retirement. And as a practice owner, there is always the potential that you might be able to sell your ownership stake in the practice.

In contrast, physicians who are employees are limited to a maximum 401(k) or 403(b) retirement plan contribution of $19,000. If offered by their employer, they may also receive a matching contribution. If we assume a salary of $250,000 and a 4% matching contribution, that would give them an additional $10,000 per year to their retirement plan for a total addition of $29,000 per year. Over a 30-year period, the combined $29,000 per year retirement contribution would grow to $2.9 million at a 7% rate of return and reinvesting all dividends. That is $1.16 million in today’s dollars, assuming a 3% rate of return.

Of course, most people would be quite happy if they could save $29,000 per year into their 401(k) plan. But physicians often have living expenses far above average, and as an employee, their 401(k) will probably not be enough to maintain the lifestyle they are accustomed to. For this reason, physicians who are employees need to pay extra attention to their retirement planning.

Physicians who are employees should start by exploring any additional ways to save that might be available to them through work. Many physicians that work for a nonprofit hospital participate in a public-service loan-forgiveness program that may erase student loans after working in the public or nonprofit sector for 10 years. While eliminating student loans is not directly retirement savings, it does offer the prospect of freeing up money to save in the future.

Physicians should also check to see if they are eligible for participation in a 457 deferred-compensation program, which would allow them to save an additional $19,000 per year. These 457 plans are not the same as 403(b) plans since they continue to be assets of the employer even though they are designated for a particular employee. It is important to understand the additional risks and limitations of 457 plans.

Finally, all physicians should consider saving outside of their retirement plan. One way to do this is by setting up an investment account and making regular monthly, quarterly, or annual contributions, which will provide an opportunity for savings to grow.

An investment account provides the flexibility to save for intermediate-term expenses, such as cars and home renovations. It also provides for a way to help manage taxable income withdrawals from 401(k), 403(b), and IRA accounts in retirement. Ultimately, investment accounts can provide supplemental resources to your savings in an employer’s retirement plan.

Like all people, there are lots of demands on a physician’s take-home paycheck. In addition to regular expenses, there is often substantial student-debt payments in addition to college savings for their own children and potentially private school. Without a plan in place, it is easy for a year to slip by without building assets and giving them a chance to grow. This is particularly true for mid-career doctors who were formerly saving substantial money as a practice owner but are now saving less as an employee.

Building wealth takes time, and we all need to periodically adapt to changing circumstances.

Doug Wheat, CFP is a wealth adviser with United Capital Financial Advisers in Holyoke.

Investing involves risk, and investors should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. All examples are purely hypothetical and not real. Results may vary. Please contact your financial adviser with questions about your specific needs and circumstances; www.unitedcp.com/ma1