After years of scrimping and struggling on a resident’s salary, the end of residency is likely to bring new financial freedom despite the health sector turmoil exacted by COVID-19. But don’t spend all of your new income right away.

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Even amid the uncertainty of the pandemic, when it comes to long-term financial security, young physicians should start saving for retirement and their golden years as soon as possible. That means planning now to make the best use of retirement savings accounts and other financial tools.

“The financial markets are a mess right now, but don’t worry about the market gyrations. You have 30 to 40 years to grow your savings,” said Mike Hegwood, director of brokerage marketing at AMA Insurance, an AMA subsidiary committed to helping physicians protect their finances and assets. “But you need to start saving now to take advantage of the historical growth of the investment markets.”

The trick is dollar-cost averaging, a savings technique that calls for regular contributions to a savings plan that builds over time. Markets may go up and down, but on average the principal builds up. Historical returns for the U.S. equities markets average about 10%.

Employers can help with building your savings by offering federally qualified defined contribution retirement plans that include 401(k) and 403 (b) plans, which allow participants to accumulate savings on a tax-deferred basis until they are ready for retirement. Employer plans can be supplemented with individual retirement accounts (IRAs).

Participants can invest their savings in a wide range of investment vehicles and can be diversified by mixing higher risk stocks or stock funds with fixed rate funds such as annuities that offer a guaranteed rate of return.

“If your employer offers to match part of your savings in your 401(k) or 403(b), you should contribute at least to the threshold of the match. It’s free money and it would be a shame to pass that up,” Hegwood said.

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New investors also need to plan to mitigate their taxes with alternative savings vehicles, Hegwood added. Qualified retirement plans such as 401(k) and 403(b) plans have contribution limits and are taxed when savings are withdrawn in retirement.  And while you may hope that tax rates decline in the future, that may not be the case. 

Roth IRAs, on the other hand, allow savers to contribute after-tax dollars that grow tax-free and can be withdrawn tax-free as well. But Roth IRAs are limited to those under certain income thresholds. Supplemental retirement plans, often funded with life insurance, don’t typically have these same income limitations and can help investors set aside additional savings, to maintain a high-income earner’s lifestyle in retirement.

Hegwood also recommended new investors consider buying some cash-value life insurance. Not only does life insurance provide a death benefit that can help protect your family, it also accumulates a cash value that can be used to pay other expenses while you’re still living.

“Financial security is not just about saving,” Hegwood said. ”It is also about protecting your ability to earn for yourself and your family. Health insurance, disability insurance and liability insurance are also important purchases to protect your ability to save from being interrupted during your best earning years.”

Most doctors and their employers purchase medical liability insurance and doctors are all familiar with the importance of health insurance, but they may not realize that health insurance can provide another retirement savings tool: health savings accounts (HSAs).

HSAs are typically used to fund health expenses not covered by a high-deductible health plans and are funded on an annual basis as a companion to health insurance. However, what isn’t used each year is not lost and can be saved for retirement, Hegwood said.

Used too soon, however, HSA funds used for non-qualifying medical expenses are typically subject to a 20% withdrawal penalty—until 65. After 65, you can no longer contribute new funds but what is left in the accounts can be used like an IRA. If the funds are needed for qualified medical expenses, they would be available on a tax-free basis. You also have the flexibility of using the funds for other, non-medical expenses in retirement. But in doing so, the distributions would be subject to income tax – similar to funds pulled from an IRA.

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Hegwood also recommended disability insurance, which replaces a portion of income lost when a policyholder is disabled from an illness or injury, usually up to about two-thirds of the policyholder’s income. Many employers provide long-term disability insurance for their employees, but the benefits paid from this insurance are typically taxable. Individual disability policy benefits, on the other hand, are not usually taxable if the premiums are paid by the insured.

Learn more about the AMA Young Physicians Section, which gives voice to—and advocates on issues that affect—physicians under 40 or within the first eight years of professional practice after residency and fellowship training.

Saving and investing can be complicated and time consuming so Hegwood recommended choosing and working with a professional financial adviser.

If you don’t have an adviser, you can find one with information from the Certified Financial Planners organization, Financial Industry Regulatory Authority or through the AMA Insurance Physicians Financial Partners program. The program provides access to a nationwide network of independent, local and experienced financial professionals who have undergone a comprehensive due-diligence process by AMA Insurance.  

AMA Insurance also offers life, disability, home, and auto insurance and provides access to other financial services products through Millennium Brokerage Group LLC, a strategic marketing partner of AMA Insurance.

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