Top Ten Planning Issues When Finishing Your Residency
By M. Shayne Ruffing, CLU, ChFC, AEP
The transition from residency to practice will be a rewarding and challenging time in your career. One day, you walk out of your training making $42,000 and into a new practice with income having quadrupled. Effectively dealing with the many issues that come along with this income can be a challenge.
Following is a list of the current issues and opportunities that you need to be aware of as you make this transition:
- Have your employment contract reviewed by an attorney. If your first position doesn’t work out and your contract has a no compete clause, you may be forced to move your family to another location or pay expensive legal fees to litigate. Don’t be surprised to learn what is in your contract after you have signed it.
- Purchase an individual disability policy before leaving residency. Your greatest asset as you begin your career is your future earnings potential. Although many will get a group disability benefit, the fact that group disability plans must be offered to everyone translates into reduced benefits and restrictions. If you are going to be an independent contractor, it is imperative that you understand how to structure your own benefits package.
- Planning Opportunity – A few of the major disability companies offer special disability packages that are only available to residents. Consider this: if you purchase disability insurance as a resident and take it in to practice, your benefits stack on top of each other. If you wait until you are in practice to buy supplemental benefits, your contracts will coordinate with each other, leaving you with less protection. As of May 1, 2006, there are now 4 companies that will offer specialty-specific coverage to an emergency physician!
- Don’t wait one year to participate in a 401(k). Currently, the maximum contribution one can make into a 401(k) or 403(b) is $15,000. Any idea what waiting one year to participate in your retirement plan could cost you? How about $150,939.85? That’s right! In 30 years, $15,000 averaging 8% per year would grow to $150,939.85. If you average 10%, the number increases to $261,741.03! Don’t underestimate the power of compound interest!
- Roth Conversion IRA. The Roth IRA is taxed differently from that of a traditional IRA or 403(b) plan. Instead of every dollar being taxed when withdrawn, earnings and contributions from a Roth can come out completely income tax free if held past age 59½. By converting an existing account into a Roth, you must pay income taxes today, although this can make sense. By choosing to pay taxes at a “resident’s bracket” versus paying taxes in a higher “attending’s bracket,” you have the potential to create a significant tax-free asset for your retirement.
Caution! In order to convert to a Roth IRA, your adjusted gross income must be less than $100,000 in the year of conversion.
- Get into the habit of paying yourself first. This simple statement is the key to financial success. Not having sufficient savings can force you to turn to debt. Remember this – “No one ever became broke by saving too much.”
- Purchase an “Umbrella” personal liability policy. Umbrella insurance extends personal liability insurance over your automobile and home. An umbrella policy will protect your assets and future income from personal lawsuits. My minimum recommendation for physicians is $2,000,000.
- Integrating student loan repayment into your financial plan. Don’t let paying off your student loans overshadow your financial plan. View debt in the context of the big picture. Set a reasonable time frame to pay off debt without impacting priority goals like retirement planning.
Planning Opportunity – Consider longer repayment periods with lower payments. This allows you to build savings, make retirement contributions, or pay off other debt if necessary. Once you are “on track” with contributions to these goals, direct available dollars to pay off the student loans as quickly as possible.
Timely Tip – Loan rates change July 1!
- Minimize income taxes on your investments. It’s not what you earn that’s important; it’s what you keep. Understand how different investments are taxed. Consider using tax-free money market mutual funds as an alternative to bank savings accounts.
- Get a will and other documents. It’s small consolation to your family when the courts must act when you’re gone or incapacitated. Avoid costly delays, court proceedings, and family upheaval. Find two hours from your schedule to spend with an attorney.
- Create a financial planning team. One way to manage your finances is to assemble a financial board of directors. This board will typically have one advisor who coordinates with the other advisors. Once you build the team, listen to your advisors and use their guidance in your decisions.
Best wishes and congratulations on achieving this exciting phase in your career.