Perhaps you’ve been tempted by the quick riches promised from cryptocurrency, penny stocks, or flipping homes in a red-hot real-estate market. Although alluring, these options are more “pie in the sky” than guaranteed “money in the bank.”
Instead of pursuing get-rich-quick schemes that carry exorbitant risk, physicians should deploy a long-term strategy to build personal wealth.
Here’s a look at some general strategies and specific investment vehicles that will get you there.
Steps to accumulating wealth
The key to building wealth is patience. Following certain strategies can help you achieve your financial goals, according to Forbes Advisor. These strategies are simple in principle, but require dedication.
Planning. Setting clear goals in the beginning is central to your financial vision. As a busy physician, you may want to employ a certified financial planner (CFP) to help. Although this may be a bit pricey, CFPs are trained to facilitate the wealth-building process. Alternatively, you can look into robo-advisor options to set up a managed portfolio.
For instance, the robo-advisor option at Fidelity is called Fidelity Go. Here‘s how the service is promoted: “We've built a range of investment strategies. Answer a few questions, and we'll suggest one we think is right for you. Once you're invested according to the strategy you chose, we'll continue to watch your account and the markets, making the necessary adjustments to keep you on track.”
A moderate-risk investment strategy could consist of 35% domestic stock, 15% foreign stock, 40% bonds and 10% short-term investments. There’s no minimum to begin investing, and advisory fees for accounts with $50,000-plus in assets are 0.35% per year.
Two of the many firms that also provide robo-advisor services are Betterment and Ellevest. (Ellevest advertises itself as “The #1 investing app for women, built by women.”)
Budget. Nobody likes to place restrictions on spending, but to build wealth, this is necessary. Careful budgeting requires a close eye on where the money goes each month, and the will to rein in overspending. Fortunately, there are apps that can help with budgeting, including PocketGuard and Mint.
It’s a good idea to set up an emergency fund.
An emergency can mess with your budget, and charging on credit cards to cover emergencies can incur high interest rates. Instead, put some money aside in a savings account, where you will always have access to it.
Automate. Bill payments and transfers to savings and investments should be automatic. First, your time is better spent when these things are automated. Second, by automating these processes, you’ll guarantee that they happen on time.
When these payments are automatically deducted from your paycheck, they become a part of your routine and you won’t even notice the money’s gone.
Rebalancing. For those who have the knowledge, gumption, time, and wherewithal to create a well-diversified portfolio on their own, it’s important to rebalance this portfolio. This could entail changes in how you invest based on market conditions. For instance, if you’re too heavily invested in stocks, direct more to bonds or vice versa.
“Financial experts have different opinions on how often you should rebalance,” wrote the author of an article published on NerdWallet.
“Generally, once a year is fine for a well-diversified investment portfolio. Pick a date and make it your rebalancing holiday, celebrated each year by spending a few minutes getting your investments back into balance.”
Special investment vehicles
In the quest for wealth, maxing out your retirement plans is a no-brainer. At MDLinx, we’ve also covered other tips that can place you on the road to early retirement.
As outlined in an article published in Medical Economics, there are more specific investment vehicles that can set you up for wealth.
Cash-balance plans. These plans give physicians a chance to take larger tax deductions to pad their retirement savings. Physicians in smaller practices (including solo practitioners) can take advantage of these plans as long as the funding is consistent. Along with 401(k) plans, cash-balance plans can amount to pre-tax contributions of $150,000–$250,000 per year. Note: You’ll need an attorney when setting up a cash-balance plan.
Backdoor Roth contributions. Roth IRAs are popular retirement options because they allow for tax-free growth and distributions. The problem for physicians is that their higher income can disqualify them from taking advantage of this. A backdoor Roth IRA allows physicians to make a non-deductible regular IRA contribution and convert these assets to a Roth IRA.
There are certain requirements to keep in mind.
The Roth IRA must be held for at least 5 years, and the holder must be aged 59.5 years or more before drawing on the earnings tax- and penalty-free. Importantly, there are no mandatory withdrawals (required minimum distributions) at age 72, as there are with traditional IRAs.
Trusts and family limited partnerships. Each of these has distinct benefits that provide peace of mind and wealth protection. Trusts shield assets from creditors in addition to tort-reform protections. Family limited partnerships are an alternative to trusts; in addition to sheltering assets, these proffer a vehicle for estate planning. They provide a discounted valuation of contributed assets, which permits enhanced gifting strategies. In other words, instead of doling out $15,000 per beneficiary per year without having to file a gift-tax return, family limited partnerships allow for $20,000 per beneficiary.
529 savings plans. With college tuition costs on the rise, paying these bills can put a serious crimp on your wealth aspirations. A 529 savings plan is a great way to save for education (and it can even be used to defray the costs of K–12 private school tuition). These plans are funded by after-tax contributions and aren’t subject to additional tax if used for education.
The maximum contribution without having to file a gift-tax return is capped at $16,000, but a 529 can be funded with up to 5 years of gifts at once. Unused funds can be transferred to the 529 accounts of your other children. The assets of the 529 are controlled by estate planning, although they’re not part of the estate.
What this means for you
Building wealth is a long process that requires careful planning and preparation. Key steps include enlisting the help of a financial planner, budgeting, and partaking of specialized investment vehicles.
MDLinx | May 23, 2022