Wealth Opportunities for Doctors

Posted on October 3, 2011 by Bill Faiferlick

There are two systems of taxation; one for those who are uninformed and one for those who are informed. Which one are you?

As with most doctors, you probably have a retirement plan which is an employee-oriented type plan – typically a 401(k) and or profit sharing plan. Providing you are willing to contribute enough money on employer contributions for your employees, you will receive an increased contribution yourself. There’s severe limitations and little tax savings for you after you consider the added employee contributions. Your increased tax savings paid for your increased employees contributions. The net result – no gain.

Surprisingly, professionals such as doctors and dentists who are capable of making a great deal of money often are no better off than those they employ. One would tend to assume otherwise given their perceived business success. I personally have known a family who by all accounts appeared to be a wealthy family, where the non-working wife spent $1,500 a month on manicures, nails, pedicures, makeup stuff etc, plus the additional expenses for workout clubs, lunches, cars, clothes and the list goes on. This professional told me they just couldn’t possible redirect $200,000 a year because he would have to force his wife to adjust her spending and lifestyle habits. It wasn’t possible. This man by all accounts and appearances looks and acts like a financial success but he will be no better off than the average American who will struggle throughout retirement.

A Little Bit of Recent History, There Are Now Massive Tax Deductions Available to You – That Every Professional Should be Taking Advantage of

The attitude of Congress had been that employees needed to be helped; while owners or professionals were left with little real tax relief. The regulatory rules and regulations were intentionally set to discriminate against highly paid or successful individuals as it has been for more than thirty years. Congressional changes in 2000 opened up again an amazing opportunity for your profession. Suddenly, Congress realized the relationship between meeting the professionals and the employees’ retirement needs. Both need to be addressed and are interrelated.

Defined benefit plans while being new to most people today have their origins back to the 1960s when these types of deductions were first permissible. Older doctors will confirm that large deferral opportunities were available and they participated religiously. They deferred and accumulated money very quickly. But in the mid-seventies, Congress suspended the much-coveted deductions doctors enjoyed, and imposed newer more stringent plans commonly known today as 401(k) or profit sharing plans. These plans immediately imposed severe discriminatory limits against all high-income earners. That is until 2000 when Congress rolled back or amended certain restrictive provisions which today permit the creation of financial opportunities with the intent to once again favor the professional without taking away (and in many cases without increasing the cost of existing employee) benefits.

How much can a doctor deduct? 

The objective is to design a strategy where you are able to personally receive new deductions ranging anywhere from an additional $50,000 up to and including $350,000 generating a corresponding income tax savings being deposited directly into your plan.

Will my Employee Cost Increase?

The objective is to maintain existing employee costs at current levels, while permitting the doctor additional benefits and tax savings in a separate stand-alone environment.

What’s Involved?

Initial consultations are treated much the same way you treat your patients. First, there is an initial consultation to accurately determine your overall objectives and what you want to accomplish. Gathering specific information from you is similar to how you first acquaint yourself with a prospective patient. The solutions derived from well thought out strategies become plans and programs designed to your individualized situation, tailored to your specific needs both personally and for the benefit of the clinic when necessary.

The Importance of Substantial Wealth Accumulations

It is often daunting to realize the total dollar accumulation needed to maintain a certain lifestyle. To create $100,000 in annual income at the onset of retirement, you will need $3,742,364 and for a $200,000 income, you will need to have saved $7,484.728 for a 30 year retirement at 3 percent inflation. (See the article: You need more cash to retire!)

Statistically most Americans retire with considerably less than $350,000 in assets. Many will actually have to rely on the equity in their homes (if there is any due to the decline in real estate values) to offset their lack of savings. To enable a person to live modestly and I do mean modestly on $40,000 a year times twenty years, you’ll need at the onset of retirement in excess of ONE MILLION DOLLARS. Because of inflation and rising prices for products and services, this sum will only provide conservatively a stagnant $40,000 income because investment returns have generally been less than the real inflation rate. The other consideration to be factored into the $1 million retirement capital requirement is that this is for twenty years ONLY. What happens if you live longer? What happens if government entitlement programs are scaled back which is the current likelihood based on reports out of Washington?

Given the likelihood that at some point during those golden years you’ll experience an unforeseen major medical issue, you can throw in the towel because you’ll be financially ruined (and that’s assuming you still have and can afford state of the art medical coverage throughout retirement). Considering the frequency medical insurance companies seem to disallow or terminate benefits at the moment they’re most needed, you have no hope short of having your face plastered on milk cartons asking for donations.

By the year 2026, the expected expenditure for social programs by the U.S. government as a percentage of total governmental expenditures will be at least 65 % of the total United States budget. By 2046, the cost is expected to be 75 % of total governmental revenue up from 30% today. What all of this means is that for individuals with the means to accumulate substantial wealth, these individuals are once again encouraged through the application of granting large income tax deductions to start accumulating large sums of money which will partly help to secure their personal financial future.

Are you selling your practice for a profit?

The other single most expensive loss to doctors’ wealth occurs when selling your practice. Most doctors either close the doors or pass the practice on to other younger doctors. There are other options available to doctors outlined in Buying or Selling a Business and in more detail in my book It’s Your Money. Doctors routinely fail to consider the value of their practice and how to structure the eventual sale of their practice so that their years of effort and capital investment can yield a meaningful return on investment.

Adequately anticipating the true cost of medical coverage

Requiring medical care and having sizeable disposable assets to pay for it can be the single largest expense you will undeniably face at one time or another in your retirement years.

Whether you are self-employed or working for a clinic, you are to some extent insulated from issues facing millions of retirees each year; that being the long term cost of medical coverage. Even modest coverage can be frightfully expensive over an extended period. Compounding this issue is your age and the incremental increase in coverage and likelihood of having a pre-existing condition which precludes you from coverage.

Currently medical coverage or expenses are absorbed as a business expense. Typically, these costs are reflected as expenses and are calculated back into your practice simply as another cost of doing business. However, once you retire these costs are painfully reborn without the benefit of your clinic and paying for them with only after-tax dollars eats at the capital set aside for retirement. For every dollar spent assuming you’re in a 30% tax bracket, you will have to have earned $1.45 as pre-tax income before $1.00 is available.

We, realistically, do not have the luxuries our parents had in expecting fully funded and relatively low cost coverage. There was a book out a number of years ago titled “Who Moved My Cheese”?. The emphasis was that people need to be flexible and adapt as work situations change. The cheese has not only been moved but we’ve already eaten most of it. Being able to afford medical coverage beyond government plans to receive the care you want can significantly erode financial resources. Failing to change with the times and plan accordingly by not understanding the future costs which for many of us aren’t that far away, could leave us destitute. With insufficient capital none of us can go back and relive the last decade and acquire the necessary capital.

Social Security and Medicare are drastically changing what they will pay or cover. Remember, they only pay for about ½ of the coverage you’ll need anyway. A larger than anticipated portion of your pre-tax income will have to be permanently allocated and taken out of circulation for life’s other pleasures for the remainder of your life.

Monthly premiums and co-payments are tied to your income; with incomes less than $80,000 there is one premium, over $80,000 annual for a single person there’s a higher premium, and for married couples its $160,000. That’s right! Your benefit and outlays are income sensitive unlike in previous years. The higher your income, the less you’re entitled to unless you agree to a larger monthly payment and or a higher yearly out-of-pocket expense. What I believe people will find shocking is the total cost individuals will pay for government issued medical coverage assuming retirement age is 65 and death occurs either at age 90 or 95. Individual premiums and co-payments for this 25 -30 year period are expected to cost individuals between $300,500 and $558,000 depending on health care inflation per person until death at age 90. By extending coverage to age 95, the cost skyrockets to between $615,000 and $907,000 per person.

Now, take this off the top of your retirement income each month. How will this directly affect your long-term spending habits? I suspect it will put a crimp into some of your plans regarding your security and retirement.

  • The medical coverage premium from above was just for the basic costs of government issued health care coverage.
  • How many of us want to be saddled with this and only this type of coverage? Consider what this basic coverage doesn’t or can’t cover in the future.
  • A onetime major medical treatment can cost $40,000 or more assuming there are no on-going rehabilitation, other medical services or medication required.
  • Medical prescriptions, co-payments, rehabilitation due to disease or injury, and major medical conditions like heart attack, limb, hip or joint replacement, and prescriptions costs have not even been factored in.
  • Ask yourself this; how many of us know of an older individual who has cruised through retirement without a scrape?
  • How many retirees have had or are experiencing medical ailments or lingering physical limitations? This doesn’t even touch long term care facilities which frankly few of us at that point will have any say about, certainly not without considerable assets.

Options available to doctors to pre-fund retirement medical costs

Professionals, are accustomed to being their own care-givers during their working years and a surprisingly large percentage of professionals, fail to anticipate the cost of adequate private medical coverage post retirement and are financially unprepared for these medical premiums which is the main option once they are retired.

Doctors need to be aware of and take advantage of pre-funding benefits on a tax-deductible basis that can improve current profitability and decrease the rate of capital depletion during retirement that are available.

Accelerate wealth accumulation during most productive years

The point is if you can discover how you can accelerate your wealth accumulation during your most productive years by adopting tax sensitive strategies; what’s the worst that can happen? I’ve never had a client complain because they’ve had too much money; but I see many wishing they would have been more prudent and interested in how to better maximize all available opportunities while they were working – opportunities that are available if we truly want to succeed at creating sustainable wealth – after all, “It’s Your Money”.