JMB: We see it day in and day out. In doing financial planning for physicians and talking about their various goals and objectives, we’re seeing the numbers change: ages of retirement, how long they want to work, how happy or unhappy they are in their practice right now. We’re seeing a growing dissatisfaction within their practice. An April 2001 Merritt, Hawkins & Associates survey concluded that 38 percent of physicians older than 50 plan to retire within three years, whereas an additional 10 percent will seek another line of work. If that forecast holds up, then 100,000 physicians are going to be retiring in the next one to three years. Only 18 percent of the physicians surveyed planned to continue in full-time patient care. According to the American College of Radiology, the number of annual retirements among radiologists doubled to about 800 between 1996 and 1998. A March 1999 study by the American Academy of Otolaryngologists found that physicians in that specialty, on average, were retiring a full decade earlier than the customary age of 75.

JMB: There are three major areas to look at. The first would be the financial or socioeconomic impact, evaluating where you currently are from a financial situation: how much money you have, how much you have in your retirement plan and what you’re planning on doing. Are you going to stop practicing, or are you going to practice somewhere where you’re going to be more satisfied but have a lower income? Can you afford to do that? Second, one must look at the legal impact of leaving a practice, as well as joining a new practice, such as contract negotiations and so forth. The third element is the psychological impact that the physician is going through—the impact that the change would have on the physician’s family, the relationship with their spouse and how that impacts their choice of what they plan on doing in the future.

JBM: If a physician was dissatisfied or unhappy, maybe their goal would be to be in a practice where he or she doesn’t need to be on call as often, or not at all. With that likely reduction of income, they will have to determine if they are able to maintain their current standard of living and, if not, what impact that’s going to have on their long-range goals, such as the education of their children and their own future retirement. It may mean that they may have to retire at a later age, but that might be okay because they’re more satisfied with the work that they’re doing. There are legal implications of whether they are even able to get out of their practice. Maybe they’re a partner in the practice and there are certain buy-out provisions that are locking them into the practice. Fine print in the contract may make it difficult for him or her to leave, so they must look at the feasibility of even making a change or when the change would be feasible. Then, there is the question of whether this change will actually make a difference for this physician, or if they are going to move to something else and still be unhappy. If they’re going to be working fewer hours, they’re going to be home more—how does the spouse feel about that? Most physicians’ social life involves the physician’s lounge. What happens if they’re not in the physician’s lounge? Do they have something else to do? Do they have hobbies? Or, is there something else in medicine that they would like to do to still feel fulfilled?

JMB: The process then moves into the legal aspects—the contracts and buy-out agreements—and working with the partners, assuming that they’re in private practice. We’ve had a client go in to talk to their partners to say, "I’d like to work on new kind of arrangement. I’d like to cut back on my hours, work three-quarters of the time, and I’m willing to accept three-quarters of the pay." Another doctor in the same practice said, "Hey, it sounds good to me. I’ll do the same thing!" So, it’s very important that there’s open discussion and an understanding that one of the partners does want to make a change within the practice or outside of the practice. When you’re making a clean break out of a practice, that’s going to involve several financial issues: Are you a full partner? Have you been buying in over time? Do you have equity in the practice? What is the value of that equity? Is there a formula that has been predetermined and are the other partners willing to buy you out at that value, or do you have to wait until a new partner is brought in and then sell your shares to that partner? Typically, the largest assets of most physicians are their retirement assets. Are they fully vested? If they are not fully vested and they leave the practice, then they’re going to be leaving their forfeitures within the plan to be reallocated to the other partners. If they are fully vested, then they can roll over the proceeds of their retirement plan, be it a defined contribution or defined benefit plan, into either an IRA or into the new practice’s plan.

JMB: If they are joining an existing practice, they would want to know if the benefits are comparable to what they previously had, be it disability insurance, life insurance, malpractice insurance, health insurance, as well as the various types of retirement plans. How many years until you buy in to become a partner? What is the call situation? Are you on a straight salary? Are you in a bonus or incentive situation? Is it paid quarterly? Is it paid annually? When you’re going into practice on you own, you have the ability to create a benefit package that centers on your own goals and objectives, but you need to put the time in to create these programs. You can hire a third-party administrator to determine what is the best type of retirement plan, given your own situation. You can use different advisors to select the proper type of disability, malpractice and life insurance for you. You can decide what accounting firm you want to use, or practice management firm, or billing service. You get to choose all of those on your own and it makes you more of a businessperson. A lot of physicians don’t want to be a businessperson—they just want to practice medicine. If that’s their goal, I think they are better off joining an existing practice. If, on the other hand, they want a little bit better control of their own destiny and they do have a little bit of a business acumen, then going into practice on their own has a tremendous amount of benefit.

Some physicians decide they may want to own the medical office building that they are practicing in. That would fall under the category of an investment and also can carry various tax advantages. Physicians as a group may choose to own the real estate and then rent the office space to the practice and receive income on a regular basis, or rent it back to themselves. Of course, there are mortgage costs, but they get write-offs for depreciation. Owning the medical office building also makes for a nice asset down the road for a family partnership to pass through to the next generation.

JMB: Have an emergency fund, typically three to six times their monthly living expenses, so they have a little cushion and don’t have to go into their portfolio for small items. We recommend a balanced portfolio coordinating a retirement plan, along with a non-qualified portfolio to meet shorter-term goals. Focus on asset allocation, usually through no-load mutual funds, and avoid the conflict with a commissioned stock brokerage because the worst thing in the world is to be in the middle of a surgical procedure and getting a call from a broker telling you it’s time to buy or it’s time to sell. Setting up a portfolio outside of their retirement plan gives the physician two different pools of funds. Once they retire, they have both taxable funds—the retirement funds—as well as non-taxable—the non-qualified. Also, the physician should consider ways to retire prior to age 59 1/2. There’s a exception in the tax law that will allow the participant of a retirement plan to access their retirement funds prior to age 59 1/2 without incurring the 10 percent IRS penalty.