Categories
Medical Economics

Where Did All The Women Physicians Go?

exit-sign-1420381288g32I’m a doctor. I look for signs and symptoms to diagnose diseases. In the past 4 months, we’ve had 6 really talented women physicians in our department resign and that is a symptom. So, what’s the disease?

If they were accepting academic leadership positions elsewhere or if they were being recruited as educators or researchers then I would see this as a sign of success in our university’s mission to develop medical faculty. But they didn’t; they all went in to private practice. They weren’t brand new academic physicians who realized they had taken a wrong career turn, they were women who were 5 – 15 years in academic medicine who had already committed a quarter to a half of their careers at a teaching hospital and left.

Some physician turnover is good and turnover tends to correlate with economic conditions. In 2009 (during the depth of the recession), annual physician turnover was low at 5.9%. Now that the economy has recovered, turnover has increased to 6.8%, the highest rate since turnover data was first collected in 2005. Many of these 6.8% of physician jobs turned over because of retirement – a lot of older physicians decided to postpone retirement during the recession so there was a backlog of physicians ready for retirement once the economy turned around. A healthy workforce has a relatively predictable percentage of physicians retiring and starting their careers so that the workforce is constantly rejuvenating.

Sometimes, physicians leave in order to take a career advancement or because their spouse is relocating to a different community. Sometimes physicians leave because they weren’t a good fit in your hospital or were not practicing high quality medicine (and often we actively encourage those physicians to leave). Not surprisingly, the highest turnover is in the first 3 years of practice – 5% of physicians leave a practice after one year, 10% leave in year two and 10% leave in year three. That’s a total of 25% turnover in the first three years of practice. And physician turnover is costly: the recruiting costs of replacing a physician is about $40,000 and the indirect costs (of lost revenue, etc.) can range from $250,000 to $1,000,000, depending on the specialty.

Leaving academic medicine for private practice is usually a one-way ticket. It is pretty easy to go from being a university physician to practicing in a community hospital but it is the exceptional physician who goes from private practice into academic practice.

So why do physicians leave a practice?

  1. Time. Physicians who trained in the 1970’s and 1980’s are the last of the baby boomer generation. During their residencies, every other and every third night call were the norm and they expected to work 70-hour work weeks when they were in practice. For physicians who trained in the 1990’s and 2000’s, work-life balance is a priority and flexibility to adjust work hours during different phases of life is essential to retain them. It’s not just the total hours but it is the predictability of hours, particularly for physicians with children at home. The ability to offer physicians 50%, 70%, or 90% positions during different seasons of their life gives you an employment advantage. For surgeons, guaranteed OR block time is a plus.
  2. Compensation. Nobody goes into academic medicine expecting to make as much as they would in private practice. Most academic physicians will accept 80% of the going private practice salary in the community to be at a university hospital and they’ll accept 60% if the leadership is charismatic and the work environment is exciting & rewarding. Once you get below 60% of the going private practice salary, physicians will leave for private practice, regardless of how great the work environment is. You can look at national salary benchmarks such as the MGMA but the law of supply and demand works most effectively on a local basis and if you have the only cardiologists trained in MRI interpretation in the region, every other hospital is going to be trying to out-bid the salary you are paying them.
  3. Equal compensation. According to a recent JAMA article, the average female physician at a public medical school makes $206,641 and the average male physician makes $257,957. In fact, in all specialties except for radiology, men make more than women. Even if you adjust for age, specialty, years of experience, specialty, faculty rank, Medicare payments, and research productivity, women physicians in academic practice make on average 8% less than men physicians. I once had a division director tell me that he had to pay a particular male physician in his division more than a female physician of the same academic rank because the male physician “…was the sole bread-winner of the family and needed to make more because his wife wasn’t working.” Ridiculous.
  4. Toxic culture. When I wake up in the morning, I’m excited to go to work. That’s not the case with many physicians and if you have a work environment where physicians are constantly trying to undercut each other and there is not a culture of respect and mutual support, then you’re going to lose your physicians. By and large, your physicians are doing wonderful things: they’re diagnosing the diseases that no one else could, operating on the diseases that would otherwise kill their patients, and counseling patients on how to prevent those diseases in the first place. They’re good people doing important things for your patients and your community… and and you need to let them know that you see it.
  5. Opaqueness. This is the lack of transparency. If your doctors cannot figure out how the finances are flowing or how decisions are made that affect their careers, you can tell them goodby because they will not stay. If a physician sees colleagues seeing fewer patients, leaving the hospital earlier in the day, not handing in their billing cards, not following up on consults, etc. and they don’t get penalized, then that physician is going to assume that no one cares that he/she is working that much harder or is that much more conscientious.
  6. Bad leaders. No one likes to fire a division director, department chairman, or CEO. But if you keep a poorly functioning leader, then you are in essence firing all of the good people who work underneath them. If one specialty in your hospital has a bad reputation for the physicians being abrasive, being burned out, or providing substandard care, then you need to start by looking at the leader of that specialty.
  7. Lack of mentorship. Everyone talks about mentorship but not very many people practice it. Establishing a culture of mentorship in your hospital doesn’t happen overnight and it requires mentorship to be a practiced priority for leaders at the highest levels.
  8. Lack of role models. If you hire a woman physician and she looks around and sees that the division directors, the department chairmen, and the Dean are all men, how long do you really expect that she is going to stay at your institution? For that last sentence, you can also substitute the word “woman” with “race”, “religion”, or any other demographic with the same result. But it is not just that. Even beyond gender, religion, and race, it is whether you identify the leaders as being like you. So for example, I’m a more-or-less caucasian male married to another physician with 4 kids. When I was looking for role models, I didn’t really care about race or gender, I cared about whether my role models were able to be successful and be married to a spouse who worked and still be able to raise normal kids. A leader who had to give up everything that he or she could have had in order to obtain their leadership position is not going to be a role model for most of their physicians.
  9. Loss of autonomy. Right or wrong, physicians want to work for physicians and not administrators. If they feel they have no control over their lives or are being put into a rat race chasing RVUs then they will feel like they have no real control over their career. And they will become burned out. No physician went through 4 years of college, 4 years of medical school, 3 years of residency, and 3 years of fellowship to become a chess piece on an administrator’s chess board.
  10. Patient overload. The patients of today are different than the patients of yesterday. Thirty years ago, as an intern or resident, I could manage a service census of 25 patients and still be home by 7 pm; today, the patients are sicker, the treatments we use are more complicated, and the time demands to get them in and out of the hospital are more acute so 25 patients thirty years ago is equivalent to 15 patients today. Similarly, I could see 25 outpatients in a half day clinic in 1996 but in 2016 with the increased complexity of the diseases, the physician documentation demands of electronic medical records, and the changes in patient expectations, I can only now see 15 outpatients in the same time period. The time allocated for a physician to see patients needs to match the time necessary for that physician to practice quality medicine for those patients.
  11. Inadequate on-boarding. Today’s physicians come out of residency well trained to practice medicine. But they are not necessarily well trained to work in your hospital. There are so many factors to consider including who to consult for what problems, how to efficiently use the electronic medical record, how you transfer a patient to the ICU, what is the blood transfusion policy, etc. If you through your newly hired physicians into practice hoping that they will swim rather than sink, a lot of them are going to sink.
  12. No opportunities for advancement. Promotion to Associate Professor or to full Professor should be a recognition of excellence and not a recognition of sacrifice. If the only way to get promoted is to give up time with ones family by doing all of the academic work at home in the evenings and weekends that you couldn’t do during the weekdays because you were too busy seeing patients all day, then you will lose good physicians out of frustration. It is unfortunate that in academic medicine, we don’t promote faculty for being excellent, we promote them for talking about (or publishing about) excellence.

So why did our 6 mid-career women leave? I think that in each case the reasons were a little different but I think that what they all had in common was that they did not feel valued. And since I am a hospital medical director, maybe that starts with me. Yesterday, I had back to back meetings from 7:30 AM to 6:00 PM and by the end of the day, after after answering patient phone calls and dealing with angry doctors/nurses/patients/administrators, I was looking to go home. What I should have been doing was looking to find one of those quiet physicians who always get their work done well and on time and asked him or her what is going on in their life and what I can do to help them achieve their own future successes. And maybe remind them of just how good of a job that they are doing.

September 15, 2016

Categories
Hospital Finances

A Cheap Tool Is An Expensive Tool

toolIt is one of those sayings that everyone’s father or grandfather told them at some time and it basically means that you get what you pay for. An inexpensive tool that has to be replaced because it wasn’t well made costs you more in the long run than the well-made expensive tool. Same goes with hospital purchases.

In hospitals, we buy expensive stuff. An MRI machine is going to run you $1 million. If you want to buy a da Vinci surgical robot, you’re going to need $2 million. A pair of endoscopes to do ERCP is about $50,000. When you are buying equipment that is this expensive, there is a good chance that your hospital is going to put out an RFP (“request for proposals”) and then use those proposals to work the price down as low as possible by creating a bidding war between different manufacturers.

Before I go on with this post, I have to make a confession. I used to hate to buy cars. No matter how much I paid for one, I was always sure that at some level, I was getting ripped off. Now, however, it’s not so bad. You can check on Edmunds or Consumer Reports and get a good idea of what a fair price is. And you can get an on-line price so you don’t have to spend horribly unpleasant time in a dealer showroom while the salesman “…checks with the manager about your counter offer price”. But buying equipment for the hospital still has that car dealer feel to it. You can’t go to consumer reports to get ratings and average prices on ultrasound equipment.

So, it takes a little bit of work to decide if the equipment that you are buying is really a good deal or not. First, talk to the physicians who will be using the equipment. Second, meet with the manufacturer representatives (but only after you have done enough homework and reading to know what questions to ask them). Third, check on-line and with other hospitals that have recently made similar purchases. Fourth, work with your purchasing department in case the purchase can be bundled as a part of a larger equipment purchase or an exclusivity contract. Fifth, don’t be in a hurry – if you are buying a car, it is best to wait until the end of the month or during the winter to get your best price, similarly, waiting will get you a better price if the sales rep or the company needs to move medial equipment inventory before the end of their fiscal reporting period. You are usually not going to just pay the sticker price for medical equipment.

Once you have a price, you’ll need to determine if there is an adequate return on investment or whether you’re going to lose money on it. To do this, you’ll need to draft a “pro forma” which is a document that projects the future net revenue that a new capital purchase will bring. Here is where you have to be particularly careful because a pro forma can be manipulated to show almost anything you want. Here are some of the steps you’ll need to take:

  1. Accurately project how often you’re going to use it. Your physicians are going to over-estimate how much they’ll use a piece of equipment – it’s just human nature. If you have children, when they reach age 11, they’re going to come home and tell you that “…every single one of their classmates is allowed to see PG-13 movies”. It may seem like it to them but the reality was that 2 of their classmates snuck into a PG-13 movie when they told their parents that they were going to see the Finding Dory at the multiplex cinema. If you aren’t sure how often equipment will really get used, call some of your counterparts at other hospitals to get an idea of actual equipment use frequency.
  2. Determine depreciation. If you depreciate a piece of equipment too quickly, then the cost of that piece of equipment will appear to be too high. For example, let’s say you need a new bronchoscope that costs $18,000 and you expect to use it 100 times a year. If you depreciate it over 3 years, that will be an equipment cost of $60/bronchoscopy. If you depreciate it over 6 years, then the equipment cost drops to$30/bronchoscopy. Accurately projecting the life expectancy and frequency of use of a piece of equipment is critical to calculating your return on investment.
  3. Project revenue. To do this, you’ll need to know how much the hospital is going to get paid for using the equipment. This is pretty easy to do for outpatient procedures since you can determine how much Medicare, Medicaid, and commercial insurance companies are going to reimburse for a particular CPT code. Just be sure you are not mixing “charges” with “receipts” since your charges are always going to be a lot higher and do not reflect what you will actually get paid for the procedure. For inpatients, this can be difficult because the hospital is going to be paid by the DRG and not by the individual procedures done during the hospitalization.
  4. Make sure you account for all of your expenses. We are starting an endoscopic ultrasound program at our hospital. In this case, it wasn’t just the expense of the equipment but also the disposable needles, the depreciation on the machine that cleans the equipment, the time for a cytopathology technician to do real-time microscope slide preparation, and the depreciation cost of a tele-pathology microscope so that a cytopathologist at a remote location can do real-time preliminary interpretation of those slides. The best way to be sure that you captured all of the expenses is to map out the procedure and include the time cost of every person involved in the procedure, preparation, disposables, cleaning, etc.

Buying a piece of medical equipment is a lot more complicated than buying a car. Getting your hospital purchasing department involved early can help keep you from buying a cheap tool that ends up becoming an expensive tool.

September 13, 2016

Categories
Inpatient Practice

Variability Creates Vulnerability

As I mentioned in a previous post, we just had our every-3-year JCAHO site survey. One of the surveyors made a comment that “variability creates vulnerability” and that phrase really stuck with me. So what does this mean? Let me give you an example. If you get on a plane, the pilot is going to go through a series of pre-flight checks and the flight attendants are going to give you a short speech about how to fasten your seatbelt and what do do in the event of a water landing. I’ve heard it dozens of time from dozens of flight attendants and it is always the same. I’ve also flown with dozens of pilots and each time, the pilot’s check list is also the same.

Not everything in the hospital can be standardized but the more you can reduce variability in practice, the less variability in outcome that you will have. Let me give you three examples.

The best outcome in CPR happens if you do chest compressions 100-120 times per minute. In order to ensure that this happens, our doctors and nurses have to go through BLS (basic life support) or ACLS (advanced cardiac life support) every 2 years. However, in the excitement of a true cardiac arrest, it can be hard to avoid going either too fast or too slow. At our medical center, we have recently started to use devices attached to the patient during CPR so we can analyze the compression rate during the code after the fact. When we first started auditing codes, I was surprised how commonly the chest compression rate either exceeded 120 or fell below 100. It turns out that this is pretty common at every hospital in the world – one’s sense of time becomes very altered when one’s adrenal glands are pumping out adrenaline at an ounce a minute during a cardiac arrest situation. We found 3 strategies to ensure correct timing of compressions – 2 that are expensive and 1 that is cheap. There are now automatic CPR compression devices that will compress the chest at a set rate and these are pretty fool-proof; we have one of these in our ER. The newer generation of the CPR monitoring devices don’t just record the compression rate but they can give a real-time read-out of compression rate during CPR. The least expensive option is to down-load a free metronome app to your smartphone and set it at 110 beats a minute and then turn it on during CPR to synchronize your chest compressions.

Our hospitalists are expected to place central venous catheters (“central lines”) and most of them learn how to do it during their residency. But there can be a lot of variability of the quality of training from one residency to another and hospitals will use different central line kits with different supplies in those kits. So 2 new hospitalists may use very different technique to put a central line into the same right internal jugular vein. To solve this, we developed a checklist for each of the steps that we expect during a central line placement and we have our hospitalists get proctored placing central lines during their first 6 months of employment to be sure that no matter where and how they were trained in central line placement, that they place it using the same procedural steps at our hospital.

Making sure you have the correct patient in your operating room and that you perform that operation on the correct anatomic part of that patient seems like a pretty straight-forward thing but every week in the U.S., there is a wrong-site surgery. Imagine waking up after anesthesia to find out that your good hip just got replaced instead of your bad hip or that you got your gallbladder taken out rather than your appendix. One way to prevent this is the “time-out” where everyone involved in the procedure stops what they are doing and confirms the patient, the sedation plan, the anatomic location, the specific procedure, etc. But time-outs only work if everyone is paying attention and you don’t miss any steps in the time-out. Therefore, the time-out should be scripted and just as predictable as the flight attendants’ pre-flight speech, no matter if you are in an OR or an endoscopy suite and no matter who is assisting during the procedure.

You can’t standardize everything in your hospital but you can standardize a lot of things. So look around you and see what you can do to reduce variability in order to reduce your vulnerability to bad outcomes.

September 13, 2016

Categories
Inpatient Practice Life In The Hospital

The JCAHO Site Survey

We just went through our Joint Commission site survey and I have a few thoughts after doing this as a medical director. The Joint Commission for the Accreditation of Healthcare Organization (JCAHO or just “Joint Commission”) is the largest of several organizations that review and accredit hospitals in the United States. Hospitals pay the Joint Commission to do a top to bottom review of the hospital every 3 years and they look at everything from medical records, to equipment, to policies, and to the plumbing. The stakes are high: if you lose your accreditation, you can lose your ability to see Medicare and Medicaid patients. I’ve participated in about 2 dozen Joint Commission surveys between Ohio State and Select Specialty Hospitals in various medical director roles. This year’s survey was the first that I have gone through as a medical director for the whole hospital.

Each hospital will have an open “window” of time every 3 years that the Joint Commission can show up. The surveyors will show up unannounced at the hospital administration offices, typically on a Monday at 7:30 AM. The hospital then gives them access to all patient care areas, medical records, policies, etc. and the surveyors inspect… everything.

The number of surveyors can vary in number depending on the size of the hospital and other factors. This year, we had 8 surveyors: a social worker/counselor, a pediatric critical care nurse, a women’s health nurse practitioner, a former hospital chief nursing officer, an OR nurse, an infectious disease physician, a pediatric oncology nurse, and a former fire marshal. The social worker and the fire marshal were only here 1-2 days but the nurses and physician were here daily from Monday through Friday.

The survey consists of informal inspections and relatively formal sessions where one of the surveyors will sit down with a group of hospital leaders to discuss things like medication safety or credentialing. The real detailed part of the survey is when one of the surveyors goes to inspect a specific practice location. They may do this by deciding to go to the respiratory therapy department in the morning and the physical therapy department in the afternoon. They can also do this using a “tracer” method where they randomly pick a patient chart and then retrospectively follow that patient’s hospital course from when they first arrived in the emergency department to the operating room to the ICU to the nursing unit. They will inspect each location and interview staff at each location.

At our hospital, we have an accreditation specialist whose primary job is to ensure that we are always meeting accreditation standards for a variety of organizations that inspect us periodically. Each person who works in a hospital has a role to play during a Joint Commission site survey. As the hospital medical director, I found my role was a bit different than it was when I was a chief of internal medicine, MICU medical director, or PFT lab medical director. Here are some pointers:

  1. Read your bylaws and know what is in them.
  2. Know what is in your medical staff rules and regulations. I printed out a list of the titles and carried it with me.
  3. Know what your various hospital policies are. Again, I printed out a list of the titles to carried it with me.
  4. Have the policies and rules/regulations at hand. Ours are on our internal hospital internet site so I carried an iPad with me so I could pull them up if needed.
  5. Seek out the surveyors and introduce yourself. Accompany them when possible so you can answer questions.
  6. There is a penalty for guessing. You’ve spent your entire life taking multiple choice questions and knowing that if you don’t know the answer, you still have a 20% chance of getting the question right if you guess. With a Joint Commission survey, a wrong guess about something can be lethal. It is better to say that you don’t know and would have to check the files than it is to guess and be wrong.
  7. Get the medical staff involved. Too often, when they know that the JCAHO is in the hospital, the doctors will hide out in their offices or the doctor’s lounge. The surveyors really like to see the physicians engaged in the process so take time to introduce them.
  8. Walk through the hospital. The best way to keep your backyard tidy is to poop-scoop weekly all year round. But if you are hosting the annual office cook-out at your house, you still want to do a quick walk through the grass an hour before the party starts just to be sure. Same goes with a survey. Look for stuff stored in the hallways, unsecured medication drawers, dust on the sprinkler heads, and water stains on the ceiling tiles.
  9. Timing is everything. The surveyors are likely not going to be judging you on your choice of a statin in hyperlipidemia. It is just too subjective and hard to do in a short survey. What they can and will judge you on is whether you adhered to your policies. So, if your policy says you need an H&P on the chart less than 30 days before a surgery, that H&P better be dated < 30 days earlier. If your policy says that the anesthesia assessment needs to be done immediately before surgery, it better be timed before the start of the surgery.  If your policy says that a preliminary op note needs to be in the chart before the patient leaves the OR area, it better be timed before the time the patient is transported to the floor.
  10. It’s your policy, stick to it. Don’t make policies that the doctors can’t adhere to. A policy is what your doctors have to do every time, not what they should aspire to eventually do. If you put in your policy that your doctors need to assess the Mallampati class prior to doing procedural sedation, it has to be done and documented every single time.
  11. Everything expires. This is low-hanging fruit for a site surveyor, every bottle and package in your hospital has an expiration date whether it is a medication, a test strip, or a cleaning agent. Be sure that someone is checking them regularly. After our recent Joint Commission survey, I went through my refrigerator at home… there was salad dressing from 2011 in the back. Good thing they were inspecting the hospital and not my kitchen.

But the good news: we passed our survey. Next week, we have to start preparing for the next one.

September 9, 2016

 

Categories
Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 12: Overall Summary

This is the twelfth and last in a series of posts made in preparation for a presentation I will be making for physicians in fellowship training at an upcoming ACCP meeting. In this post, I’ll summarize the key points from the last 11 posts.

Retirement planning for physicians is different than for everyone else. You make a lot more money. You have a lot more educational debt. Because of how long you trained, you have less years to save for retirement. Because of your income, your children are not going to be eligible for financial aid in college. And you have different insurance needs. Here is my list of the 13 rules to invest by for your retirement.

Start saving for retirement as early as you can afford to. Compound interest is a beautiful thing and you need to make it work it’s wonders for you.

Know your tax rate. It is not your income tax bracket that is important, it is your effective income tax rate and these are very different numbers. You also need to know your capital gains tax rate and which types of income are susceptible to income tax versus capital gains tax. Also, realize that changes in tax laws and tax rates are inevitable and the rates today will very likely not be the rates when you retire.

Tax-deferred investments are almost always better in the long run. Financial advisors who tell you that you will be in a lower tax bracket when you retire and so you should invest in post-tax investments are wrong – your goal is to retire in the same or a higher tax bracket than you are in now. Tax-deferred investments outperform other types of retirement investments.

If you have access to a defined benefit pension plan, take it. We’ve all heard about defined benefit pension plans that went belly up during the great recession and many people got scared of these pension plans. But the reality is that all investments went belly up during the recession. Unlike a blue collar worker or high school teacher for who the pension plan may be the only retirement plan that they have, you will have a lot of additional options and a defined pension plan is a fantastic component of a well-diversified retirement portfolio.

Investment priority listSet a priority list for retirement investment options. Each different plan has different tax implications and some are going to be better than others in the long haul. Employer-matched 401(k) or 403(b) plans are a no-brainer because the you can basically double your money from the outset. 457 plans have an advantage of no penalties for early withdrawal compared to 401(k) and 403(b) plans. If you are at a university, you may be able to invest in BOTH a 457 and a 403(b) plan. Once you become eligible for a 415(m) plan, you will likely have to make a one-time irrevocable decision about whether to contribute to it and how much to contribute to it – I recommend you choose to contribute the maximum percentage of your salary that you can; even if you can’t afford to do that now, you can always reduce your 403(b)/457 contributions for a few years until you are financially able to do both the 415(m) and your other tax-deferred investments. If you have self-employment income (from consulting, etc.), then open an SEP and put the maximum contributions that you can into it. Every year, put money into a traditional IRA and then immediately convert it into a Roth IRA – this gives you additional diversification in the types of retirement accounts that you have. After you have done all of that, then start putting retirement savings into regular investment accounts (i.e., those made up from post-income tax money). Don’t put money in a traditional IRA unless you are going to convert it into a Roth IRA.

Buy term life insurance.  But only buy as much as you need during the time in your life when other people who depend on you need it.

Buy a $1 million umbrella insurance policy. Remember, as a physician, you have a big red bull’s eye on your back that every personal injury attorney in the United States can see.

Seek no-load mutual funds with low expense ratios. The easiest options will be index funds.

Pay off your student loans on time but don’t try to pay them off too early. Being debt-free is always desirable but if you are careful with your personal budgeting and finances, then you will be better off contributing to a tax-deferred retirement plan than making additional early payments on your student loans.

If you use a financial advisor, pay him/her by the hour. Avoid using financial advisors who get paid by investing your money. No matter what they say, they are going to be motivated by making as much money off of your investments as they can. By paying by the hour, you avoid the conflict of interest that comes with getting advice from advisors who work on commission. Some investment companies (such as TIAA-CREF and Vanguard) will have free financial counseling by advisors who are not on commission, take advantage of free advice that comes without a conflict of interest.

For your children’s college savings, open a 529 plan and make regular monthly contributions to it. The tax advantages of 529 plans are huge and the control you have over the account puts these plans far ahead of other college savings options.

Diversification is the foundation for a strong retirement portfolio. Know the right percentage of stocks versus bonds in your portfolio for your age. Your goal is to have the optimal balance between risk and returns – when you are younger, take greater risks in order to get greater long-term returns – when you are older, take less risks in order to get more predictable short-term returns. Don’t forget that a defined benefit pension plan is the ultimate in predictable returns and this gives you a great foundation for portfolio diversification.

Above all, realize that you can be your retirement fund’s best friend or its worst enemy. Knowledge and patience are your most powerful tools in investment for retirement. If you try to beat the market, you most likely won’t since even professional stock analysts usually don’t. You need to make a long-term plan and stick with it. When the stock market crashes and everyone is in a panic, that’s the time for you to put a little extra into your retirement funds rather than pull money out of stocks because even though stock markets go down, they always eventually come back up and as a physician, you are going to have a secure enough job and high enough income to weather economic declines compared to people in just about any other profession.

September 7, 2016

Categories
Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 11: State Teacher’s Retirement System, Yes Or No?

This is the eleventh in a series of posts made in preparation for a presentation I will be making for physicians in fellowship training at an upcoming ACCP meeting. In this post, I’ll be covering the pros and cons of state teacher’s retirement systems. This post will mainly apply to those physicians pursuing an academic career at a university.

Most states have a special pension program for teachers and university professors, including physicians who work at universities. In Ohio, we have STRS, the State Teacher’s Retirement System. Although each state’s teachers’ retirement program will be different, I’m going to discuss Ohio’s STRS. If you work at a university in a different state, you’ll need to be familiar with the specifics of your own state’s system to decide if it is right for you.

In Ohio, STRS is currently financially healthy but that is not currently the case for every state. During the recent great recession, most pension plans really suffered and lost a lot of their value. But they still needed to pay out a fixed amount in pension payments every year. So Ohio STRS, like many other state teacher’s retirement systems, came dangerously close to having projected future liabilities exceed projected future income. This made state legislators and taxpayers nervous since they did not want to have to bail STRS out with taxpayer money. It also made new physician faculty nervous since they were worried that they might end up putting money into STRS and not getting it back out again once they retired. Now that the recession is over, STRS is healthy again but it does illustrate that a pension is an investment and like any other investment, it has risk. Its just that the risk is relatively low compared to most of the other things you can invest in.

One thing to keep in mind about Ohio STRS: it is a substitute for Social Security. In other words, you will not have Social Security payroll tax taken out and consequently, you will not be getting Social Security checks when you turn 65 or 70 if you are a teacher in Ohio. If you have other income, for example, you worked enough years and contributed to Social Security before becoming employed at a university, or maybe as a professor, you have some outside income from consulting, etc. that is subject to Social Security payroll tax, then you may be eligible for Social Security benefits in addition to your STRS pension benefits in retirement. However, the federal government will look at the amount that you get from your STRS pension and your Social Security monthly payments will be reduced, fairly drastically. In my case, because of my work history, I’ll have STRS retirement benefits and will be eligible for Social Security benefits. But my annual Social Security benefits will not even be enough to make 4 months’ worth of mortgage payments.  Bottom line, if you have STRS, don’t count on much (or maybe anything) from Social Security.

When we first become employed as faculty members in Ohio, we have some irrevocable decisions to make. The first is whether to participate in STRS or in the “alternative retirement plan” or ARP. In the ARP, you can put your money into an investment of your own choosing, a lot like a 403(b) or 457 plan. When you take the money out in retirement, you can take it out however you want but when you have taken it all out, it is gone. So, unless you have other investments, you could find yourself at age 70 or 80 and broke with no income.

If you decide to go into STRS as opposed to the ARP, then you have to decide whether to do the “defined contribution plan” or the “defined benefit plan”. For details about the differences between these, refer to the 2nd in this series of posts. The vast majority of physician faculty will choose the defined benefit plan with the result that you (or your surviving spouse if you die) will get a fixed monthly income for the rest of your life. My father was a physician and university professor who died when I was in college – STRS helped support me in my last year of college and in medical school and I am eternally grateful for that support.

There are federal contribution limits for STRS that are currently set at $265,000. That means that you can only contribute to STRS up to that amount of salary and anything over $265,000 needs some other retirement investment option. For many universities, that will be a 415(m) plan that will kick in if you make more than $265,000 per year. The 415(m) plan will typically be with an investment company, such as TIAA-CREF, and it is not with STRS.

If you go the defined benefit route, then you do not get the maximum benefit until you have a certain number of years of service. That used to be 30 but when the recession hit, the number in Ohio was increased to 35. Therefore, if you leave academics to go into private practice, you will not get the maximum retirement benefit.

With any defined benefit pension plan, you are, in essence, taking a gamble that you will out-live other people in your age range and ensuring that no matter how long you live, you’ll always have at least something to live off of. As physicians, there are two variables that make us different than most other teachers in STRS. First, the average teacher starts his or her career after completing their master’s degree at about age 23 or 24. The average physician does not start his or her career as a professor until after completing residency or fellowship between the ages of 27 to 31. Since the years of service to get full retirement benefits in Ohio is 35 years, the average teacher will be eligible to retire at age 57 whereas the average physician with a 3-year residency will need to be age 62 (although in some residencies, you can start contributing to STRS during residency and this will lower the retirement age). Therefore, a physician will typically have a shorter life in retirement to fund than the average teacher. On the other hand, physicians tend to have healthy habits: we have access to good preventive medicine, we rarely smoke, and we usually exercise and eat right. So we hopefully can live to an older age than the average American.

One other aspect of STRS to be aware of is where the contributions come from. There is an “employee contribution” of 14% to STRS and also a “university contribution” of 14% to STRS. On the surface, it looks like the State of Ohio and consequently the Ohio taxpayers are funding university physicians’ retirement accounts to the tune of 14% of their salary. BUT, the Ohio State University, like most other universities, gets the funds to pay for the “university contribution” from the physician practice plans and not from state government. Therefore, in essence, we the physicians fund the “employee contribution” by a 14% reduction in our gross salary and we also fund the “university contribution” by transferring the equivalent of 14% of our salary from our clinical practice income to the university. Thus in reality, the physicians are paying for the entire 28% STRS contribution and the taxpayers of Ohio pay nothing.

STRS v ARPSo, should you choose STRS or the ARP? If you think (like I do) that you are going to live a long, long time in retirement, then having a fixed income that you can count on every year is an advantage but if you think you are only going to make it 5 or 10 years after you retire, the ARP is the better option. STRS has the ability to contract with health insurance companies for good group prices on health insurance policies and this can be a plus if you are going to retire before you are eligible for Medicare; no one knows if “Obamacare” will be repealed by politicians in the future so no one really knows if health insurance exchanges will continue to be available in the future – having the confidence that you can get access to affordable health insurance no matter what happens in the future can be a plus. If you think you are going to stay in academic medicine for your whole career, then STRS is a good option but if you think you may leave to go into private practice after a few years, then the ARP is the better option. If you are a control freak and you can’t stand someone else overseeing your investment, then the ARP is better for you since STRS will make all of the investment decisions regarding your retirement account. Lastly, if you are risk adverse, go with STRS – even though STRS (like all investments) has risk, in the long-run, that risk is a lot less than putting your money in the stock market yourself.

So, what is a new faculty member to do? My own advice is that if you have access to a defined benefit pension plan (such as STRS) as one component of a diversified retirement portfolio, do it. As an academic physician, you are going to have a lot of additional investment options including a 403(b), 457, and a converted Roth IRA that will give you that diversification. You may not have Social Security. Having the relative security of a fixed monthly STRS pension for the rest of your life will allow you to be more aggressive in your other retirement investments by not needing to have as high of a percentage of your retirement portfolio in low-risk bonds. This will allow your retirement portfolio to have a higher percentage of stock that are both riskier than bonds but in the long-run, will pay off more.

In the final post of this series, I will summarize the key points from all of the previous posts.

September 5, 2016

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Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 10: Insurance For Physicians

This is the tenth in a series of posts made in preparation for a presentation I will be making for physicians in fellowship training at an upcoming ACCP meeting. In this post, I’ll be covering the types of insurance that you need to get yourself safely to retirement.

You can buy insurance to cover almost anything you can imagine, and there are salesmen out there that will try to. Most physicians will need several types of insurance: home, car, health, malpractice, disability, life, and umbrella.  I am going to focus on just the last 3 types of insurance.

Disability insurance. You’ve likely invested more than $200,000 and between 11 and 15 years in your education to become a physician so you had better protect that investment. The amount and type of disability insurance you need will depend on your individual circumstances. For example, early in your career, you have a lot more to lose if you suddenly find yourself unable to work whereas if you are close to retirement and already have a sizable retirement fund, then you may not need to depend on disability payments to get by. Also, you will need to consider your specialty. A friend of mine who is a general surgeon had to stop operating in his early 50’s due to arthritis in his thumb and that pretty much ended his practice career. On the other hand, another of my colleagues who is an endocrinologist became paralyzed from the waist down and dependent on a wheelchair after a diving accident as a young adult; she practices full-time and is one of the most highly regarded physicians in her field nationally. Many group practices and hospital employers will provide a standard disability insurance policy and you will need to look at your own circumstances to determine if that is enough or if you need to purchase additional disability insurance on your own. Disability insurance policies can have a lot of differences. For example, some will cover student loan payments and some won’t; some are subject to income tax and others are tax-exempt.

Life insurance. This is a tricky one. If you are single with no dependents, you may not need any life insurance since if you die, no one will be left unsupported. But most of us have at least one person other than ourselves who depend on our income. The amount of life insurance that you need will vary depending on how many people depend on your income and for how long they will be depending on it:

  1. If your spouse does not work, you need more life insurance
  2. If you have children, you need more life insurance
  3. If you are early in your career and have not built up a sizable retirement fund, you need more life insurance
  4. If you have a lot of debt (mortgage, loans, etc.) that you don’t want to leave to your heirs, you need more life insurance
  5. On the other hand, if your spouse works, your kids are out of college and you are near retirement, you may need little or no life insurance

There are essentially two types of life insurance, term and whole life. For physicians, term life insurance is the better deal and I would stay away from whole life policies since whole life policies are considerably more expensive and provide coverage that you will not need for your entire life.

Umbrella insurance. This is a policy that provides coverage over and above your regular insurance policies. When asked why he robbed banks, Willie Sutton famously replied, “Because that’s where the money is”. The same could be said for why personal injury attorneys sue physicians: because that’s where the money is. As a physician, you have a big red bull’s eye painted on your back and if you are involved in an automobile accident or someone slips on your sidewalk and gets injured, there is a pretty good chance that they and their attorney are going to go after you for more than your regular automobile or home owner’s insurance policy. I think that all physicians after residency and fellowship should have an umbrella insurance. $1 million in coverage is usually sufficient.

So, in summary, don’t just buy a lot of disability insurance, buy the right amount that you are going to need based on your specialty and how far along you are in your career. Don’t just buy a lot of life insurance, buy what you need when you are younger and when your family is dependent on your income. But do buy umbrella insurance.

In the next post in this series, I’ll go over the advantages and disadvantages of state teacher’s retirement systems for those physicians who are eligible for them.

September 3, 2016

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Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 9: Saving For Your Children’s College Education

This is the ninth in a series of posts made in preparation for a presentation I will be making for physicians in fellowship training at an upcoming ACCP meeting. For most physicians, you will have three major investments over your lifetime: your house, your retirement, and your children’s education. It this post, we’ll examine the options that you have to save for your children’s college education. Although it is not exactly retirement planning, it does impact your retirement plans since if you don’t prepare for college expenses now, you may find yourself either unable to contribute money into retirement when college expenses come due or even worse, you may find yourself having to takes loans or early withdrawal from your retirement account to pay for your children’s college expenses.

If you are a physician, I’ve got some good news and some bad news for you. The good news is that you are going to have a very good income. The bad news is that your kids are not going to be eligible for financial aid when they go to college because you make too much money. So, unlike most Americans who send their kids to college, you are probably going to have to pay the sticker price… and that price is high. This year, the cost of tuition, room & board, books, and fees for the Ohio State University (a public university) is $22,753 for an Ohio resident. My wife’s and one of my daughter’s alma mater, Notre Dame (a private university) is $65,093. And this doesn’t include the cost of transportation and personal expenses. For 4 years of college, that adds up to $91,012 for a public university and $260,372 for a private university.

Even scarier is the fact that the cost of going to college has been increasing at about 5% per year, in other words, twice the regular inflation rate. That means that if you have a child born today, then in 18 years, a public university is going to cost you $54,758 for the first year and $236,013 for the entire 4 years of college. If your newborn child goes to a private university 18 years from now, that freshman year will cost $156,654 and the entire 4 years will cost $675,199. If you have 4 kids, like I have, then you’ll end up spending more on their education than you will to buy your house, so you have to start saving early.

Fortunately, you have several ways to save for your children’s college education: regular investments, Coverdell educational savings accounts, uniform gifts to minors accounts, and 529 plans. Let’s look at the advantages and disadvantages of each.

Regular investments. This would mean putting money in stocks, bonds, or mutual funds in your name and then drawing the money out when you eventually pay college expenses. The only advantage of this is that the money is yours so if your child ends up getting a full-ride scholarship or not going to college, then you can use the money for whatever you want with no penalty since you did not use it for college expenses. The disadvantage is that you have to pay taxes on the earnings: regular income tax on interest income and capital gains tax on dividend and capital gains income.

Coverdell educational savings accounts (ESAs). These used to be known as education IRAs back when I was saving for my kids’ education. The contribution limit is $2,000 per year and the initial contribution is not tax deductible. The money grows tax-free and if the investment is eventually used for education purposes, it is not taxed when it is withdrawn. You can put almost any kind of investment of your choosing including stocks, bonds, and mutual funds in the ESA. An important limitation is that If your taxable income is greater than $110,000 per year filing single or $220,000 if married filing jointly, then you cannot contribute to an ESA. For most physicians, the $220,000 income limit and the $2,000 annual contribution limit make ESAs either not possible or, if possible, then an inadequate vehicle for college savings.

Uniform gifts to minors. This allows you to give money to your children and then it can be invested in any kind of investment that you (or the child) wants. You cannot deduct any contributions from your taxes and as the money grows, you’ll have to pay regular income tax on the interest and capital gains tax on the dividends and capital gains – under the current tax law, the first $1,000 of income is not taxed, the second $1,000 is taxed at the dependent child’s tax rate, and anything over $2,000 is taxed at the parent’s tax rate. Also, once the child reaches the age of majority (18-21, depending on the state), the money is theirs to do whatever they want with. So, if your idea was that they would spend it on college and their idea is that they would by a Corvette, you’ll be seeing a nice new Corvette in the driveway when he or she turns 18. Because of the lack of tax advantages and the lack of control that you have over the money once your child becomes an adult, uniform gifts to minors is not a good option for most physicians.

529 plans. These plans allow you to invest money into an account to be used for your child’s college education. The money in a 529 plan grows tax-free and as long as you use the money for college education expenses, you don’t have to pay any taxes on the withdrawals. Additionally, in some states, you can deduct contributions from your state income tax; for example, in Ohio, we can deduct up to $2,000 in annual contributions per child from our state income tax. There is no limit to the amount of money that you can put into a 529 plan but if you contribute more than $14,000 per year ($28,000 if married filing jointly) then there are tax consequences since you will have exceeded the maximum amount that the IRS allows you to “gift” to one person in one year. There are 2 types of 529 plans: (1) prepaid tuition plans that allow you to purchase tuition in selected colleges at today’s tuition rates and (2) savings plans that allow you to invest the money in state-approved investments, usually mutual funds. I’m a bit leery about the pre-paid tuition programs because if you are buying this for your newborn son, you don’t even know what state you are going to be living in 18 years from now, let alone what college he is going to want to go to. Each state has a different 529 plan that uses different mutual funds. Of note, you can invest into any state’s 529 plan that you want; for example, when these plans first came out, I invested into Iowa’s 529 plan even though I lived in Ohio and had never set foot in Iowa in my life. At the time, Iowa’s 529 plan used low-cost Vanguard mutual funds and I wanted access to them. Once Ohio switched to Vanguard funds for Ohio’s 529 plan, I moved the funds from Iowa to Ohio. The state income tax advantage that you get may only apply if you invest in your own state’s 529 plan. If you don’t need to use all of the money in the 529 account for one child, then you can very easily move the money into another child’s 529 account. If there is still a balance in your 529 accounts after you have put all of your kids through college, you can withdraw the balance of the account and use it for whatever you want but you will have to pay a federal 10% penalty on the earnings from the residual account balance. That 10% penalty may seem like a lot on the surface but it really isn’t when you figure all of the tax advantages that you have had with the money in the 529 plan over the years.

So in summary, college is expensive and will get more expensive. There are several options for saving for your children’s college education and my personal opinion is that the 529 plans are the best option for physicians. What I did with my own children was to put $5,000 into each child’s college fund account when they were born (that would be $10,000 in today’s dollars). I then put additional money into each child’s account each month. For Ohio’s 529 plan, that was easy – I set up a regular monthly direct deposit from my checking account into the 529 fund so that it happened automatically at the beginning of each month. That way, I didn’t have to think about it and I was not tempted to use the money for other purposes. At the end of the day, we put 2 of our children through private colleges and 2 through public colleges from the money in their 529 plans.

In the next post, we’ll look at insurance for physicians.

September 1, 2016

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Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 8: Pay Off Student Loans Versus Save For Retirement?

This is the eighth in a series of posts made in preparation for a presentation I will be making for physicians in fellowship training at an upcoming ACCP meeting. In the last post, I discussed how to invest your post-tax money for optimal returns in retirement. In this post, we’ll look at whether it is better to pay your student loans off early or invest in retirement.

First, let’s just get this out of the way, if you have the option, the best way to manage your student loans is to get someone else to pay for them. There are a few ways of getting your student loans paid off. If you are pursuing a career in medical research, there are NIH loan repayment programs that will pay up to $35,000 a year on your loans. There are loan repayment programs if you join the military or if you agree to practice in certain underserved parts of the country. Lastly, when you get your first job out of residency, ask if the hospital or group practice will pay off some of your loans – most won’t but some will (particularly if they’ve been having a hard time recruiting into the position) and the only way to find out is to ask.

The average medical student graduates from a public medical school with $172,751 in loans and from a private medical school with $193,483 in loans. That is a lot of debt for a resident making $50,000-$55,000 a year. If you can’t get someone else to pay off your loan, then you’ll be making monthly payments for a long, long time. The jump in annual income from being a resident to being an attending physician can seem like a lot, and it is, but it comes with a rapid ramp-up in the loan repayment requirements. Plus, as a medical student and resident, you may have been driving your grandmother’s hand-me-down 1998 Honda Civic and living in a one-bedroom apartment… you’re 30+ years old and you’re ready for a lifestyle upgrade. So, it is easy to find yourself spending all of that new income on stuff and not on your future retirement.

Above all, do not get behind in your regular student loan payments. The cost in penalties is just too high and you’ll just fall further and further behind. So, we’ll assume that you are making your regular monthly payments on your student loans and then you have to decide if it is better to make a few extra payments on your loans or if it is better to put some extra money into a tax-deferred retirement plan?

As a general rule, I am pretty debt-adverse and just feel better getting out of debt but if you are disciplined (and to get through 11-16 years of college, medical school, residency, and fellowship presumably you do have personal discipline), then you can use some strategic financial planning and budgeting to give you the best long-term financial outcome. So, let’s make some assumptions in a hypothetical case:

  1. You have $150,000 in student loans. You probably have more than this but it is an easy number to use as an example.
  2. The average interest rate on your loans is 6%.
  3. You have a 15-year repayment period for your loans. This will equate to $15,316 of payments per year ($1,276 per month) of which about $9,000 per year is interest.
  4. You can deduct up to $2,500 of annual interest payments off of your income tax each year.
  5. Your tax deferred 401(k)/403(b)/457 has an 8% annual return on investment.
  6. Your taxable income is $258,000 ($255,500 after the loan interest deduction).
  7. You are married and filing jointly.
  8. We’ll use 2015 income tax and capital gains tax rates.
  9. We’ll compound interest monthly on the loan and we’ll compound capital gains monthly on the tax-deferred retirement account.
  10. You are financially responsible and you project that this year, you will have $20,000 in pre-tax income that you can use to either (1) put in your tax-deferred retirement account or (2) pay income taxes now on the $20,000 and use it to make extra payments on your student loans.

Now let’s take a look at what your financial picture will look like if you make extra payments on the loans versus if you invest the money into a tax-deferred retirement account.

tax analysis 5

The first thing to notice is that with either choice, your taxable income drops to $255,500 because you can deduct $2,500 of your $9,000 in interest payments off of your taxable income for that year. The $20,000 in pre-tax money that you decide to use for extra payments for your student loan becomes $15,3116 after you pay an effective income tax rate of 23.42%. On the other hand, if you put the money into a tax-deferred retirement account, then after 1 year, that $20,000 becomes $21,660 and the value of that money if you were to retire after a year at your current effective income tax rate would be $16,743.

Next, look at your overall financial picture at the end of the year if you make extra payments on your student loans. We’ll define the overall financial picture as your total assets (salary that year + the projected value of your tax-deferred retirement fund [after you pay taxes on it when withdrawing it in retirement] minus your debts (the balance remaining on your student loan). In this scenario, your effective income tax rate will be 23.42% and your overall financial picture will be $37,349.

If, on the other hand, you decide to put money into a tax-deferred retirement account, your effective tax rate will drop to 22.70% and your overall financial picture will be $38,922. In other words, you come out ahead $1,573 by putting that $20,000 in a tax-deferred retirement account as opposed to making early payments on your student loans.

Now let’s assume that your student loan interest rate is a little higher, say 7% rather than 6%:

tax analysis 6

Note that the value of the loan changes due to the effect of the higher interest. If you make extra payments on the student loan, your overall financial balance is $35,920 whereas if you put the extra money in a tax-deferred retirement account, your financial balance is $37,330. In other words, you come out $1,410 ahead by putting the money in a tax-deferred account.

Finally, let’s take a worst-case scenario and assume that you have an exorbitant student loan at 9% annual interest:

tax analysis 7

Now, your overall financial balance will be $33,022 if you make extra payments on your student loans versus $34,103 if you put the money into a tax-deferred retirement account for a net advantage of $1,081 to put the money in the retirement account. The bottom line is that you always come out ahead by putting the money into a tax-deferred retirement account instead of making extra payments on your student loan.

Finally, let’s assume that you do not have the flexibility to put money into a 401(k), 403(b), or a 457. Should you put money into a regular investment after you have already paid income tax on that money?

tax analysis 8

If the student loan is 6% then you come out only $145 ahead by investing the money (for all practical purposes, break-even). If your student loan is 7% (analysis not show), you come out only about $18 ahead by making an extra payment on the student loan (also, essentially break-even). If your student loan is 9% (analysis not shown), you come out $1,428 ahead by making the extra payment on the student loan. In other words, unlike the situation with a tax-deferred retirement fund where you always come out ahead by investing in your retirement fund, the situation with a regular investment funded out of your post-tax dollars is more complicated. If your student loan interest rate is high, then you are better off making extra payments on the loan and if the student loan interest rate is lower, it doesn’t make a lot of difference which choice you make.

Every physician’s situation is a little different and you have to take into account the nuances of your own particular circumstances in deciding whether to put additional money into your retirement account versus make additional payments on your student loans. What is not taken into account in the above analysis is the peace of mind that you get when your student loans are finally paid off and from my own past experience that peace of mind is priceless.

In the next post, we’ll take a look at options for investing in your children’s college expenses.

August 30, 2016

Categories
Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 7: Choosing Post-Tax Investments

This is the seventh in a series of posts made in preparation for a presentation I will be making for physicians in fellowship training at an upcoming ACCP meeting. In the last post, I discussed how tax-deferred investments outperform post-tax investments for retirement planning for most physicians. In this post, I will take you through the pros and cons of various post-tax investment options for retirement planning to use after you have maxed-out your tax-deferred options.

As a physician, you will have a myriad number of investment options and there are going to be a lot of people out there who are going to try to convince you that they have the best option for you. In previous posts, I went through some of the factors that should influence your investment decisions. In this post, I am going to focus on 3 general options for you to use with the money that is in your checking account after you have paid this year’s income tax on it:

  1. Regular investments. These could be stocks, bonds, mutual funds, money market accounts, etc. They consist of money that you have from your regular salary after you have paid income taxes for that year. As a general rule, these accounts will be taxed in three ways: (1) annual interest income, (2) dividend income, and (3) capital gains income. Interest income will be taxed every year as you earn it at whatever your effective regular income tax rate is for that year. Dividend income will be taxed each year at your capital gains tax rate. Capital gains income is taxed at your capital gains tax rate for the year that you sell your stock or mutual fund on the difference between the selling price and the original purchase price (i.e., you don’t have to pay capital gains on the amount that you originally invested when you opened the account).
  2. Traditional IRAs. You can put many different kinds of investments in an IRA: stocks, bonds, mutual funds, real estate, etc. Traditional IRAs are taxed at your effective regular income tax rate for the year that you withdraw money from the IRA. For a typical physician with a relatively high income, you will put money into an IRA from your salary after you have already paid income tax on it for that year. When you take the money out, you won’t have to pay income tax a second time on the amount of your original investment, only on the difference between the selling price and the original purchase price.
  3. Roth IRAs. For a typical physician with a relatively high income, you will not be able to invest directly into a Roth IRA. But, you can take advantage of a current loophole in the tax law that allows you to open a traditional IRA and then immediately convert it into a Roth. This is a so-called “backdoor Roth” that has been available since 2010 when a law governing IRAs expired. This is a surprisingly easy thing to do and most large investment companies will allow you to do it in just a few computer keystrokes from the comfort of your home. The great thing about a Roth IRA is that once you put money into it, you never have to pay any income tax or capital gains tax on it when you withdraw money from it in retirement.

So, which one should you choose? Let’s take an example of a physician who has $5,500 left over in her checking account at the end of the year and she decides she wants to put a little more into her retirement savings over and above what she put in her 401(k) that year. We’ll assume she is going to retire in 30 years and that when she retires, she is projecting an annual retirement income that will put her in the 15% capital gains tax bracket and that her effective regular income tax rate will be 21.3%.

tax analysis 4

In this analysis, her $5,500 grew to $60,147 in all three accounts. For regular investments and the tradition IRA, her taxable amount at the time of retirement is $54,647 ($60,147 – $5,500). On the regular investment, she pays capital gains tax. On the traditional IRA, she pays regular income tax.

At the end of the day, once she retires, she will have been much better off with the Roth IRA than with either a regular investment or a traditional IRA. What a lot of physicians don’t realize is that they are better off with a regular investment than with a traditional IRA. For many years, I was one of those physicians and I dutifully put money every year in a traditional IRA thinking that I was making a good investment. But here is the catch: you will pay capital gains tax on your investment income from a regular investment account but you will pay regular income tax on your investment income from a traditional IRA, and your regular income tax rate will almost certainly be higher than your capital gains tax rate.

The above analysis is pretty simplistic but it works if you are a young physician starting your career. It gets complicated if you’ve been around a while and have rolled investments into a traditional IRA. You see, the federal income tax law allows you to move money around from one type of tax-deferred account into another. This is a good thing because if you change jobs, you can end up with a bunch of different 401(a) accounts, 401(k) accounts, 403(b) accounts, etc. You’d be amazed at how many people lose track of all of their various retirement accounts and leave a few thousand dollars here and there in various pension accounts from different jobs that they have had in the past and never claim that money. So, the law allows you to transfer the money from (for example) a 401(a) pension account into your IRA or your 403(b) account when you change jobs. You have to be careful with transferring tax-deferred retirement account money into a traditional IRA or you can make your ability to convert that traditional IRA into a Roth IRA difficult. Here’s why:

About 15 years ago at Ohio State, we consolidated all of the various individual department practice corporations into a single multi-specialty practice company. So, the Department of Medicine Foundation, Inc. became a subsidiary of the larger OSU Physicians, Inc. I had a 401(a) pension with the Department of Medicine Foundation, Inc. and when we closed out that company to become OSU Physicians, Inc., we also closed out the 401(a) plan so I needed to move that retirement money somewhere. I thought I was being real smart by rolling the 401(a) money into my traditional IRA where I would be able to invest it in low cost index mutual funds. But then in 2010, the law prohibiting the conversion of traditional IRAs into Roth IRAs expired opening up the possibility of the backdoor Roth IRAs. The problem was that by that time, my traditional IRA account contained pre-tax money from my (tax-deferred) 401(a). Tax law requires that if you do a Roth IRA conversion, you have to consider all of your traditional IRAs together as a whole so movement of any money out of that traditional IRA has to be considered to consist of the same ratio of pre-tax/post-tax money that is contained in the entirety of your traditional IRAs. So for me to convert my traditional IRA into a Roth, I was going to have to pay regular income tax on the money in it from my previous 401(a) rollover during the year that I did the conversion. That was going to create a huge tax liability during the conversion year. Fortunately for me, the great recession occurred causing a massive drop in the value of the money in my traditional IRA so I was able to convert it into a Roth when the stock market price was close to its lowest in years, thus minimizing the amount that I had to pay in regular income tax on the conversion. If I had to do it all over again, I would have rolled the 401(a) over into a 403(b) account so that I could keep the traditional IRA account free of any tax-deferred account dollars and available to do an annual Roth IRA conversion each year without having to pay additional income tax.

So the bottom line:

  1. If you have extra $5,500 of spending money at the end of the year ($6,500 if you are over age 50), put it into a traditional IRA and then immediately convert that traditional IRA into a Roth IRA.
  2. If you have more than $5,500 ($6,500 if you are over 50) to invest at the end of the year, leave it in a regular investment account.
  3. Do not leave money in a traditional IRA; only use the traditional IRA as a vehicle to get that money into a Roth IRA.
  4. If you need to consolidate tax-deferred accounts, do not put them into a traditional IRA since that will contaminate your traditional IRA with pre-tax money that will be taxed at your regular income tax rate if you try to roll any portion of your traditional IRA into a Roth IRA in the future.

Most new physicians have a lot of college and medical school debt. In the next post, we’ll look at whether it is better to pay off that debt early or put money into retirement accounts.

August 28, 2016