Retirement might be far away or right around the corner, but all spine surgeons should have a retirement plan and money put away annually for their golden years. How much to put away and where to put it really depends on individuals and their goals for the future. Here are eight points on how surgeons should be saving during their years in medical practice to plan for a comfortable retirement.
1. More options are available for private practice surgeons. Partners in private practices can have a 401(k) plan and profit sharing plan, which allows them to save $51,000 pre-tax in 2013. They can also establish a defined benefit plan as their pension and put large sums away pre-tax.
"If they are hospital employees and all they have is W-2 salaried income, they are at the mercy of what the hospital has to offer," says Chris Sands, Vice President and Private CFO®, oXYGen Financial. "The surgeons in private practice have more opportunities to put larger pre-tax sums away for retirement."
However, independent practice owners must be compliant with non-discrimination rules in ERISA.
"You have to be non-discriminating, but you really want the lion's share of the benefits going to the surgeons," says Hunter von Unschuld, JD, of CEBS Fractal Profile Wealth Management. "Surgeons are limited, especially when they are in big medical practices with nurses and technicians, because non-discrimination rules come into play. They get frustrated with this, but they can do top-hat plans, saving additional income on top of the regular 401(k), and that allows them to put in far more contributions."
2. Beware of underestimating inflation. Retirement plans sometimes contain wrong assumptions about the future, including inflation rates and compensation trends. Beware of relying too heavily on current trends in the healthcare and financial space because change will likely occur.
"The biggest problem I see for surgeons is that their retirement plans are full of Swiss cheese," says Mr. Sands. "There are a lot of different pitfalls or holes they may succumb to by having poor assumptions, such as under-estimating inflation at 3 to 4 percent when it's really higher than that. That's the number the government gives for planning, but for surgeons and other high income physicians, their own personal inflation rate can be higher than that depending on
how they choose to structure their lifestyle."
3. Figure new tax rates are here to stay. Another common mistake is underestimating taxes at a 25 to 30 percent rate when, in reality, they should factor in 30 to 40 percent. Individuals with incomes over $450,000 are in a new tax bracket as of Jan. 1, 2013, and additional rules apply for investment tax. More changes may occur in the future.
"Surgeons sometimes overestimate asset growth," says Mr. Sands. "They think they'll receive 7 to 8 percent of return on investment when they only get 4 to 5 percent. Assumptions about inflation, taxes and rate of return can be very dangerous."
4. Factor in income variation in the future. The healthcare industry is trending toward lower reimbursements and consolidation, so surgeons may not have the same or climbing income rates in the future. Physicians in private practice may struggle with lower reimbursements while employed surgeons could face smaller contracts in the future.
"ObamaCare has impacted Medicare rates, and that will impact physician compensation," says Mr. Sands. "Some surgeons make $400,000 to $500,000-plus, and we could see that drop significantly. People must plan for an income drop, and new tax rates will eat a lot of that income."
Surgeons need flexibility to as much as possible for retirement. "A lot of surgeons are concerned with ObamaCare and other cuts they have to take that they won't be able to put away enough for retirement," says Mr. von Unschuld. "When they have defined contribution plans they can put away substantially more. I have some surgeons who are putting upward of $350,000 away per year for retirement."
5. Include a pension plan. Many physicians are missing pension plans today, and less than 5 percent of surgeons have installed a pension plan for themselves. Self-employed physicians can create a defined benefit plan, which allows individuals with high incomes call for high qualified deductions to save and pay less in taxes.
"The goal is to really start off working with the younger surgeons on pension plans because at some point they are going to grow older and think about retirement," says Mr. Sands. "They need to set themselves up to have a paycheck in retirement."
Hospital-employed surgeons are W-2 employees, meaning they might have a 401(k) plan, but they don't have room for deductions and the pension plan is often missing. As surgeons begin to demand more options, hospitals may likely offer deferred income annuities and single premium immediate annuities within their retirement plans to satisfy the higher income individuals' desire for downside protection and some guaranteed paycheck in retirement.
"With hospital employment alone, surgeons don't have many choices right now to put more money away pre-tax and create a paycheck for themselves," says Mr. Sands. "It's not only about how much you can make and save today, but how much cash flow you'll have during retirement. Surgeons are reliant on a paycheck during their working years, so it's nice to see a paycheck in their retirement years."
6. Maximize 401(k) plans. Surgeons who are currently employed at hospitals often don't optimize the financial resources they have for retirement planning. They mismanage their 401(k) plans and skip automatic rebalancing. Other times they leave orphan plans at the hospital when they change jobs.
"Make sure to either roll the plans over or put them into IRAs," says Mr. Sands. "The stock market is climbing, and the real question and concern for people is how they will mitigate risk of loss in the market. Most surgeons don't have a plan in the case of loss."
People making average income with 401(k) plans can maintain their standard of living with just those savings, but for high income surgeons it won't put a dent in the tax burden. "They have to lower the tax burden to capture the benefits today," says Mr. Sands.
7. Consider non-qualified retirement plans. Another option for surgeons is non-qualified retirement plans, which Mr. von Unschuld describes as a "Roth IRA on steroids." Roth IRAs allow contributors to put in money after tax with no upfront tax deduction.
"The non-qualified plans work the same as with the Roth IRA, but you can put in as much money as you want without limitations," says Mr. von Unschuld. "Additionally, there are no limitations about when you can access that money."
With today's tax deduction, surgeons receive the tax free income on the back end. Those in the 30 percent tax bracket can put in $10,000 on a qualified plan to save $3,000 on taxes. If that contribution grows to $100,000 in a qualified plan, you'll have to pay $30,000 when you take it out. The non-qualified plans don't have that same issue.
"It grows tax-free and comes out tax-free," he says. "When you are doing income planning, money that comes out of qualified plans is fully taxable, but money coming out of non-qualified plans is tax free and not included to off-set social security."
8. Prepare for unexpected changes. Have a contingency plan available in the event of an unexpected occurrence that would render you unable to practice medicine. This is especially important as a young surgeon who still has medical school bills and will be years away from retirement. A non-qualified plan may be the best contingency option.
"Since non-qualified plans allow you to access the money at any time, you can use those funds as long-term care benefits at no extra cost," says Mr. von Unschuld. "You never know about your future health and abilities. Surgeons stand for long periods of time during surgery and often develop back issues or other disabilities. This retirement plan can give them benefits so if they start having problems down the road, their coverage is built in."
More Articles on Spine Surgeons:
5 Areas for Spine Surgeon Leaders to Pave the Way Today From Dr. Richard Wohns
The Long Term Fulfillment in a Spine Surgeon's Career: Q&A With Dr. William Watters of The Baylor College of Medicine
20 Spine Surgeons Focused on Implant Design
1. More options are available for private practice surgeons. Partners in private practices can have a 401(k) plan and profit sharing plan, which allows them to save $51,000 pre-tax in 2013. They can also establish a defined benefit plan as their pension and put large sums away pre-tax.
"If they are hospital employees and all they have is W-2 salaried income, they are at the mercy of what the hospital has to offer," says Chris Sands, Vice President and Private CFO®, oXYGen Financial. "The surgeons in private practice have more opportunities to put larger pre-tax sums away for retirement."However, independent practice owners must be compliant with non-discrimination rules in ERISA.
"You have to be non-discriminating, but you really want the lion's share of the benefits going to the surgeons," says Hunter von Unschuld, JD, of CEBS Fractal Profile Wealth Management. "Surgeons are limited, especially when they are in big medical practices with nurses and technicians, because non-discrimination rules come into play. They get frustrated with this, but they can do top-hat plans, saving additional income on top of the regular 401(k), and that allows them to put in far more contributions."
2. Beware of underestimating inflation. Retirement plans sometimes contain wrong assumptions about the future, including inflation rates and compensation trends. Beware of relying too heavily on current trends in the healthcare and financial space because change will likely occur.
"The biggest problem I see for surgeons is that their retirement plans are full of Swiss cheese," says Mr. Sands. "There are a lot of different pitfalls or holes they may succumb to by having poor assumptions, such as under-estimating inflation at 3 to 4 percent when it's really higher than that. That's the number the government gives for planning, but for surgeons and other high income physicians, their own personal inflation rate can be higher than that depending on
how they choose to structure their lifestyle."3. Figure new tax rates are here to stay. Another common mistake is underestimating taxes at a 25 to 30 percent rate when, in reality, they should factor in 30 to 40 percent. Individuals with incomes over $450,000 are in a new tax bracket as of Jan. 1, 2013, and additional rules apply for investment tax. More changes may occur in the future.
"Surgeons sometimes overestimate asset growth," says Mr. Sands. "They think they'll receive 7 to 8 percent of return on investment when they only get 4 to 5 percent. Assumptions about inflation, taxes and rate of return can be very dangerous."
4. Factor in income variation in the future. The healthcare industry is trending toward lower reimbursements and consolidation, so surgeons may not have the same or climbing income rates in the future. Physicians in private practice may struggle with lower reimbursements while employed surgeons could face smaller contracts in the future.
"ObamaCare has impacted Medicare rates, and that will impact physician compensation," says Mr. Sands. "Some surgeons make $400,000 to $500,000-plus, and we could see that drop significantly. People must plan for an income drop, and new tax rates will eat a lot of that income."
Surgeons need flexibility to as much as possible for retirement. "A lot of surgeons are concerned with ObamaCare and other cuts they have to take that they won't be able to put away enough for retirement," says Mr. von Unschuld. "When they have defined contribution plans they can put away substantially more. I have some surgeons who are putting upward of $350,000 away per year for retirement."
5. Include a pension plan. Many physicians are missing pension plans today, and less than 5 percent of surgeons have installed a pension plan for themselves. Self-employed physicians can create a defined benefit plan, which allows individuals with high incomes call for high qualified deductions to save and pay less in taxes.
"The goal is to really start off working with the younger surgeons on pension plans because at some point they are going to grow older and think about retirement," says Mr. Sands. "They need to set themselves up to have a paycheck in retirement."
Hospital-employed surgeons are W-2 employees, meaning they might have a 401(k) plan, but they don't have room for deductions and the pension plan is often missing. As surgeons begin to demand more options, hospitals may likely offer deferred income annuities and single premium immediate annuities within their retirement plans to satisfy the higher income individuals' desire for downside protection and some guaranteed paycheck in retirement.
"With hospital employment alone, surgeons don't have many choices right now to put more money away pre-tax and create a paycheck for themselves," says Mr. Sands. "It's not only about how much you can make and save today, but how much cash flow you'll have during retirement. Surgeons are reliant on a paycheck during their working years, so it's nice to see a paycheck in their retirement years."
6. Maximize 401(k) plans. Surgeons who are currently employed at hospitals often don't optimize the financial resources they have for retirement planning. They mismanage their 401(k) plans and skip automatic rebalancing. Other times they leave orphan plans at the hospital when they change jobs.
"Make sure to either roll the plans over or put them into IRAs," says Mr. Sands. "The stock market is climbing, and the real question and concern for people is how they will mitigate risk of loss in the market. Most surgeons don't have a plan in the case of loss."
People making average income with 401(k) plans can maintain their standard of living with just those savings, but for high income surgeons it won't put a dent in the tax burden. "They have to lower the tax burden to capture the benefits today," says Mr. Sands.
7. Consider non-qualified retirement plans. Another option for surgeons is non-qualified retirement plans, which Mr. von Unschuld describes as a "Roth IRA on steroids." Roth IRAs allow contributors to put in money after tax with no upfront tax deduction.
"The non-qualified plans work the same as with the Roth IRA, but you can put in as much money as you want without limitations," says Mr. von Unschuld. "Additionally, there are no limitations about when you can access that money."
With today's tax deduction, surgeons receive the tax free income on the back end. Those in the 30 percent tax bracket can put in $10,000 on a qualified plan to save $3,000 on taxes. If that contribution grows to $100,000 in a qualified plan, you'll have to pay $30,000 when you take it out. The non-qualified plans don't have that same issue.
"It grows tax-free and comes out tax-free," he says. "When you are doing income planning, money that comes out of qualified plans is fully taxable, but money coming out of non-qualified plans is tax free and not included to off-set social security."
8. Prepare for unexpected changes. Have a contingency plan available in the event of an unexpected occurrence that would render you unable to practice medicine. This is especially important as a young surgeon who still has medical school bills and will be years away from retirement. A non-qualified plan may be the best contingency option.
"Since non-qualified plans allow you to access the money at any time, you can use those funds as long-term care benefits at no extra cost," says Mr. von Unschuld. "You never know about your future health and abilities. Surgeons stand for long periods of time during surgery and often develop back issues or other disabilities. This retirement plan can give them benefits so if they start having problems down the road, their coverage is built in."
More Articles on Spine Surgeons:
5 Areas for Spine Surgeon Leaders to Pave the Way Today From Dr. Richard Wohns
The Long Term Fulfillment in a Spine Surgeon's Career: Q&A With Dr. William Watters of The Baylor College of Medicine
20 Spine Surgeons Focused on Implant Design