Retirement planning is an important step in your financial journey. A physician with family responsibilities may have many retirement savings options, and finding what best suits your unique goals may seem daunting. The key is to save aggressively, and to diversify your retirement income sources.
Imagine your financial stability as a sturdy stool. Each leg represents a particular source of income. Diversifying income sources is akin to adding more legs to the stool, which makes it more stable. Similarly, your financial situation will be more secure with many streams of income in retirement.
Physicians often start retirement planning later in their careers. During medical school and fellowships, they have limited opportunities for retirement savings. Given this delay, it’s often advisable for physicians to save 25–35% of their income toward retirement.
So, what are the best retirement savings options for physicians? Let’s explore.
The Traditional Route
401(k) Plans: A Foundation for Physicians’ Retirement
Hospital systems often offer 401(k) plans as a primary retirement savings vehicle. These employer-sponsored plans allow physicians to contribute on a pre-tax basis. The tax advantages of contributing to a 401(k) are especially valuable In San Diego, where the cost of living can be high.
Physicians working in nonprofit hospital systems may have access to 403(b) plans. These are like traditional 401(k) plans but are specifically designed for employees of nonprofit organizations. Contributions to a 403(b) plan are also made on a pre-tax basis, offering tax advantages to physicians.
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Be sure to take advantage of employer matching contributions, if available. Matching contributions can significantly boost retirement savings over time. We recommend prioritizing contributions to the plans with employer matches.
Some health system benefits package examples (subject to annual revisions) include:
- Scripps Clinic Medical Group — Has 401(k), Profit Sharing Plan (PSP), Supplemental Benefits Group Plan, and a Cash Balance Plan.
- Sharp Healthcare — Has Retirement Plan, Money Purchase Plan (MPP), and Cash Balance Plan.
- UC Health — Has 403(b), 457 plan, and Defined Contribution Plan (allowed to make after-tax contributions)
As you start to break these down, you will see there are various opportunities available within each. There are also specific rules you should be aware of as well. For example, the Scripps Clinic Medical Group supplemental benefit group plan asks for a one-time election to opt in or out of the plan. Once you opt in, you must stay opted in for the duration of your employment.
Sharp offers the Retirement Plan (RP) and the Money Purchase Plan (MPP). Between the two plans, employees may contribute up to the 2024 maximum of $69,000. There is also a Cash Balance Plan available. There are specific qualifying rules for participating in the Cash Balance Plan.
UC Health offers a 403(b) plan and a 457(b) deferred compensation plan, both pretax and with new Roth contributions, as well as a defined contribution plan. Employees can defer up to $23,500 to both the 403(b) plan and 457(b) plans for 2024 (with catch-up of $7,000 for age 50 or older). There is a special catch-up provision for 403(b) plan contributions for employees who meet certain requirements.
The complexity of benefits packages like those listed above may feel overwhelming. However, experienced financial professionals can help you figure out what’s best for your situation.
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Pension Plans
As of 2024, some hospital systems still offer defined benefit pension plans. For example, UC Health and Kaiser offer pensions which provide a fixed, regular payment to physicians upon retirement. While less common in the past, these plans can offer a stable and guaranteed income stream during retirement. If this option is available to you, you should carefully review the terms of the plan. You should understand the calculation method for benefits and payout options. It is typically based on a formula that includes the number of years worked, your age, and your average salary over the last few years.
There can be several options for pension plans. With UC Health, there are three different programs, depending on your hire date.
Preventive Care for Your Finances
Relying on a single source of income is comparable to your metaphorical stool having only one leg. It might support you for a short while, but it will ultimately become unstable. Diversifying your income can create a more balanced and stable financial structure and help you withstand economic fluctuations and unforeseen challenges. Some retirement plans for physicians’ options include:
Health Savings Accounts (HSAs)
HSAs are a great way to save for medical expenses in retirement. Consider maximizing the use of HSAs, especially if you are enrolled in high-deductible health plans. HSAs offer a triple tax advantage: contributions are tax-deductible, earnings are tax-free, and withdrawals for qualified medical expenses are tax-free.
Physicians can use HSAs to cover current medical expenses or let the funds grow for future healthcare costs in retirement. With rising costs of healthcare, an HSA can be a valuable tool for short- and long-term financial planning. If possible, sign up for the family HSA plan and you’ll be able to contribute up to $8,300 in 2024.
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Backdoor Roth IRA(s)
Physicians seeking to diversify their retirement planning should consider Backdoor Roth IRAs. This strategy involves contributing to a traditional IRA and then converting it into a Roth IRA. By doing this, physicians can benefit from tax-free withdrawals in retirement. Be mindful of tax implications and eligibility criteria. A financial advisor can help navigate the complexities of backdoor Roth IRAs effectively.
Brokerage Accounts
Traditional brokerage accounts do not offer the same tax advantages as retirement-specific accounts. However, they often allow for greater flexibility in investment choices and withdrawals. Physicians can use taxable brokerage accounts to bridge income gaps in retirement. They can also use them for investments that are not available in their retirement plans.
Real Estate Investing
Real estate investment can be a valuable addition to your retirement saving strategy. Physicians may explore opportunities such as purchasing rental properties. Rental properties can provide a dual benefit: long term appreciation in property value and rental income, which can supplement retirement funds.
Are You a Physician Seeking Retirement Help?
Our team of thoughtful and caring advisors at Blankinship & Foster is ready to help you gain clarity, confidence, and direction as you prepare your retirement planning strategy. Over the past 30 years, we have provided comprehensive investment management and financial planning for more than 100 physicians and their families. We have a 40:1 client-to-advisor ratio and offer eight CERTIFIED FINANCIAL PLANNERS™ professionals who can provide custom tools to lay out your goals and milestones, prioritize and track your progress, and more. Together, we can take actionable steps toward achieving your personal definition of success. Contact us to learn more about how our financial advisors for physicians can partner with you.
Retirement planning requires a thoughtful and multifaceted approach. Leveraging employer-sponsored plans like 401(k)s, tax-advantaged accounts like HSAs and IRAs, and considering additional investment avenues are essential steps in building a robust portfolio.
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