Check out these 5 factors that can significantly impact a dermatologist’s financial plan and should therefore incorporate flexibility and resiliency to structure the plan for long-term success.
One true adage about life: It is always changing. As such, resiliency and flexibility are attributes that should be prioritized in the financial plans of physicians, including dermatologists. Flexibility will allow a dermatologist to adapt their finances to changes over time and create a resilient retirement plan to meet the doctor’s unique financial goals, despite challenges that may arise.
This article examines 5 factors that can significantly impact a physician’s financial plan and should therefore incorporate flexibility and resiliency to structure the plan for long-term success.
Significant changes to the tax code in the last 5 years underscore the importance of flexibility in retirement planning. Taxes will continue to change, and tax rates may look very different in 3, 5, 10, 20, or 30 years. A tax diversification approach can help alleviate the impact of future tax law changes. Many financial planners advocate diversification of asset classes among investments, but it is equally essential to diversify the tax rate exposure to one’s wealth.
In fact, when we examine investing from the perspective of tax diversification, we see that most investors have inadequate investments in asset classes or structures that will be immune to future increases in income or capital gains taxes. Assets such as cash value life insurance, tax-free municipal bonds, Roth IRAs, and other vehicles should be part of any wealth-building plan to create the resiliency needed to withstand changes in tax liability for the overall portfolio.
The bottom line is that individuals need to have enough flexibility to be prepared for the possibility of tax rate changes, for better or worse, during their investment timelines.
In this context, market means more than the small sample of the stock market in the United States that is represented by the Dow Jones Industrial Average or even the S&P 500 index. There is volatility in all securities, commodities, real estate, and other asset marketplaces domestically and internationally. Values in all classes often go up, but they also come back down.
Savvy investors understand that portfolio diversification is key to reducing portfolio risk. Rather than staying within a specific area, such as securities or real estate, diversification must cross investment classes, especially in a volatile market. A balance of asset classes—international and domestic, traded and untraded, correlated to markets and noncorrelated—constitutes a flexible and resilient long-term approach.
Few of us can accurately predict our income in the near and distant future. Individuals can lessen the impact of unforeseen changes to income by adhering to a budget and prioritizing saving (each month, quarter, and year). These basic steps are fundamental to weathering any temporary or even long-term hits to income and cash flow, making a financial plan resilient and able to remain on track.
In addition, it makes sense to use savings vehicles that allow uneven funding from year to year. In the area of qualified retirement plans, one example would be a defined contribution plan that allows flexibility in individual contributions each year.This is in contrast to defined benefit plans, which require a specified level of investment and can entail underfunding penalties. More relevant still are nonqualified plans, which provide the option for increasing contribution levels when income is high but skipping them entirely during years in which income wanes.
Another asset class that allows flexibility is permanent life insurance—specifically, a policy that has the benefit of tax-deferred growth and asset protection. In universal life policies, funding can be flexible from year to year, unlike whole life policies, for which funding must occur each year.
Any planning designed to shield wealth from a legal claimant, creditor, or even a soon-to-be-former spouse is typically not effective if it is implemented only when the threat becomes reasonably foreseeable. In other words, asset protection planning must be put into place before there is a problem. The challenge is that the individual wants to maintain ownership of, control of, and access to their assets at times when there is no looming liability threat.
Fortunately, with comprehensive asset protection planning, utilizing exempt assets, legal tools, insurances, and proper ownership forms, these goals can typically be accomplished. Individuals can generally build flexibility into financial plans using tools that protect wealth if and when there are liability threats but still allow ownership, control, and access to that wealth when the coast is clear.
Health is the single most important element that can impact your long-term plan. At one extreme, good health is a blessing that allows individuals to be more productive, create more wealth, and enjoy it. At the other extreme, poor health can keep individuals from earning a living and even lead to premature death, which can have a devastating economic impact on the surviving family. Because of this, it is imperative that a conservative wealth plan considers potential changes in health.
Both disability and life insurance are essential to enhance the resiliency of a physician’s long-term financial plan and minimize the impact of health setbacks. Securing the proper insurances protects an individual’s ability to earn, with options that provide a regular income stream in the event of disability and offer financial protection to heirs in the event of death.
Life insurance coverage is needed not only if one has concerns about meeting individual financial goals but also if these concerns apply to the financial welfare of one’s family. There are a variety of life insurance products, from term to cash value and from whole life to private placement.
Whatever product is chosen, a thorough analysis is needed to ensure adequate coverage given one’s income, debt, assets, family situation, tax rate, state of residency, and goals.
We all know that fluctuations in tax rates and market performance as well as changes in one’s liability, income, and health are possible, if not likely, during our lifetimes. For this reason, building flexibility and resiliency into a financial plan is essential to minimize the impact of these types of changes.
David Mandell, JD, MBA, is an attorney and author of more than a dozen books for doctors, including Wealth Planning for the Modern Physician. He is a partner in the wealth management firm OJM Group (www.ojmgroup.com).
Robert Peelman, CFP, is a partner and director of wealth advisors at OJM Group. They can be reached at 877-656-4362 or email@example.com.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice or as a recommendation of any particular security or strategy. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently; accordingly, information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.