At the pinnacle of peril: Physicians insured for disability but not covered

by W. Ben Utley CFP®
14 Feb

You have disability insurance, right? Sure you do. You bought your first (and maybe your only) policy while you were in training. Yet you still have a nagging feeling that something bad might happen to you, and you’re not certain you will be ready to provide for your family if your practice becomes impractical.

Your fear is well-founded. According to the Council for Disability Awareness, a typical professional aged 35 and in good health has a 21% chance of becoming disabled, with a 38% chance that the disability will last more than 5 years.

In the past 15 years of doing financial planning for young doctors, I’ve found that most physician families are poorly prepared for this, the pinnacle of financial peril. Inadequate insurance and insufficient savings leave gaping holes in the safety net many physicians weave for themselves, while the demands of practice push this important-but-not-urgent issue to the bottom of the pile of priorities.

You may have disability insurance but you’re probably not covered. You have no real plan for the aftermath, and it’s time for you to do something about it.

Insured but not covered

If you haven’t done a thorough review of your coverage, you may find that your insurance contract will pay little or nothing when you make your claim.

Your monthly benefit amount is probably too low. Most physicians are sold a disability policy while they’re still in training. The monthly benefit in policies is based on some fraction of earned income. Given that residents earn about $4,000 per month and benefits equal about two-thirds of that, you might find that the policy you bought as a resident pays you no more than $2,700 per month. As a practicing ophthalmologist, you may be earning—and spending—ten times that much to support your family. A resident-sized monthly benefit will leave much to be desired by your practitioner-sized budget.

Your policy’s definition of disability may be needlessly narrow. Most policies cover the catastrophic disability known as “total disability,” but the way that total disability is defined varies greatly from policy to policy. For example, if your policy says, “The insured is totally disabled when both unable to perform the principal duties of the regular occupation and not gainfully employed in any occupation,” then you have what is known as an “any occupation” definition of disability. It means that if you go back to work doing anything at all, you will lose your benefits.

For ophthalmologists, there is no substitute for coverage bearing the “own occupation” definition of disability, which might read like this:

Total disability means that, because of sickness or injury, you are not able to perform the material and substantial duties of your own occupation. You will be totally disabled even if you are at work in some other capacity so long as you are not able to work in your own occupation.

High quality policies will recognize a surgical specialty as your own occupation, so you can keep your options open during disability. For example, if you can’t do surgery any more, you may still be able to practice general ophthalmology. Your earnings plus your benefits may come close to what you were making before you became disabled.

Policy limitations and exclusions might cause your claim to be denied. Have you experienced anxiety, depression, or marital difficulty that caused you to seek counseling or psychiatric treatment? If you disclosed this in your insurance application, there may be a rider excluding claims related to this issue. The language in some policies places a 2-year limit on benefits for mental and nervous claims, regardless of your health at the time you made your application. Before you gloss over this limitation, consider the findings from a 2005 study in the Archives of General Psychiatry: One in five U.S. citizens is bound to suffer from a serious mental disorder in any given 12-month period.

No plan for the aftermath

You may be surprised by how long it takes to get a benefit check. Income disability insurance policies include a co-insurance-like “elimination period” that may run from 30-365 days, with the majority of policies bearing a 90-180 day elimination period. During the elimination period, you will be disabled but you won’t be paid. In fact, once the elimination period ends and the benefit period begins, you won’t get a check until the end of the month. That means 4-7 months could pass before you can cash the first check.

You probably don’t have an emergency fund. Even though it’s a fundamental part of financial planning, physicians often overlook the emergency fund in their rush to buy a home, fill the 401(k), and pay off student loans. I find that physician families spend $10,000 per month on average, while medical specialists who are married with children may spend $15,000 or more. By parking $40,000-$120,000 somewhere safe and easy to reach, you’ll be ready to bridge the gap during the elimination period.

Ophthalmologists in private practice have one more thing to worry about: business continuity. Payroll, rent, office expense, and interest on business loans continue to run while you’re disabled. Business overhead expense (BOE) insurance can pay all of these expenses and may even cover part of what you pay a locum tenens physician to see your patients while you recover. Having BOE coverage means you won’t need to spend personal assets to keep the doors open, and it also prevents your partners from bearing the burden of your portion of the unallocated overhead. These policies have elimination periods that run 30-90 days, so it makes sense to maintain an emergency fund for your practice as well as your family.

Not urgent, but important

Preparing for a disability is not difficult but it can be time consuming. Once you’ve made it a priority, you can follow these steps to get ready.

1. Gather complete copies of all your insurance paperwork, including correspondence. Call the insurance company and request fresh copies if necessary. Correspondence is crucial since it gives you clues about changes in your policy over the years. If you become disabled, the contract is the first thing your attorney will ask you to produce.

2. Review your policies. Read through and circle key elements in each contract: monthly benefit, definition of total (and partial) disability, elimination period, premium schedule, limitations, exclusions, and clauses that may let you get more coverage without more underwriting. Review the letters and the riders, too. If you don’t understand what you’re reading, find an attorney or insurance consultant for help.

3. Think about how your situation has changed since your policy was placed. Has your back injury healed? Has it been 2 years or more since you saw a counselor or took an antidepressant? Has your income increased by more than 10%? Use the answers to improve or increase your coverage.

4. Re-shop your insurance. Approach this as if you have no coverage at all. This way, you can learn whether or not you are insurable, what the limit may be on your total monthly benefit, and which features are available in new policies. Don’t buy any insurance (yet).

5. Compare new insurance to old. Weigh the benefits of your old policies with those from new coverage, and consider the cost-per-thousand of benefit from both. Think about adding or replacing coverage based on your findings.

6. Max it out. Insurers base their offerings on the size of your earned income, subject to a maximum limit. Even if your cost of living is less than the maximum benefit, get all the coverage you can. Most benefits end at age 65, and you need to be prepared for disability beyond that point. Plan to use the excess benefits you receive to cover your expenses during retirement.

7. Build an emergency fund. Set aside at least enough cash to see you through the elimination period plus one more month. Keep the money safe in a certificate of deposit with a bank or credit union. This is your backup plan, so don’t take unnecessary risks by investing it.

When you’re done, meet with your partners or your practice management consultant and decide what you need to do to keep your business running smoothly, too.

 It’s time to do something about it

You spent decades getting an education and years building your practice. As the months roll by, a disabling accident or illness becomes more likely. A split second can mark the end of your days as a profitable physician and the beginning of your life as a disabled doctor—be certain that life is a good one.

Mr. Utley is president and founder of Physician Family Financial Advisors Inc., which delivers fee-only financial planning and independent investment advice to clients coast-to-coast. Contact him at 541-463-0899 or visit www.physicianfamily.com.

This article originally appeared in the February 2012 ezine of Ophthalmology Business, pages 10-12. To download a PDF version, click here.

Categories : Insuring, Media

Even the pros can’t beat a passive approach to investing during times of global peril

by W. Ben Utley CFP®
07 Feb

Stock and bond markets are off to a great start in 2012, despite continued pessimism surrounding the  Greek debt conundrum.

What I find interesting is how last year’s terrible news had such a tiny negative effect on diversified investors. For all the hype and hand wringing, the index of global stocks was down only 6% (and global bonds were up about that much).

If you want to learn more about diversified investing, here are some articles you might find useful…

 Index Funds Beat “Professional” Investors, Again

This shouldn’t be news but it is: another study proves that passive investing beats active investing. When professionals pick stocks in an attempt to outperform the market as a whole, they’re betting against the index. It seems counterintuitive, but professionals armed with education and experience have a tough time beating the market on a long-term basis.

This latest study, conducted by Merrill Lynch and reported by Larry Swedroe, a respected author and investor, notes that only 23 percent of all U.S. stock fund managers outperformed the S&P 500 during 2011, meaning that three-fourths of them failed to earn their pay.

“The question is simple: when the odds are stacked against you, why play the game?” Swedroe asks. “You shouldn’t base investment decisions on what’s almost certainly nothing more than an exercise in data mining – torture the data enough, and it will confess.”

 How to Build a Portfolio with Core Funds

Every investment portfolio needs a solid foundation that balances risk and reward. To build this foundation, we often use two mutual funds: a broadly-based global equity index fund (a “stock fund”) and a broadly-based global fixed income fund (a “bond fund”).

With that foundation in place, we may add other funds to “tilt” the portfolio toward small cap stocks, value stocks, a shorter duration in bonds, or a different exposure to international securities.

This article from CBS News MoneyWatch explores the ins and outs of how to build a portfolio using core funds and how some investors are building in their tilts using index funds.

 The Moral to These Stories

Sometime, somewhere, something is going to be blowing up. When you pick stocks, or markets, you’re betting that you won’t pick the next one to blow up, which seems a little bit silly when you look at the numbers. It’s better to accept the reality of uncertainty and diversify broadly.

When you diversify, you might not have bragging rights at the party, but you are certain to be in attendance.

To see all the articles I find, as I find them, follow me on Google Plus.

Categories : Investing

Trash or treasure? How to keep your financial records organized without losing your mind

by W. Ben Utley CFP®
17 Jan

If your New Year’s resolution is to “get organized” then today’s post can help you start 2012 off right…

Here’s a great question:

“What paperwork do I have to keep and for how long?  I have soooo many bank statements, old paid bills, investment statements etc!
Thanks- [Busy Mom/Doctor Who Shall Remain Nameless]”

 Answer:

Ugh… I know you hate dealing with paperwork, and that’s why I’ve devised a simple scheme to help you decide what’s trash and what’s treasure.

But first, you’ll need two things: a big box and a magic marker.

 The Simple Three-Step Process

  1. Label your box: On the side of your box, write the words “2012 Financial Records”. Let your kids draw on the box just to add some fun and get them involved.
  2. Put stuff in your box: As you receive “financial stuff” throughout the year, stick it all in that box… willy nilly, disorganized, in the original envelope if you dare. Got bank statements? Stick ‘em in the box. Investment report? Stuff ‘em in the folder. Paid bills? Ditto.
  3. Repeat: At year’s end, right after you finish singing “Auld Lang Syne” (what does that mean anyway?), put that box some place safe… and be done with it.

When 2013 begins, get a new box and repeat the three steps. If you have financial stuff from previous years, you can drop each year’s worth of stuff into its own box.

 Is it really that simple?

Yes, it is. Here are the benefits:

  • Always have everything.
  • Never lose anything.
  • No need to sort/tag/taxidermy anything.

If you need something, It will take you less time and energy to dig through your box than it takes to neatly organize all that stuff. Chances are good that you won’t look back into the box at all.

Still not convinced?

If you’re a recovering perfectionist like me, then you might want to check out these articles that tell you precisely what’s trash and what’s treasure.
Warning: these articles tell you to  save almost everything…

What do you think about this post? Trash? Or treasure? Let me know…

 

 

 

 

Categories : How-To, Miscellaneous, Q&A

401k’s bigger but not enough for certain doctors

by W. Ben Utley, CFP®
10 Jan

The IRS usually makes your life more difficult, but this time, they got it right. Limits on retirement plan contributions have been increased for 2012.

What does the increase mean to you?

  • Self-Employed Doctors: If you’re one of the remaining few practitioners who hasn’t yet been forced to join the local hospital and you still own your practice, you probably have a cross-tested safe harbor defined contribution plan, like a 401(k) combined with a profit sharing plan. In your case, limits for total contributions will increase by $1,000 for 2012, to $50,000 per year.
  • Doctors Who Are Employees: If you work for a non-profit hospital or clinic, you probably have a 403(b) plan or other tax-deferred arrangement, and doctors employed by for-profit healthcare providers may have a traditional 401(k). In either case, the IRS has upped the limit on elective deferrals—the amount you choose to have withheld from your paycheck—by $500 to $17,000 for 2012.

What do you need to do?

To benefit from these changes, you need to increase the amount you have withheld from your pay. Depending on the way your retirement plan works, your contributions might not be adjusted automatically and they cannot be increased retroactively, so it’s important that you take action. Call your human resources or benefits person and ask them, “Am I signed up to max out my retirement plan this year?”

The max is not enough.

Even with increased limits, fully funding your retirement plan does not mean you’ll have enough money on the day you decide to hang up your practice. When I help physician families do their retirement fund planning, I see that stuffing your 401k to the max often means you’ll have only half as much money as you might need when you retire, so you’ll probably need to save outside your plan too, using Individual Retirement Accounts (IRA’s) and after-tax accounts. (Beware people trying to sell you tax-deferred annuities for this purpose.)

If it’s been a while since you updated your Retirement Fund Plan or you don’t have a Retirement Fund Plan, contact me so I can help you get on track.

Categories : Retirement, Saving

Will emotional investors lose faith in efficient markets after 2011?

by W. Ben Utley CFP®
29 Dec

Personal finance is a broad field, filled with very bright thinkers. While I have much to teach young doctors about financial planning, I would need another lifetime to write and teach everything they need to know about investing

Rather than recreate content about investing, I plan to share what I uncover in the articles and blog posts from other thought leaders in the field. I’ll point you in the right direction and add a few thoughtful words of my own to help you on your way.

 And of course, if you have questions about investments, I’m here to help answer them.

In the final weeks of the 2011, the investment markets see sawed between positive and negative territory for the year. In a year marked by political and economic uncertainty here, in Europe and in Arab nations, the fact that the markets are at or near positive territory for 2011 is remarkable in itself, but only if you’ve had the temerity to hang on to your investments.

 

Investing is an act of faith

The act of investing—putting your hard-earned money to work in an at-risk endeavor with uncertain prospects for a positive outcome—has always been a leap of faith on some level. Uncertainties abound, and mountains of research testify to the fact that it’s impossible to time the markets.

Despite that fact, investors continue to search for ways to glean the reward while sidestepping the risk.  The credit crisis, the dot com crash, and the real estate crash are so clearly visible in the rear view mirror that it seems we should somehow have seen them coming. While it seems like a good idea to spot investing bubbles and do everything you can to avoid them, this post from the New York Times Bucks Blog makes it clear that “looking for a bubble spotter is just the latest way we’ve come up with to trick ourselves into thinking that there is a way to time the markets.”

 

Markets are more efficient now than ever

 It’s easy for investors to become bedazzled by mutual and hedge fund managers who beat the market in the short run. “If they can do it, I can too” is what the wishful investor thinks.

The truth is most stock pickers — whether professional or amateur — cannot consistently beat their benchmarks. It’s a loser’s game, primarily because the market has become more efficient during the past 50 years.

So what do I mean by “efficient”? An efficient market is one where information about securities in that market is priced into those securities as soon as the news is available. Efficient markets leave little room for people to make profits without bearing risk.

In this post at the MarketRiders blog, you can read up on the five reasons why stock pickers are playing a fool’s game.

 

Investors only get two emotions

Many investors have a hard time gauging their appetite for risk. That makes it easy to take on too much risk when markets are rising and or avoid risk when they are declining.

Unless you’re firmly grounded somehow—by years of personal experience, by a set of written investment guidelines, or by the steady hand of a rational advisor—markets like we’ve experienced over the past ten years may cause you to vacillate between the two emotional extremes of greed and fear.

In fact, you might begin to believe that the tried and true strategy of “buy and hold” is dead. I assure you, it’s not. In this article by Larry Swedroe for CBS News, you can see that there’s far more to “buy and hold” than meets the eye. Swedroe stresses the importance of buying a diversified portfolio, holding the right mix (or asset allocation), rebalancing to maintain risk exposure and avoiding unnecessary taxes on your holdings.

Swedroe cites a well-known Warren Buffett quote that is worth repeating: investors “should try to be fearful when others are greedy and greedy only when others are fearful.” And right now, they’re fearful.

 

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Categories : Investing

If money talks, what does your cash donation tell your children?

by W. Ben Utley CFP®
13 Dec

It’s that time of year, when a Salvation Army volunteers stand outside the mall, freezing their butts off, ringing that crazy bell, hoping you’ll toss a buck into their bucket.

But when you do that thing—give a charitable donation—and your kids see you do it, what does that tell them about YOU and your beliefs?

You work hard for your money, so when your kids see you giving it away, they might wonder if you’ve left your senses.

Giving doesn’t make sense. It’s not logical; it’s emotional. All of our decisions, including decisions about money, are born from our emotions. They rise up through our nervous systems, gaining credence as feelings, forming thoughts, and then words which we use to rationalize the action we took as a result of the emotion, which we call beliefs.

What emotion lies behind this odd behavior of giving? Professor Robert Plutchik boils emotions down to the eight basic states you see below. Maybe you can identify the emotion behind your charitable gift, then use logic to help your children understand what you believe and why you give:

  • Surprise: Have you ever found something so amazing, so unbelievably good, that you just had to tell everyone about it? In fact, it’s so shockingly great, you believe your money can make it go further or become even better? While you’re writing your donation check, let your kids in on the secret too.
  • Fear: What seems dangerous, out of control, or likely to bring harm? Do you believe you can help put a stop to it? It might be a good time to warn your kids about it, and let them know you’re putting your money to work to prevent it from happening.
  • Trust: Do you have faith in a higher power? Do you know that—no matter what—everything’s going to be alright? You might tell your kids that giving money away is easy because you trust that you’ll have more in the future, even though you can’t prove it.
  • Disgust: Does something in this world just turn your stomach? If you believe there are some things that have no place in this world, you can tell your kids you believe your money can help fight whatever that thing might be.
  • Anger: Do you have a strong distaste for a particular happenstance out there? What really makes you mad? Maybe you believe your money can help overpower the situation and put it in its place, so tell your kids that you’re mailing a check because you just can’t take it anymore.
  • Anticipation: Does “pay it forward” mean something to you? Do you find yourself thinking about reciprocity, or giving to get? You might tell your kids that giving is what you do in order to make room for good things to come into your life.
  • Sadness: Have you lost a loved one? Was there a time in your life when you felt desperate? You might tell your kids about that time in your life, and let them know you believe in honoring those memories by donating.
  • Joy: Are you happy with your life or your circumstances? Do you feel positively overflowing? Maybe you can tell your children you believe you have more than enough money, so much in fact that you can afford to give some away.

When you can tap into the emotion behind your giving, and explain your actions so that even a child can understand, then you will be ready to explore the emotions and the “why” behind all your other financial decisions, from sharing to saving to spending.

So tell me, what charity did you support this year? What was the emotion behind your gift? What do you believe about your gift? What did you tell your kids?

Categories : Parenting, Sharing

2011 Tax Tips for Ophthalmologists | Ophthalmology Business magazine

by W. Ben Utley CFP®
01 Dec

With the top marginal tax rate set at 35% for this year, every dollar you don’t pay in taxes will save you at least thirty-five cents in that bracket. If you live in one of the many states with an income tax, you could save even more. The end of the tax year is at hand, so now is the perfect time to call your tax advisor and work through some tactics to trim your tax bill. The following tips may offer you some sweet opportunities.

Plug in and save.

With gas prices topping $4 per gallon in parts of the country, you might be tempted to buy a hybrid, but the real tax savings are currently (no pun intended) in electric cars. When you buy a vehicle certified for the Qualified Plug-In Electric DriveMotor Vehicle Credit, you can save up to $7,500 in taxes. Andrew Schwartz is a certified public accountant in Boston, and author of a monthly tax newsletter for healthcare professionals at http://www.MDTaxes.com. He said, “This is a great tax break for doctors since it’s not limited by the Alternative Minimum Tax (AMT) like the credit for hybrids was.” Mr. Schwartz noted that many of his firm’s married clients were hit by the AMT in 2010, making the credit particularly valuable for doctors who are in a position to purchase electric. To avoid a shock at tax time, consult your tax advisor BEFORE you step into the dealer’s showroom.

Open a health savings account (HSA).

The health savings account was established in 2003 as an additional tool to help Americans save for medical expenses in a tax-sheltered environment. If your circumstances qualify you for it, an HSA can be a particularly handy tax management tool for physicians. You will never pay taxes on the money (as long as you follow the rules): Contributions are tax-deductible to begin with, they grow tax-deferred, and qualified withdrawals are tax-free.

In 2011, you can set aside up to $3,050 in potential medical expenses for yourself, or if you have a family plan, you can contribute up to $6,150. As an added twist, you don’t necessarily have to spend it right away. You can let the money grow tax-deferred indefinitely by paying your healthcare expenses out-of-pocket instead of taking the money out of your HSA.

Before you rush to call your existing insurance broker, know that you can purchase your health savings account and health savings insurance (i.e., your HSA-eligible, high-deductible health plan, or HDHP) from two separate vendors. It can be advantageous to consider separate, best sources for each; by shopping around, you may be able to reduce administrative and investment expenses and improve your investment selections.

Invest in equity index funds.

While we’re on the subject of investment selections, whether you’re investing in tax-sheltered accounts such as an HSA or in taxable accounts, I recommend viewing your investment activities from a portfolio- wide perspective. The object is to build and maintain an overall portfolio that (1) reflects your personal goals and risk tolerances, (2) uses broad diversification to minimize unnecessary risks, and (3) accomplishes numbers 1 and 2 while keeping costs low.

It’s tempting for physicians to pursue fancier investments, but the truth is, “fancy” is all too often a synonym for expensive and overly complicated, without adding any expected value in return. Instead, consider simple index funds from The Vanguard Group for retail investors, or passively managed funds from Dimensional Fund Advisors for physicians using an approved advisor. Either way, you can accomplish all three goals above with minimal complexity. And if you hold your funds, rather than fleeing from them during times of market volatility, you can defer capital gains and keep your tax return simple.

Your tax advisor will love you for it.

Turn your losing investment into a winning tax move.

If one of your investments turned out to be a lemon, you can “make lemonade” by selling it for a loss. If you’ve lost $3,000 or more on an asset such as a stock or mutual fund, you can sell before year-end to “recognize” the loss, and offset up to $3,000 worth of ordinary income this year. If you lost more than $3,000, you can “carry forward” your losses into future years to offset future gains or income.

Give your gains to charity for good.

On the flip side, if you’re charitably minded and you’ve got an asset that has appreciated significantly in value, consider donating the asset “in kind” to a qualified charity.

For example, say you own 100 shares of the XYZ Fund that you bought at $50/share, and now it’s worth $75/ share. If you sold the fund, you’d owe tax on the $2,500 gain. If you instead gifted the fund to charity (without selling), you’d sidestep the capital gains tax, plus qualify for a tax deduction on your gift. Since it is a non-profit organization, your charity won’t owe taxes on the gift either. The same strategy applies to most assets, including stocks, bonds, mutual funds, or real estate. If you are going to make a donation anyway, you may as well maximize your tax advantage. The devil is in the details, so consult your tax and financial advisors first.

Save taxes as you save for your kids’ college.

As you set aside funds for your children’s or other beneficiaries’ higher education, consider contributing to a Section 529 college savings plan where the investments can grow tax-deferred and be spent tax-free for qualified higher education expenses.

Most states offer their own 529 plan; you may use your state’s plan, but you are not obligated to. In deciding which plan is best for you, consider factors such as the state-tax benefits your state offers, as well as the quality and expense ratios of the funds available within the plan. BillCleveland, a certified public accountant with Preston & Cleveland Wealth Management,Augusta,Ga., commented, “As with all investing decisions, when comparing 529 plans, make sure you understand the cost/ benefit ratio. These aren’t like cuts of meat, where the more you spend, the higher quality you get. Costs vary widely, especially between direct-sold and broker-sold plans.

Sometimes less is more.” One of the best places to begin your research is at http://www.savingforcollege.com, a comprehensive and objective source for clearly disclosed information on 529 plans.

Working two jobs? Set up a separate retirement plan.

If you’re waiting to make partner in your practice, you might not be covered by your employer’s retirement plan yet. This means you might be eligible to establish your own SEP-IRA, where you can contribute earnings from a second job—such as teaching or working locum tenens. SEPs are easy to establish and, depending on your circumstances, you may be able to contribute up to $49,000 for 2011.

Add your spouse to your practice payroll.

Even if your spouse is employed elsewhere, as long as he or she is not already covered by a qualified retirement plan, he or she can contribute up to $11,500 to your SIMPLE IRA ($14,000 if 50 or older) or up to $16,500 to your 401(k) ($22,000 if 50 or older). Accounts under both plans get more than a tax break; they gain protection from creditors under the Bankruptcy Abuse Prevention Act (BAPA). If your spouse is a practice employee, be certain to document duties and services performed, and pay an appropriate wage.

Take interest in your debts.

If you have auto loans, credit card debt, or other consumer debt—or if you have student loans and you earn too much money to take the student loan interest deduction—consider refinancing these debts with a second mortgage or a home equity line of credit (HELOC).

For most physicians, interest on the first $100,000 of “non-acquisition home equity indebtedness” (loans against your house that you didn’t use to buy the house) can be taken as itemized deductions and could save you several thousand dollars in taxes. Also, HELOC’s and second mortgages tend to bear lower rates than consumer debt. Be certain to stay current on payments to avoid foreclosure. Also, don’t sustain debt simply to avoid taxes; work closely with your financial planner to optimize your overall debt management plans.

Invest in your business.

If you can’t choose between two new pieces of equipment, you might want to get off the dime and decide before yearend.

For example, if you’ve been thinking about adding a HOYA iTrace Surgical Workstation (Hoya Surgical Optics, Chino Hills, California) or a Nidek OPD (Nidek, Fremont, Calif.) (40-45 K), or an IOL Master 500 (Carl Zeiss Meditec,Dublin,California) or a Haag-Streit LENSTAR (Haag-Streit,Mason,Ohio) (30-34 K) to your armamentarium in the surgical suite, now may be a great time to make that upgrade and invest in your practice.

Thanks to various government stimulus measures, the Section 179 deduction for business equipment purchased in 2011 has been raised to $500,000. You may not speak IRSese, so let me tell you that the Section 179 deduction means you can expense an entire purchase this year, rather than spreading the expense—and the tax savings—over several years. For a summary, visit http://www.section179.org/stimulusacts.html.

Refresh your retirement plan.

If your office uses a SIMPLE IRA or a safe-harbor 401(k) plan, it might be time for a new plan: the New Comparability Plan. Pension consultants will tell you it’s a cross-tested defined-contribution retirement plan for discretionary profit-sharing contributions.

But what it does for you is not nearly as obscure as its description. Simply put, it treats highly compensated employees (doctors) more favorably than employees who earn less (staff) by allowing you to put more money into your account than traditional plans do— without breaking rules designed to ensure fairness to all participants.

Even though the Treasury Department formed these plans more than a decade ago, implementation is complex, so the adoption rate has been slow among small businesses.

If you don’t have time to explore this option, and you don’t have a consultant who can do it for you, visit the American Society of Pension Professionals & Actuaries (www.asppa.org) and find a consultant to assist with the heavy lifting.

Layer on the tax savings.

“To make retirement savings even less taxing, you could layer a cash balance defined benefit plan on top of your new comparability plan,” said Jeff Curl, Summit Benefit & Actuarial Services,Wauwatosa,Wis.According to Mr. Curl, “You can get contributions two to four times higher than what might fit in the new comparability plan, perhaps up to $200,000 for highly compensated doctors.” Mr. Curl warned that these plans are only appropriate for consistently profitable businesses, as may be the case with larger, more mature ophthalmology practices. But if you explore cash balance plans, watch out for plans that involve life insurance.

“They might be a good plan for the guy selling the insurance, but they might not be the best plan for the doctor,” said Mr. Curl.

Contribute to your IRA.

Remember the good old days in residency when you worked your tail off and made so little that you could actually deduct your IRA contributions? In the grand scheme, it’s actually a good thing that those days are gone forever, but you can still make non-deductible contributions to a traditional Individual Retirement Account.

JanetDavis, a certified public accountant with Trusted Advisors Consulting,Tucson,Ariz., said, “The Roth conversion is still available to tax payers in 2011 and later years, regardless of income. Even though you can’t deduct your IRA contributions, it’s still a great idea to make them, so you can convert the IRA later. It makes those IRA contributions even more powerful.” Ms. Davis is referring to the fact that the Roth IRA conversion option is currently available to high earners, which means you can convert your Traditional IRA account to a Roth, pay the taxes on the conversion upfront, and let your earnings grow tax-free for the rest of your life.

Physicians under age 50 can contribute $5,000 to an IRA for themselves and an additional $5,000 for a non-earning spouse (make that $6,000 if you’re 50+), and you can make your 2011 contribution any time before you file your return, which may be April 15 of next year.

When and how to make these sorts of conversions can get pretty complicated pretty fast, especially once you factor in tax-efficient estate planning. However, properly managed, they can be of significant value to your bottom line, so they’re worth considering.

Keep an eye out for Alternative Minimum Tax (AMT).

“Physicians earning $200,000–$400,000 per year often wind up paying the Alternative Minimum Tax,” said Ms. Davis.

Doctors in the AMT may want to take advantage of the 28% AMT bracket by converting to a Roth IRA, taking deferred compensation, or making other moves to accelerate income into 2011. After all, tax rates are set to rise in 2013, making that 28% rate look like a bargain by comparison.

Remember that most tax breaks come at a price, like increased expenses (interest paid, purchases made, or assets simply given away) or deferred gratification (saving for college and retirement). At best, tax breaks are sweeteners to help you make an otherwise sour decision, and they may motivate you to do something that’s actually more expensive than the alternative, like buying a brand new car instead of a good used one. In the end, tax maneuvers are just one more tactic you can use in your financial plan, so keep your goals in mind and stay focused on reaching them.OBccntinued from page 22 Mr. Utley helps young doctors get on track with a personalized one-page plan to pay off debt, save for college, and invest wisely for retirement.

Physician Family Financial Advisors Inc. delivers fee-only financial planning and independent investment management to clients coast-to-coast from its headquarters in Eugene, Oregon.

This article originally appeared in the December 2011 print edition of Ophthalmology Business, pages 20-24. To download a PDF version, click here.

Categories : College, Investing, Media, Retirement, Taxes

Four reasons for 5-year CD’s in your Emergency Fund

by W. Ben Utley, CFP®
29 Nov

Since the new normal set in a few years back, I’ve recommended you build reserves you can tap in the event of a real financial emergency. You should store your Emergency Fund in a safe place, like a credit union or a bank and keep it separate from checking and other accounts. Here are four reasons why I like five year certificates of deposit for the physician family’s Emergency Fund:

  1. Five-year CD’s beat the rates available on demand deposits, like checking and money market accounts. A quick peek of the top rates via BankRate.com  shows that today’s top-yielding 5-year CD’s have an annual percentage yield  (APY) of 1.99% while money markets with a $25K deposit yield 1.00% APY and checking yields a paltry 0.25% APY.
  2. The sting of the early withdrawal penalty is a good thing. The typical 5-year CD imposes a penalty equal to six months worth of interest, so the thought of “paying a penalty” is probably enough to help you use the fund only for emergencies.
  3. Don’t let the penalty take your eyes off the prize They’re still better than 1-year CD’s for most doctors. For example, let’s assume you hold $100K in a one-year CD versus that same amount in a five-year CD. And let’s assume you have an honest-to-goodness emergency that wipes out the whole pile after only 12 months. With the best one-year CD available today, you’d earn about 1.15%. With the five-year CD, you’d earn 1.99% minus about 0.99% for penalties, leaving you with about 1% in yield. Does it look like you’re giving up 0.15%? Not so fast. The chances of actually having an emergency are small if you’re doing your financial planning the right way.
  4. You stand a chance to make twice as much in five-year CD’s as in one-year CD’s. If you don’t have an emergency and you keep your five-year CD, you’ll earn 1.99% every year (plus compounding) for five years, versus only 1.00% for your one year CD (and maybe more or less depending on what interest rates do in the future). Both of these options easily beat checking accounts.

Before you buy a five-year certificate of deposit read the find print. Many five-year CD’s bear a six month prepayment penalty but some have a twelve month prepayment penalty, and most will charge that penalty regardless of how long you hold the CD. That means if you cash out the CD in the first three months, you may be forced to pay a portion of your principal as well as all your interest.

Remember, these are long term, emergency only instruments that won’t earn much, but they’ll help you stop worrying about money and sleep well knowing you’re prepared for a financial emergency.

Wanna know the difference between investing and saving? Submit a comment and I’ll tell you. J

Categories : Saving

Look Before You Leap: 10 questions every physician should answer before making an alternative investment

by W. Ben Utley CFP®
15 Nov

It reads more like a parable than a proverb: A friend or colleague approaches you with an “investment opportunity,” you have some extra money available, and you don’t want to miss out on the action, so you give him your hard-earned cash. And then something goes terribly wrong.

You lose most—if not all—of your money. Your relationship and your wallet both suffer greatly.

For example, consider this composite illustration that could happen (has happened, with variations on the theme) to any number of physicians.

 Look before you leap: An illustration

Dr. Brown and Joe, a well-respected local real estate developer, are good friends. One day, Joe offers the doctor a chance to invest in his next spec home. “It’ll be my biggest project ever,” he says, “and I’ve already got interested buyers. Your $200,000 will easily double.

Dr. Brown is intrigued. “The market” has given him ho-hum returns, so he has been looking for an attractive investment. Joe knows what he’s doing, so the doctor shouldn’t need to spend too much of his limited time inspecting the details closely. After all, his own house near the project site has appreciated nicely since he purchased it a decade ago. The next time they meet, a handshake closes the deal.

That was late 2007. You may already have guessed where this is headed. (“Spec,” by the way, is short for “speculative.”) Several months later, Dr. Brown has not heard much from Joe. Progress seems to be taking forever. By the time the home is completed, the bottom has fallen out of the real estate market; the interested buyers have disappeared.

Unable to sell the home, Joe moves into it himself. “We’ll have to wait for the market to turn around,” he says. Today, in 2011, Dr. Brown is still waiting.

The questions to ask

Bottom line: While there is a chance that you might get in on the next big deal, there’s also a statistically greater chance that things will not go so well in an “alternative” investment (meaning an investment other than traditional stocks, bonds, and mutual funds). Before you put your capital at risk, ask yourself these 10 questions to increase the odds that you will receive a return OF your investment as well as a return ON your investment.

1. “Why am I being asked to make the investment?” The obvious answer here is because they need the money, with “they” being the people who are ultimately asking you to invest in their venture. But there’s more to it than meets the eye. In a capitalist country like ours, there’s a ton of money out there seeking excellent deals. What makes you so special that you have been tapped to tackle this deal? Is it your background and experience with similar deals? Or is it simply your availability (maybe even your naiveté)? Seek a convincing answer that stands to reason.

Don’t be moved merely by the tempting exclusivity of a deal.

2. “How is the opportunity structured?” Most deals offer to make you a shareholder or a partner, while others may invite you to be a lender.

Some offer a choice. Your position will dictate your property rights— which will determine your expected return, as well as where you stand in the pay-back line in the event of a debacle. Your position also gives you some idea about the offering party’s motivation and a clue about how the deal will be handled. Along the spectrum from fully engaged partners to silent sources of cash, what sort of relationships do they seek?

3. “What will they do with my money?” If you are expecting them to be the stewards of your money, then you might want to know what— exactly—they will do with it. Will your money be used to build a building? Or tide them over until more cash comes in? Or refinance an existing loan? Or develop a product? You want an answer that will tell you how they plan to create wealth with your money. If there are written materials available (like a business plan, prospectus, or private placement memorandum), you should dig through them to find the answers to these questions. Will they be providing ongoing reports, shareholder meetings, or similar ways to remain informed?

4. “How do I know they’re telling me the truth?” When you judge the quality of an investment opportunity, consider the quality of the people involved with the deal. Are their names clearly disclosed? Confirm that they are who they say they are, and find out how long they’ve been doing what they say they’ll do. It may be tempting to take someone else’s word for it, but you should do your own homework to verify the offering party’s credentials. Insist on a background check if you’re not absolutely certain about their integrity. If you have access to an attorney or financial advisor to champion your interests, a small investment in an objective second opinion on the matter is money very well spent.

5. “What’s my recourse if things go wrong?” Find out who you’ll be dealing with when things don’t go according to plan. Do they appear to be in a financial position to make you whole again? What does their backing look like? Is there any form of bond or assurance? While a risk is a risk, and you should expect some chance of loss, you want to know how things might wind up if the deal does not go as you hope it will.

6. “What are my alternatives?” While this particular deal might sound appetizing, there are always other deals, sometimes with better terms. Once you’ve been enticed to consider unconventional investments, you might find yourself in a whole new world as an investor.

Consider a range of options before selecting the ones that are a good fit for you. Focus on your real needs rather than the opportunity du jour.

7. “Do I really need to bear this risk?” Unconventional investments sometimes promise greater rewards than plain vanilla offerings like good old-fashioned mutual funds. By the same token, they usually entail a great deal more risk. Since many alternative investment opportunities require large sums of cash that may be tied up for some time to come, check the opportunity against your financial plan to make sure this risk is appropriate and necessary.

8. “How do I get my money back?” The liquidity of your investment is a good question, but even smart physicians often fail to ask about it.

The answer can be elusive. You may have more, less, or no control over when you can cash out. Perhaps your assets will be tied up until an initial public offering of stocks or bonds pays you out. Or maybe you’ll receive your capital back in regular, periodic payments. Some investments may not be transferrable until your death (think “roach motel for capital”). If you don’t need the money for a while, this may be fine, but it’s best to go in with your eyes open.

9. “Could I lose more than I invested?” If you’re being asked to buy a liability-generating asset (like equipment that will be leased) or if you become a partner in a business that goes belly up, you can end up in court or suffer spendy legal bills. Be particularly careful if you are being asked to guarantee a debt of the new venture (which is often the case with something as mundane as the development of a medical office building).

Don’t assume that only your invested capital is at risk; sometimes an asset becomes a liability.

10. “What are the political risks?” When you put your capital to work, you may find that it competes with the interests of others close to you. For example, if you participate in a pharmaceutical venture, could you end up being perceived as having conflicts of interest? Or if you open a surgicenter that could be used to do procedures other than those of your specialty, might potential referral sources view this as a threat? Consider the value of your business relationships, family ties, and friendships … and take the long view when you do so. These relationships may be more valuable to you than the money.

Revisiting Dr. Brown’s situation

Let’s return to Dr. Brown and steps he could have taken in considering Joe’s proposal.

Why me? Had he probed Joe more carefully about why he was being asked to invest, Dr. Brown may have discovered that Joe was turning to his friends because he’d been unable to close a deal with his traditional funding sources. This might have been good to know.

What are the details? Dr. Brown also would have been welladvised to conduct some due diligence on his friend through an objective third party. He might have discovered, for example, that the reason Joe’s usual creditors had turned him down was because he had never taken on a project of this size, and they lacked confidence in his expertise.

Don’t skip the formalities.

Because Dr. Brown had no formal agreement with Joe, it was unclear whether his “investment” represented a loan or an equity stake, leaving the doctor with few property rights or legal recourse. Had he secured an attorney to define the venture, he may have been better positioned to recover a portion of his investment.

Think big-picture. If Dr. Brown had $200,000 of investable assets, was this the best use of his money given his own (not Joe’s) personal goals? True, had he placed the money in a balanced blend of boring index funds, he would not have doubled his money. But he could have avoided the due diligence headache and captured market returns—plus he’d still have most of his capital.

Friends indeed. Had Dr. Brown demurred, citing any number of entirely plausible reasons (“My spouse says no,” “My financial planner says no,” “I need to upgrade my office equipment next year,” “I’ll be setting up a college fund for my children,” etc.), he could have retained Joe’s friendship. Or, had he lost it, it wouldn’t have been much of a loss.

Instead, the friendship soured along with the venture.

When revisiting your hardearned money, remember what it’s all about—ultimately, money is a means to an end. First, invest only as much as you can afford to lose without derailing your ability to reach your goals. Then, if you think you’ll enjoy the experience of staking your claim and seeing whether you win or lose, do your homework, call your attorney, and go slowly. But if the thought of an “alternative” investment makes you nervous, then use that nervous energy to come up with a carefully considered plan and stick to it. Whether you bear a lot of risk or a little, be certain to have cash on hand when it’s time to pay tuition bills or cover the cost of living when you’re no longer in practice.

Mr. Utley helps young doctors get on track with a personalized one-page plan to get out of debt, save for college, and invest wisely for retirement.

This article originally appeared in the November 2011 print edition of Ophthalmology Business, pages 27-29. To download a PDF version, click here.

Categories : Investing, Media

You can’t…

by W. Ben Utley, CFP®
09 Nov

“I can’t refinance my house because there aren’t any comps.”

“I can’t get disability insurance because I have high blood pressure.”

“I can’t live in a $250,000 house because I won’t be happy there.”

“I can’t buy a used car because I need a car that runs.”

“I can’t use a debit card because it’s not safe.”

“I can’t get life insurance because I have depression.”

“I can’t invest because the market will crash.”

“I can’t use a credit union because I’ve always used a bank.”

“I can’t retire because there’s no one to care for my patients.”

“I can’t build an emergency fund because I have student loan debt.”

“I can’t sell my condo because no one can finance it.”

“I can’t follow a spending plan because I don’t have a spending problem.”

“I can’t learn about investing because it’s not my thing.”

“I can’t hire a financial advisor because they’re all a bunch of con artists.”

“I can’t do financial planning because I don’t have time.”

That’s your inner voice talking.

The one thing you can’t do—for certain—is make the voice go away. The thing you can do is choose whether or not to believe.

What’s your voice telling you right now?

Categories : Miscellaneous
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