5 Steps for Physicians to Create Their Retirement Critical Mass

These 5 simple steps to investing wisely will get you on track to enjoying your hard work and living fully.

Live like a resident and save big

The earlier you can amass money and let the power of compounding interest work for you, the better. If you start to max out ($17,500/year) your company sponsored retirement plan at age 30 at 8% interest, you will have accumulated $547,317 by age 40. Assuming no other contributions, 8% interest and retirement at age 65 this $547,317 would grow to over 3.7 million dollars. Alternatively, if you wait until age 40 to begin saving, holding the other factors constant, the result would be just over 1.7 million dollars at age 65. Those ten years made a huge difference – you made over twice as much and you didn’t have to save a dime more. Your future self will thank you.

Pay off and manage your debt

For new physicians, student debt is a burden that continues to grow. At 7-8% interest, getting it under control is paramount. As a general rule of thumb, the higher interest rate debt takes priority. If you have a 9% loan and a 5% loan, focus on the former. That said, mentally, paying off smaller amounts can be rewarding. Assume you have a loan with a balance of $10,000 and one with a balance of $200,000. Even if the former has a lower interest rate, there is a mental benefit to paying it off – namely, making the $200,000 gorilla seem manageable.

Tip: Manage real estate debt with caution. I recently interviewed a physician for my upcoming book whose enthusiasm for the real estate market was palpable. This same physician bought at the peak of the market in 2006 and got burned. He was also on the brink of retirement.

Here are three red flags to watch out for.

  • Leverage works two ways. It feels great when the real estate market is humming along, and when things pull back, just the opposite
  • In retirement, you want liquidity. Selling real estate takes time. Selling a mutual fund takes a day.
  • Concentrating the majority of your wealth in one asset is risky. Diversification can not only reduce portfolio risk. If done correctly, it can increase your expected return.

Figure out how big of a nest egg you will need

Spending $150,00 per year in retirement and using a 4% annual distribution puts the figure at $3,750,000. Income sources such as Social Security and pensions will impact this figure. Also take into consideration expenses that will be expiring in retirement, such as your mortgage.

Draft and investment policy statement

Your investment policy statement (IPS) should, at minimum, contain the following:

  • Asset allocation
  • Risk tolerance
  • Liquidity requirements
  • Portfolio strategy

The IPS is the core of your long-term investment plan. All investment ideas should be filtered through your IPS. If the idea is not congruent with the plan, scrap it.

Protect yourself

Life, disability, umbrella and malpractice insurance are a must for physicians. Millions of dollars can vanish in the blink of an eye, and your retirement prospects right along with it, if you are inadequately insured.

Life insurance is particularly important for younger physicians who, in the event of their passing, would need to pay off a mortgage and replace years of lost income for their family. The good news is that a 20-year term life policy will not break the bank.

Disability is important for physicians for all stages of life. Making sure your income stream is protected in the event of a long-term disability is crucial. Your earning power is a huge asset. Typically, physicians are covered in part through work and should consider a supplemental policy. Umbrella policies cover excess liability beyond your home and auto coverage. A two million dollar policy typically costs less than $1,000 per year. This is cost effective coverage that’s status quo for nearly all financial plans. Malpractice insurance is an obvious must for physicians and is self-explanatory.

Living Fully: Stefan Turkula

Stefan Turkula is in his five-year residency for orthopedic surgery. At 32, his ability to Live Fully and Invest Wisely despite 80-hour work weeks and a daunting debt burden is impressive. My hope is that you can pull a few nuggets of inspiration from his interview. I know I did.

What drove you to medicine in general, and specifically to orthopedics?

Medicine was something that was always on my radar as a career. My grandfather was a family physician in a rural town in North Dakota, and I have an Aunt who is a plastic surgeon. So, I sort of had them to look up to for a while. That being said, I never thought of medicine as a career until I started thinking of ways to apply myself in things I was passionate about; using science, technology, and physical skill to care for and treat people in their time of greatest need. Medicine affords me that privilege and I’m thankful every day that I get to do my job (some days more than others, however).

Orthopedic surgery, as it would turn out, was essentially my destiny. For me it is the perfect symphony of medicine, science, and technology being used to make people more functional and feel better than before they met me. Which is sort of a mantra of mine, I want to leave every patient feeling at least a little better than they did when they first met me.

Typically, if someone is seeing me in the emergency room they’re having one of the worst days of their life. Being able to take someone from that point, to being able to enjoy life in a meaningful way for him or her is a pretty cool feeling.

Additionally, having been an orthopedic patient many times myself, I find myself easily identifying with many people musculoskeletal problems and appreciating their desire to get back to functioning at a high level again. I love being able to help them achieve their goals.

Now, it’s no secret that becoming a doctor isn’t cheap. How are you dealing with the debt burden of medical school?

Ah, the debt burden. It’s substantial. I funded 100% of my medical school and graduate program with student loans, and I graduated with about $400,000 of debt (which includes my $20k from undergrad). Now, what is my plan to pay it off? Public Service Loan Forgiveness (PSLF). The amount of debt I have and my salary as a resident ($52,000 this year) are so mismatched that repaying anything substantial while I’m still in training is essentially impossible.

Luckily there are some very reasonable programs. The Income-Based Repayment (IBR) and Pay as You Earn (PYE) options are the only reasonable choices for me, but in the long run I’m relying on the PSLF program. PSLF is a godsend for those in medicine with a lot of debt. With the criteria being that you must work for a non-profit (99% of teaching hospitals are non-profits) and make the minimum IBR or PYE payments for 10 years, it’s a no-brainer to start that as soon as possible.

When I’m finished with residency and fellowship, 6 years, I will have 4 years of payments left if I continue to work at a non-profit hospital until the remainder of my loans will be forgiven. Now with the crushing interest rates given to student loans (I think my average over all loans is like 7%), my total amount forgiven, which accounts for future interest and minimum payments for 20 years, will be close to $900,000. That’s just an insane number that’s hard to comprehend now, much less when I was student taking out those loans. So, I’m pretty much reliant on the PSLF program.

What is the best piece of financial advice you ever received?

“Save money for what you hate, spend money on what you love.” I have no idea where I heard/read that, I guess I could just take credit for making it up, but it’s been a good mindset for my money management. I take it to mean that make sure you’ve covered everything that is a burden (rent, car payment, utilities, etc) so they’re no longer burdens and just out of your mind. Whatever you have left over, do with as you please.

I don’t go crazy, and tend save a small amount each month, but there are things that are important for me, like travel, and I’m more than happy to spend a lot of my income on that rather than squirrel it all away. Let’s be honest, I’m a 32 year-old single guy and I work 80+ hours a week. I don’t have much time to spend money, and I don’t make a large enough salary to realistically save much for my retirement or future at the moment.

So, my current philosophy is that I’m going to invest in my happiness rather than an investment portfolio. That will change quite a bit once I finish training and start making a real orthopaedic surgeon salary in a few years, but in the meantime I’m happy just being happy.

At Merriman, we focus on helping our clients live fully. It sounds like you do this part well!

I skied competitively in freestyle skiing from the age of 10 on, and eventually won the Junior Olympics when I was 17. Skiing gave me an incredible amount of freedom and appreciation for travel and seeing new places. I got to see and do a great number of things that I wouldn’t have been able to without skiing. Just because I was a good skier I was able to be exposed to the outdoors and love being there. As a teenager you barely realize these things, but all those experiences are what have shaped me to be an adventure seeking, outdoors loving person.

Like I said before, at the moment, I invest in my happiness. My schedule is such that when I take vacation, it has to be for an entire week at a time. We get 4 weeks a year in my program and that usually means 1 week every 3-4 months. No random 3-day weekends or anything like that. So, I’ve committed myself to making the most each vacation. Each week is an opportunity for a new adventure, and so far it’s worked out for me.

I have the privilege of having lived all over the country and can find a place to crash in almost any city if need be. That being said, I did take a solo trip to Canada last winter that was astounding affordable. I flew into Calgary on a cheap ticket, rented the cheapest car I could find, and spent a week sleeping in youth hostels with crazy 20 year old Australian and German students on holiday while skiing and exploring the Canadian Rockies, making some pretty interesting friends along the way. The strength of the US dollar vs the Canadian made the trip so much cheaper than I had expected. So by sacrificing any semblance of luxury, I was able to have a pretty amazing adventure on the cheap.

I’m always on the lookout for what might be a good, inexpensive trip. Such as camping in Zion national park for 4 days, which was another vacation I took last year. I took a super cheap flight to Las Vegas, got a car for $20/day and went backcountry camping in Zion, which is pretty much free, and you get see some of the most beautiful scenery on earth. Those sorts of trips are what I’m always on the lookout for. Fairly simple to plan, and the major expense is the plane ticket.

Clearly, Stefan is doing things right. His ability to live a full and meaningful life in the face of limited time and economic resources is inspiring. If you are resident or young physician reading this, my hope is that it inspires you to work within your means financially, enjoy life and make wise decisions about your debt management.


Stefan Turkula is not a current or former client of Merriman, nor is he an employee of the firm. Stefan authorized Merriman to share his personal story in the interview and subsequent blog post for illustrative purposes only.  Merriman did not pay Stefan to participate in the in the interview.

Asset protection for physicians

Our litigious society puts the need for asset protection strategies at the forefront, especially for physicians and other high income earners. Whether it’s creditors, litigants or future ex-spouses, you owe it to yourself, your heirs and any other benefactors of your estate to protect the assets you have worked so hard to accumulate.

Insurance is the simplest form of asset protection. Home and auto insurance are the bare bones, absolute basic insurance, which everyone should have. Not too far removed and equally important are the following:

  • Umbrella insurance, also known as excess liability insurance. Its purpose is to shelter you from excess liability that stretches beyond your basic insurance limits. Coverage typically starts at $1 million and can go north of $10 million, depending on your needs. It’s cheap – typically a few hundred dollars for the first $1 million in coverage and incrementally more cost effective as you add more.
  • Malpractice insurance.

Important note: Make sure there are no gaps in your coverage. One way to avoid this is by working with one carrier, which should also afford you a multi-line discount. Also, be diligent about staying on top of your insurance. Annual reviews are prudent.

From there, look to slightly more complicated techniques to further buoy your asset protection plan.

  • Prenuptial agreements. If you’re getting married for a second time, or simply getting married late in life, prenuptial agreements can protect your assets in the event of a future divorce.
  • Maximize contributions to your retirement accounts. Company sponsored retirement accounts such as 401(k)s are protected from creditors under federal law. IRAs and Roth IRAs are protected – in certain cases to a lesser extent – under state law.
  • Limited Liability Companies (LLCs). By putting your home in an LLC, you are protecting your personal assets and limiting the exposure of what’s in the LLC To isolate exposure, a separate LLC is advisable for each property.
  • Where available (this varies from state to state), certain forms of ownership, such as tenancy by the entirety, can help protect assets from creditors and litigants.
  • Asset protection trusts. Used for your heirs, charity and even to effectively manage an inheritance.
  • Gifts. Removing assets from your estate before the end of your plan.

This list covers a significant amount of the asset planning that most physicians should consider. Start with the simple items, such as insurance, and build from there. An effective asset protection plan will help you sleep better and ensure that everyone who is depending on you is taken care of.

The nuances of rebalancing

iStock_000019901243SmallI recently received a question from a client of mine about an article that referenced rebalancing a portfolio at the same time each year. In theory, an annual rebalance is not a bad way to go. However, there’s quite a bit more to how we manage the rebalancing process than that.

For Merriman clients, we:

  • Avoid unnecessary transaction costs by using cash inflows and outflows as a tool to rebalance a portfolio back to its target allocation. Cash inflows are used to buy underweight asset classes and cash outflows are used to sell overweight asset classes.
  • Allow assets that are performing well to continue to perform – a documented trend called momentum – by placing tolerance bands around our allocations. This also helps avoid excessive rebalancing transaction costs.
  • Favor rebalancing tax-deferred accounts in December to coincide with mutual fund distributions and Required Minimum Distributions (RMDs), again reducing transaction costs.
  • Help defer taxes by rebalancing taxable accounts in January, when appropriate.

Market performance can also have an impact on the need for rebalancing. If returns are flat for a few years, there is less need for rebalancing. In volatile times, more.

In addition there will be one-off cases such as:

  • Tax loss harvesting. If there is a significant downturn in the markets (think 2008), we can use that as an opportunity to harvest losses to be used against future gains. We did this for our clients in 2008 and it is paying dividends today.
  • Introduction or deletion of an asset class can also provide an opportunity to rebalance your portfolio.

Rebalancing your portfolio is an integral step in maintaining a well-balanced portfolio and reducing its risk. But to do it once a year at the same time every year may not be the best solution for you. Depending on your situation, a more customized rebalancing approach may save you significant money in transaction costs and taxes in the long run. As always, check with your advisor to find out what’s right for you.

Don’t let your emotions invest for you

Monday, October 19, 1987—aka Black Monday—was a fearful day for investors across the globe. The damage exceeded 20% in stock market declines by the time the exchanges closed. In the wake of such steep declines, investors too often are driven to act by their emotions. In this case, fear. Fear that the decline will continue. Fear that their hard earned savings will be sucked dry by the markets. A more recent example of this fear was invoked by the financial crisis. In both cases the markets recovered in short order. But, the market never recovers for those who sell out of it. Clearly, fear selling is a bad idea.

Fear is not the only emotion that muddles our investment decisions. Greed is just as dangerous.

The 1990s seemed too good to be true. Investors could not lose money in technology stocks. Valuations seemed to have changed and the exponential rising prices were within the new norm. People got greedy. Some went so far as to use their home equity to purchase stocks. And then, just like that, the party was over. The end of the decade saw technology stocks come crashing down. Those who got greedy and concentrated all of their holdings in technology stocks paid the price.

Anytime the sky is falling or the markets seem too good to be true, remember the mantra—be greedy when others are fearful and fearful when others are greedy.

While fear and greed top the list of emotions that can wreak havoc on your investments, there are others: angst and excessive pride, for instance.

The issue with angst is if you wait for events to happen (government shutdown, fiscal cliff, quantitative easing, etc.) or for the markets to “normalize,” you often miss the boat.

Excessive pride can sometimes drive people to buy individual stocks. It’s the classic cocktail party conversation where someone tells you they bought Microsoft stock in the 1990s or Apple stock at the turn of the century. They do not tell you about the other 10 stocks they bought that went south. By focusing on the one home run, people subconsciously convince themselves that investing in individual stocks is a wise venture. It’s not. In fact, it’s speculation, not investing. Do not let pride get in the way of making smart investment decisions.

Clearly we cannot let our emotions guide our investment decisions. Emotional investing is not successful investing.

Follow these steps to help avoid the pitfalls:

1)     Build a plan. Write it down and stick to it. If the markets turn over, do not deviate from your plan. If anything, rebalance your accounts back to their initial targets.

2)     Turn off the news and tune out the financial pundits. In the age of information, the evening news is not going to give you a leg up on investing. That is, everyone knows everything and it is all factored into the price of securities.

3)     Do not assume things are correlated when they are not. GDP is not nearly as highly correlated to stock market returns as people think. Nor, for that matter, are political events.

4)     Diversify your portfolio. Put another way, do not put all of your eggs in one basket. Remember what happened to technology stocks in the 1990s.

5)     Focus on what you can control. You can control how much you save and whether or not you succumb to your emotions. You cannot control the markets and politicians.

Here’s the exciting part: if you can keep your emotions at bay, invest wisely and let the markets work, you can reduce your stress and increase the likelihood of a successful retirement period.