Financial Planning and Management for the Emergency Physician
Many emergency physicians, especially those early in their careers, find themselves too busy working to think about managing their money. Yet financial planning can be as important as career planning.
"When it comes to personal finances and investments, it's important that emergency physicians have a business orientation to both income and personal financial management," says Gregory L. Henry, MD, a past President of ACEP. Dr. Henry is a Clinical Professor in the Department of Emergency Medicine at the University of Michigan Medical School in Ann Arbor, and a Staff Physician at St. Joseph Mercy Hospital. He is also the CEO of Medical Practice Risk Assessment, Inc., and Vice President of the Risk Management Emergency Physicians Medical Group.
"In the first 10 years after medical school, the most important thing is setting plans for saving and investing. The sooner you begin, the sooner you will reach your long-term financial goals and the better your family, lifestyle, career and retirement options will be," says Dr. Henry.
Negotiating employment contracts, understanding taxes, evaluating benefit packages, choosing insurance plans, managing debt, developing good saving and spending habits, and investing for the long term are all elements of sound financial planning.
"The average full-time emergency physician in the U.S. made about $180,000 in 1997. About 90% of ED doctors are within 25 percent of the $180,000 figure," says Dr. Henry. "Emergency medicine after graduate training is a flat-rate profession. We reach peak income early and level off. It's not like working in business. When negotiating an employment contract, don't consider just the initial amount. Ask what doctors who have been there five years and 10 years make."
Also consider that a high-cost-of-living area does not necessarily mean a higher income for emergency physicians. There may not be a direct relationship between cost of living and your pay. So if you choose to live in certain areas of the country, there may be tradeoffs in terms of income, he says. "Do your homework. Get cost-of-living figures from the chamber of commerce and learn what the local pay scale is for emergency physicians so you'll be able to plan accordingly. Understand the opportunity cost involved in making a decision about where to live and work. Calculate what your discretionary income is going to be. If you do not take this cost-of-living-adjusted view, you'll have no idea what the employment offer is really worth. The issue is not how many dollars you make, it's the lifestyle and investment plan you can sustain and pay for with those dollars," says Dr. Henry.
"When it comes to financial planning, don't go it alone, especially when you're first getting started in your career. Find a mentor. When you go out to interview, look at the group and ask yourself: Who here has the accomplishments and lifestyle that I want to have? Keep in mind that mentoring involves many aspects of a career, not just the financial. Consider what type of retirement plans group members invest in, but also ask about whether they write or teach and are involved in ACEP. If you don't see a role model in the group, interview elsewhere."
Nearly three-fourths of emergency physicians work as employees of either a hospital or a group, while most of the rest work as independent contractors. It's important to understand the differences between being an employee and being an independent contractor and your financial rights and responsibilities in each situation, as well as the tax implications, says Dr. Henry.
"You can decide in certain groups or certain situations to receive your clinical income as an employee and your administrative or other income as an independent subcontractor," he says. "For example, I actually run my own professional corporation because I funnel all my non-clinical earnings - my teaching money, my speaking money, my writing money, my medical-legal consulting money - through that organization. The cash advantages of working as an independent contractor for at least some of your work are actually very, very good. And there can also be cash flow and retirement plan advantages." It's important to discuss these employment and income arrangements with an attorney and/or an accountant.
Benefits vary widely by cost and quality. When someone offers you a "full-benefit package," ask to see that enumerated, says Dr. Henry, who offers these general guidelines on the value of a good benefits package. In the $40,000 income range, the value of the benefits package should be about 33-36 percent of base income. In the $100,000 income range, it should be about 18-23 percent. And near the $200,000 range, it should be about 12-14%.
"You can calculate the value for yourself. Almost every state medical society offers its members a benefit package for life, health and disability insurance. Just call them and see what it costs. You can compare their package with what you're offered," he says.
If you're negotiating for a reduced shift (e.g., three-fourths or one-half time), consider the value of the reduced hours when it comes to benefits. Ask how it affects the benefits package. Will you have to pay into the plan to receive full benefits? How much?
When it comes to insurance, many doctors buy coverage they don't need, says Dr. Henry. Consider any employment benefits your spouse receives and avoid paying for double coverage. Also consider how your insurance needs may change over time based on your age and any dependents, as well as your financial status.
"Life insurance products should be considered during the early part of a career as a security tool for people who have dependents. Don't over-buy or over-invest in life insurance," advises Dr. Henry. "The key is not the total amount, but what your family gets to keep. All life insurance is not created equal. And at certain levels it is not tax deductible. Ask an attorney or a financial planner about the advisability of creating an insurance trust, which may allow the money to be nontaxable at the time of your death. Most states recognize insurance trusts."
Disability insurance is very expensive and should be purchased with careful consideration as to how much might be needed and under what circumstances. "Disability insurance should be used to provide asset protection at a minimum level only if you desperately need it. What you want is something that kicks in at six months and provides what you need to meet some basic living costs. Review your coverage regularly on a risk-benefit basis. By the time you're 50 and you have good investments, you may not need a disability policy," he says.
"Doctor's have liability. This is an element of personal financial planning that most people don't have to consider," says Dr. Henry. "It's important to understand that malpractice insurance policies vary greatly. Saving money on a malpractice policy is not necessarily a good idea. You should know the A.M. Best rating of the insurance company, which is a matter of public record. I always advise residents to make sure they have a copy of the declaration page of the policy, that they ask questions about it and that they understand it clearly."
The good news is that qualified retirement plans are always hard to touch in judgment actions, he says. And some state laws make it very difficult to take a person's house or other personal property as part of a judgment. Know the laws in your state.
Saving and spending
Developing good saving and spending habits is the key to solid financial planning. "Pay yourself first. Add 10-15 percent of your take-home pay to your investment program every month. If you don't, the money evaporates," says Dr. Henry.
"Pay down debt, compound interest works for you in investments and against you in debt. You can view debt as a tool, but it has to be taken seriously. Consolidate debt so that interest is in a tax-deductible vehicle such as your home mortgage. Avoid credit card debt or car loans; debt is always carried better in other ways," says Dr. Henry. "Carrying debt in any form that is not tax deductible is a waste of money. Look for loan arrangements that call for larger payments. And remember that the best forced savings plan around is to reduce debt - the long-term savings are huge."
"If you have children, fund them from day one. Use bonds, mutual funds and other protected investments to save for their education. You have 18 years to build these funds," he says. Never make yourself house poor or possession poor. Too many people are made unhappy by the very things that are supposed to make them happy, says Dr. Henry. As a general rule, the monthly cash flow costs of a house are the mortgage amount, plus an additional 40 percent to cover taxes, insurance and upkeep.
"Doctors, as a group, are not bargain hunters. They fall into the habit of just paying for things because they're so busy with the rest of life," says Dr. Henry. "Learn to search for a good value. It is possible to live well and save money. Sometimes certain things are better put off until you can actually pay the entire tab. Consider, for example, buying a used car or waiting until you can pay cash for a new one."
"All investments are a balance of four elements: return rate, risk, liquidity and tax consequences," explains Dr. Henry.
Return rate. "The power of compound interest is staggering. The time to make a difference in your future financial security is now," he says. Money invested at 5 percent for 40 years will grow to more than seven times its initial value (e.g., $1,000 invested at 5 percent will grow to $7,040). That same $1,000 invested at 10 percent would grow to 45 times its initial value, or $45,259 over 40 years.
"What would you like your financial situation to be in 40 years? Investing at a steady rate over a long period of time is what will get you there. Time is on your side, and the smartest investors understand this," he says.
The power of compound interest is also demonstrated by the "rule of 72," which is a simple way to calculate how long it will take for an investment to double in value. Divide 72 by the interest rate your investment is earning. For example, if you put $10,000 in an investment earning 5 percent annually, you would have $20,000 in about 14.4 years (72 ÷ 5 = 14.4). An investment earning 10 percent annually would double in 7.2 years.
Risk. Your personality will drive some of your investment decisions. How much risk can you tolerate? "Never make an investment that does not let you sleep well at night. It's not worth it. Keep your options open. Better a fairly reasonable rate of return over 20, 30 or 40 years in investments with which you're comfortable, than trying to beat the odds in the short term," says Dr. Henry.
"Don't put too much of your money in one investment. It's important to have a balanced portfolio, but the stock market is not the only place to invest your money, you can also invest in land and utilities and bond funds and CDs, and a variety of other options."
Liquidity. Liquidity is very important if you have long-term obligations that come due at a certain time - college tuition, for example. "You can time your investments, such as bonds and certificates of deposit, to mature exactly when you need the money. Cashing in investments early is not good, you almost always pay a penalty," says Dr. Henry.
Tax consequences. "Always maximize your retirement options. That means that at the end of the year, if you have a retirement contribution plan of some kind and you don't have the cash to make the maximum allowed contribution, borrow the money to do so. Always let money grow tax free and in a protected harbor. Learn about various retirement plans, including IRAs and Roth IRAs," says Dr. Henry.
Another general rule is to avoid mixing personal business with pension account funds. "There is a test called the 'prudent person' test that can apply to self-directed pension accounts. While you do have control over where the money in such accounts is invested, if it is not in what is considered a 'usual and acceptable investment vehicle,' the IRS may disallow it. If, for example, you're giving loans out of that money to friends and family, that does not pass the prudent person test. The IRS may then disallow the investment and you will pay a penalty and interest, as well as tax. When pension money is involved, always ask an advisor (attorney or accountant): Does this pass the prudent person test?" he advises.
"Finally, financial planning should assume a maturing of your career. The trap of having to work longer and harder to pay for things should be avoided. When you calculate your cash needs down the road - when your children are in college, for example - you should not be calculating it based on working 42 hours a week in the department. Emergency physicians work hard, but we do cut down our hours over time," says Dr. Henry. "The key to sound financial planning is to start saving early and regularly, and continually reevaluate your needs, goals and investment strategies."