Fixed income is an IRQ column focusing on financial planning, featuring discussions with IRs and experts on how to keep your finances healthy.
On episode 7 of The Kinked Wire, Warren Krackov, MD, FSIR, speaks with Clint Gossage, CFP, of CMG Financial Consulting, about the unique financial circumstances that physicians find themselves in throughout their career.
This episode was published on Feb. 24, 2020. It has been edited for flow.
Warren Krackov, MD, FSIR: Clint, thanks for being here, because many of us in health care don’t have a great grasp on personal financial planning. Do you notice that your services are different for doctors as compared to other professionals you might work with?
Clint Gossage, CFP: Definitely. What’s unique to financial planning for physicians is that most doctors have higher debt loads than the average person. Doctors have huge income fluctuations from one year to the next and begin saving later in life than most.
Warren Krackov, MD, FSIR
Warren Krackov, MD, FSIR, (top) and Clint Gossage, CFP (bottom).
WK: I'd like to unpack the debt side of things. I had that situation and many of my colleagues do too. If you're right out of training, debt means more to you than if you're halfway or three-quarters of the way through your career. What do you tell folks to do with those large debts that they could be facing?
CG: Don’t ignore them. I see the biggest amount of trouble when people say, "Okay, I'm going to stick my head in the sand and one day I'll make enough money and the debt will magically go away." Then they wake up and realize, "Okay, the money is good, but after taxes and all of these new expenses that I have, it hasn’t magically made the loans disappear." It’s worth understanding if loan forgiveness is a potential option or if you are in a situation where you may have to buckle down for a few years and instead focus on repayment and realize that to get out from under these loans, it's probably not the best idea to be buying another big house purchase on top of. The best idea is to have a plan of attack beforehand, and because once a person locks into some life-changing purchases it's much tougher to undo than to plan it all out from the beginning correctly.
WK: So in other words, you may not have to tell other professionals to hold back on their spending for a number of years, just because their debt profile is so different. Is that accurate?
CG: Yes. Also consider that other professionals are starting their practices much earlier in life. They start in their late 20s, so, the payback window begins much earlier and it's easier to tackle debt. By the time they are in their 30s, hopefully the debts are paid off. Well, doctors aren't like that. The average doctor is finishing their residency and fellowship in their 30s at that point and are just now able to start paying back loans. That can take until they're in their 40s.
Clint Gossage, CFP
WK: My colleague Jaimin Shah, MD, had a great line which is, "Live like a resident during the first several years after training.”
CG: That’s great advice. It helps to save money the first few years out because it allows you to pay back student loans and catch up on saving. And if you've already put five years’ worth of savings away, it makes buying a house, a nicer car or even just putting more money into travel that much easier because you have money that is compounding in the background. And then you’re not relying solely on your salary for all money coming in.
WK: Along those lines, in the first few years after residency when you've got a lot of things in mind—starting a family, buying a house, saving for emergencies and retirement—you still have to service your debt. How do you recommend IRs do that?
CG: That is the most frequent question that I get. When you're finished with residency, you have the debt repayment, and you also haven't been able to buy anything of large value for maybe a decade or more, and you now have the funds to fix your car or buy a home. You start playing catch up. But first you want to think about taxes. The question becomes, "How do I both effectively save money and reduce taxes?" That’s when those tax advantage retirement accounts like your 401K, a 457 B if you have it, an HSA or a back door Roth IRA become a big help. All these accounts give you a tax benefit and an investment benefit, and there is a limited amount you can put in those each year. It helps get everything in line.
The next thing to focus on is an emergency fund, which is done by sketching out a cash flow plan of your income and expenses, so you can see what is left over for other kinds of saving. If all this preparation is done earlier, it's a lot easier to know how much money there is left to be able to prioritize toward your conflicting objectives. It’s important to figure out your targets and then automate as much as possible, be it through automatic transfers, or automating your savings. Whatever you want to save each month, move it to a separate account that you won’t touch, and automate as much as possible. If you have the right systems in place, everything gets easier.
WK: With each point you mention, there seems to be more and more complexity and I feel like I have neither the understanding nor the time to actually deal with this myself. If you're just a naïve interventional radiologist, how do choose someone to help you with this?
CG: That’s a good question. The financial industry isn’t like medicine where you go to one practitioner and they might not quite be as skilled, but at least you know they went to medical school. There's not that equivalent in finance. It's easy to think you're dealing with a reputable advisor, but what you're really dealing with is a commissioned salesperson or someone that gets paid to sell you products.
When looking for an advisor, look for an advisor who is fee-only and has some certifications. At a baseline, I recommend working with a Certified Financial Planner (CFP). If someone says they're fee-only, do your digging and try to understand how they are paid. Are they only paid by you? Before you start an agreement, an advisor should provide you with a form ADV which has all their disclosures and information on how they’re paid and how their fees work. It’s important to understand those pieces.
I also wouldn’t rely on word of mouth. No shots fired to older attendings, but I feel like the word of mouth happened a lot more though in that generation, and now a lot of the younger attendings are doing their own due diligence to find advisors who aren’t just their buddy or their friend or their friend's friend.
WK: If I find someone who is fee-based, does that mean that I pay them for the work they do, whether I make money or lose money?
CG: There's different terms out there. You want it to be fee-only, which seems a little silly, but fee-based can also apply like a commission. It’s not just understanding that someone is fee-only, but ultimately you want to know how they are compensated. The only person that pays the advisor should be you, the client. There are a lot of different fee models out there, but your advisor should not make any money off of insurance commissions or for selling products to you.
WK: It’s amazing how much work it is to find the right person.
CG: It is, and I think that barrier scares a lot of people. Some think, "Well, if I have to do this much research to find somebody qualified maybe I'll just put my head in the sand and hope it will all be fine."
WK: For IRs close to retirement, does your advice change on days where there is a lot of fluctuation in the market, or the points drop a lot?
CG: My approach doesn't change. We try to get our clients to understand that the market is risky. It's easy to forget it when over the past 12 years, the market's pretty much been straight up, but the market can move so much on just a day-to-day basis. If you look at the statistics, the market tends to be down more than 4.5% two days out of the year on average. Going into it, I expect these things will happen and I try to communicate that early on, so my clients aren't caught by surprise.
We manage the risk by not changing things based on a day-to-day fluctuation and preparing a portion of the portfolio to be ready for events like this. We want to have at least five years’ worth of safe investments that won’t fail when the stock market falls. These investments may not earn as much, but you can live off them when the market is down. This preparation prevents you from needing to sell stocks while they're dropping. That’s where people get into trouble—panic selling after stocks have dropped. Ultimately, you want your stocks to sit and grow for a long time.
Watch for the next installment of Fixed Income which will focus on what comes after retirement.
