by Susan Schwartz
What does the phrase "financial planning" mean to you? Do those words make you think about setting a budget, paying down your debts, investing your money, or something else entirely?
By definition, financial planning involves a variety of services to help you manage your financial resources and achieve your financial goals.
Financial planning begins by identifying your individual financial goals, evaluating your current financial position, and identifying risks that may prevent you from achieving your goals. You then develop a financial program, put it into action, and periodically review your progress. Keep in mind that your financial plan is not set in stone and will evolve as your life, obligations and objectives change.
A financial planner can provide you with a comprehensive plan or can help you tackle individual areas of your personal finances including:
Here are some of the issues that seem to be common to young healthcare professionals:
Saving for Retirement
During your working years, contributing to a 401(k) or a 403(b) plan at work is one of the best tax shelters available to you. Amounts contributed reduce your taxable earnings and grow tax-deferred. Plus, amounts held within the plan are generally protected from your creditors, and you can borrow up to half the balance in your account (up to $50,000) to purchase a home or for other reasons. This year you can contribute up to $14,000 ($18,000 if 50 or older) into this tax-advantaged retirement account.
Other retirement savings opportunities include Individual Retirement Accounts (IRA), and self-employed retirement accounts such as SEP IRAs, SIMPLE IRAs, or Solo 401(k)s. If you're not eligible for a 401(k) or 403(b) this year, or you're already maxing it out for 2005, then consider contributing to one or more of these types of accounts.
Saving for College
Many parents are concerned with saving for their child’s college education. A 529 plan is a great way to save for college since earnings within the account grow tax-deferred and withdrawals are federally tax-free through 2010 if used for college related expenses. (Starting in 2011, qualified distributions will be taxed at the child's rate.) These plans are available to all taxpayers regardless of income, and you can contribute up to $55,000 in one year for your child.
Contributions of $2,000 per child per year can be made to a Coverdale Education Savings Accounts (ESA or Education IRA) if you're single and earn below $110,000 or married and you and your spouse together earn below $220,000. Like 529 plans, ESAs grow tax-deferred and withdrawals are federally tax-free if used for qualified education expenses. One advantage of ESAs over 529s is that funds can be withdrawn tax-free for private elementary and secondary school expenses as well.
For most people, purchasing a home is their single largest investment and is a key component to their long-term financial success. Besides getting the tax break for the mortgage interest and real estate taxes you pay, owning a home provides a hedge against inflation since a fixed-rate mortgage remains constant over time even though inflation makes everything else more expensive. Another benefit is that you're not taxed on the first $250,000 ($500,000 if married) of gain realized when selling your principal residence as long as certain requirements are met.
When deciding how expensive of a home you can afford, it’s important to consider the additional expenses associated with home ownership . For example, property taxes, maintenance expenses and insurance are all costs you'll incur as a homeowner.
Proper asset allocation and selection of suitable investments for your portfolio are also integral parts of your personal financial plan. With more than 14,000 mutual funds available to you these days, there are plenty of funds to choose from. You can buy into funds that own large company stocks, small company stocks, mid-cap stocks, or a blend. You can also buy funds that own government bonds, corporate bonds, or even junk bonds.
When planning your asset allocation, take into account your individual tolerance for risk and the time horizon for how long the money will remain invested. Once you’ve made your selections, a periodic review is recommended to be sure that your investment portfolio continues to be on track to meet your goals.
What's Your Financial APGAR Score
Wondering how you stand financially? Take a few minutes to work through our five question financial AGPAR test.
by Lawrence B. Keller, CLU, ChFC, RHU
Due to adverse claims experience, insurance companies have decreased the amount of individual disability insurance coverage available to physicians. Currently, the maximum benefit offered to physicians that perform invasive procedures is $10,000 per month, regardless of earned income. As a result, securing a reasonable amount of disability insurance protection has become a significant challenge for highly compensated physicians. This article will provide you with several strategies to protect more of your most valuable asset, your ability to earn an income.
Build A Solid Base Of Personal Coverage
The first step is to make sure you have maximized your individual disability insurance coverage. This should consist of a Non-Cancelable, Guaranteed Renewable policy with a true “Own-Occupation” definition of disability for the longest period available. Please note, as of this writing, I know of only one company that still allows Anesthesiologists, Emergency Room Physicians, and Surgeons to purchase a policy with this definition to the age of 65, or longer.
However, if you have an older policy with a Future Purchase Option rider included, you might be subject to the rules that applied at the time you bought the policy. In that case, you might be able to purchase coverage in excess of $10,000 per month with the same contractual provisions that were in your original policy.
Add Solid Supplemental Personal Coverage
The second step is to enroll in a group Long-Term Disability (LTD) plan, purchase a supplementary policy to protect your retirement plan contributions, or purchase a “high limit” disability policy from a special risk carrier.
Group Long-Term Disability (LTD) Insurance
If your current employer makes group LTD available, or if you are changing employers, you may have the opportunity to supplement your individual disability insurance coverage. Furthermore, many disability insurers allow a group Long-Term Disability policy to be purchased with as few as two employees participating in the plan.
While the contract provisions are not as comprehensive as individual policies, group LTD can be an attractive supplement for self-employed physicians looking to increase their overall protection limit. Once you own an individual policy, it would not be affected by subsequently enrolling in a group LTD plan. However, if your individual policy is not already at its maximum benefit level, this strategy might prohibit you from increasing your individual policy further.
Disability Insurance Protection for Retirement Plan Contributions
Traditionally individual and group disability insurance policies were designed only to replace a portion of your current income. They were generally not intended to replace lost retirement contributions in the event of a disability. However, there are two insurers that currently offer disability insurance protection for retirement plan contributions.
These are not pension plans. Rather, they are programs that provide disability income insurance to guarantee your ability to make retirement plan contributions until age 65. As such, these are separate policies (not optional riders added to a policy) and therefore may be issued independent of, and in addition to other disability coverage.
Instead of directing disability payments to your pension plan, these policies pay benefits into an irrevocable trust during a period of total disability. The trustee then invests the funds at your discretion until you reach age 65. At that point, the trust’s assets are distributed to supplement the income you receive from your original retirement plan(s).
Under these policies, the amount of monthly benefit available for purchase is solely a function of the total amount of annual contributions (employee and/or employer) being made to a defined contribution retirement plan. These types of plans include Money Purchase, Profit Sharing, 401(k), 403(b) plans, Simplified Employee Pensions and Salary Reduction Simplified Employee Pension Plans (SEPs & SARSEPs), Employee Stock Ownership Plans (ESOPs), Traditional, Roth, and SIMPLE IRAs, Keogh plans and certain non-qualified deferred compensation agreements.
“High-Limit” Disability Protection
Under this type of policy, you can purchase benefit amounts up to 65% of earned income (if the premiums are personally paid), or 75% (if the premiums are employer paid), less other disability coverage in force.
For example, a General Surgeon earning $360,000 could qualify for a total monthly benefit of $19,500. Assuming he or she already had $10,000 month of traditional coverage, an additional $9,500 month would be available.
One such carrier even offers a unique “Medical Occupation” definition of disability to physicians and surgeons. Meaning, the policy will provide total disability benefits when “due to sickness or injury you cannot perform the substantial and material duties of your regular occupation or in any professional capacity within the medical profession”.
Please note, these policies typically pay benefits for a maximum of five years and must be renewed every three or five years. In addition, on the renewal date following a term of insurance, the underwriters reserve the right to refuse renewal or to offer renewal with different policy terms or rates.
Protect Your Practice, As Well As Yourself
If you are a physician in a group or private practice, there are other forms of disability insurance available to help protect your practice, as well as yourself. These types of policies might include Business Overhead Expense (BOE), Disability Buy-Out (DBO), or Business Reducing Term, which are beyond the scope of this article.
As a result of poor claims experience, insurance companies have limited the amount of disability insurance they are willing to issue to physicians. Unfortunately, it has become increasingly difficult for physicians to secure adequate disability insurance protection relative to their income levels. I have briefly outlined a few strategies that may be used to help physicians maximize their disability insurance benefits in today’s marketplace. However, due to the complex nature of disability insurance planning for highly compensated physicians, it is best to employ the services of a professional insurance agent who specializes in working with medical professionals. He or she will not only be familiar with your occupation, but with which strategies and insurance products might work best in your situation.
Lawrence B. Keller, CLU, ChFC, RHU is the founder of Physician Financial Services, a New York -based firm, specializing in income protection and wealth accumulation strategies for physicians. He can be reached for questions or comments at (800) 481-6447 or by email to firstname.lastname@example.org.
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