Two experienced financial planners share their combined wisdom and knowledge in this handbook that focuses on helping doctors grow and protect wealth. As a specialty doctor, you shouldn't always follow the rules that others adhere to when it comes to finances. Your high income, subsequent high taxes, and significant exposure to litigation all require you to pay even closer attention to your financial goals than the average person. By using this essential wealth management and preservation handbook, you can learn Strategies to diversify your tax risk; Methods to lessen the impact of litigation; Qualities to look for when seeking professional advice; Spend more time doing the things you enjoy with the people you love. This guide includes examples, diagrams, and more to make it easy to understand your financial options and the impact of the decisions you make. Navigating this financial world isn't easy, but taking an active approach will put you well on your way to Optimal Financial Health.

OPTIMAL FINANCIAL HEALTH

The Doctor's Essential Wealth Management and Preservation HandbookBy Anthony C. Williams Marc E. Ortega

iUniverse, Inc.

Copyright © 2012 Anthony C. Williams and Marc E. Ortega
All right reserved.
ISBN: 978-1-4759-2523-4

Contents

1. Introduction.................................................................32. Why Now?.....................................................................53. What is Luck?................................................................74. Budgeting....................................................................125. Planning Considerations......................................................156. Does Debt Have You Down?.....................................................177. Entering Practice............................................................228. The 20% Guideline............................................................419. A New Way to Look at Debt....................................................4410. Investment Strategies and Suitability.......................................4911. Tax Efficiency and Growing Your Wealth......................................5512. Debunking Three Common Tax Myths............................................6113. Scary Math..................................................................6314. The Tax Train Is Coming.....................................................6715. Life Insurance Tax Planning.................................................7016. All about IRAs..............................................................7817. Active vs. Passive Portfolio Management.....................................8318. Asset Protection Considerations.............................................8919. Disability Insurance Coverage...............................................10120. Life Insurance Coverage.....................................................10621. Equity Indexed Universal Life...............................................11722. Other Insurance Coverage....................................................12423. Retirement Income: The Transition into Retirement...........................13324. Enjoy It!...................................................................14925. Should You Meet with a Financial Adviser? A Checklist.......................15326. Financial Planners—Qualities to Seek..................................15527. Final Thoughts..............................................................157APPENDIX A......................................................................163APPENDIX B: Wrap Accounts.......................................................166APPENDIX C: Legal Documents to Consider.........................................169APPENDIX D: Mutual Fund Basics..................................................171APPENDIX E: Alternative Asset Classes...........................................178APPENDIX F: Traditional Investments.............................................184APPENDIX G: Separately Managed And Unified Managed Accounts.....................186APPENDIX H......................................................................192APPENDIX I......................................................................197About the Authors...............................................................201Contributing Authors............................................................205

Chapter One

Introduction

If you are like most doctors, your time is at a premium. You have spent the majority of your young adult life in school and in training. After eight to twelve years of learning your specialty, the time has come to enter the professional workforce and enjoy the fruits of your labor.

Your future income will provide great opportunity but also some significant challenges. In our experience, the time our clients have spent in their medical training often leaves them ill-equipped to deal with personal and professional financial situations. These challenges generally lead clients down the path of anxiety, agitation, and playing catch up; all too often those emotions cross over into their personal lives as well. Most of our clients have asked questions pertaining to these challenges such as:

1. Is my family protected from a personal and/or a professional lawsuit?

2. What happens if I can no longer earn an income?

3. How much money do I need to retire?

4. When should I start saving or investing?

5. What is the best way to develop a savings/investing plan?

6. What should I know about with regard to my employer benefits?

7. Whom should I look to for advice?

8. How can I think about these issues while shouldering massive student loan debt?

9. I rotated with an attending who says he will never retire. What can I do so that won't happen to me?

10. How much should I spend on a home?

11. How do I minimize my tax burden?

12. I've heard I should protect my income. What are the key issues to consider?

13. What investments are most appropriate for me at this stage of my career?

14. What are the most common mistakes doctors make?

15. What is the value in evaluating financial issues while in training?

16. I've heard I should pay my home off as quickly as possible. Is this accurate?

17. Do I need life insurance? If so, what type best fits for me?

18. What issues should I consider when evaluating employment contracts?

19. How do I evaluate the differences among different practice environments?

20. How can I avoid the financial challenges my parents and colleagues face?

21. What asset protection measures should I evaluate?

These are only a few of the questions we have been asked; there are far too many to list here. The purpose of this book is to provide general guidance as a resource for doctors as they seek financial independence.

The question then becomes, "Are you one of the lucky ones?" Yes! We feel you can become lucky with deliberate forward-thinking and planning. You can sleep well at night knowing that you have taken steps to protect yourself and your family if tragedy strikes. You will know you are on the path towards achieving your financial objectives.

Now, begin your journey towards Optimal Financial Health and being Lucky.

Chapter Two

Why Now?

A. Over the past nineteen years of our professional practice along with research and consultation with many doctors, we came to one dramatic conclusion: many of our clients suffer from IDILS. Unfortunately, there is no pill for "I'll Do It Later Syndrome". Often, depending on the individuals' personal or professional status, we hear the following:

1. "I'm in training now; I'll start looking at these issues closer to the end of my training."

2. "I'm too busy finishing training and interviewing. I'll start evaluating these issues when I get into practice and have money."

3. "I just started practice and have too much going on now; once I become a partner will be a better time."

4. "I'm single; these issues are irrelevant to me until I get married."

5. "We just got married and are too busy; we can wait to address these issues until we have children."

B. If people wait until they are several years into practice to begin the planning process (especially after partnership is achieved) the following things will happen:

1. They will continue to put off planning.

2. They will constantly feel behind.

3. They will increase their standard of living to meet or exceed their income ceiling.

4. The likelihood of achieving their goals decreases.

5. They may not achieve peace of mind regarding their financial situation.

In fact, one of the primary reasons we began speaking at teaching hospitals throughout the western United States is because our clients continually expressed to us the following: "I wish I had looked into these issues earlier. If I had, I would now be much further ahead than I am and probably wouldn't have made so many mistakes." They would then ask us to speak at the institution where they completed training, as well as to their colleagues at their existing practices.

The bottom line, however, is that there is a treatment for IDILS: The earlier you begin the planning process; you improve your chances for achieving your financial goals and objectives.

Chapter Three

What is Luck?

The definition we use is "when opportunity meets preparation." Personally, we do not believe in luck. You may ask then, "Why write a book about being one of the lucky ones?" The answer is to demonstrate that you and you alone control the luck factor using our definition. Through your determination, motivation, and planning you will be more likely to achieve your financial objectives, goals, and dreams.

A. Okay, if we have the definition of luck in place, let's break down the two components. First, what is the opportunity? How many people do you know who can expect to transition from $40,000 per year in income to $200,000 or more? With this type of income increase, your opportunity is your ability to lay the foundation of your financial plan prior to establishing or increasing your standard of living. When you take a proactive approach to your planning anticipating the income increase, your likelihood of success increases tremendously.

B. Next, what are the steps involved in the preparation? Here are the fourteen steps.

1. Identify Your Goals and Objectives.

You have likely heard about the power of visualization. When it comes to goal setting, it is well proven that people who visualize and write specific goals for their futures are more likely to achieve their goals, and obtain higher wealth than those who do not.

2. Review Your Budget.

While in training, most doctors work in a cash-in cash-out environment. When reviewing your budget you will find areas of opportunity as a result of unnecessary spending. Additionally, this exercise prepares you to turn your budget upside down. In other words, determine what your goals are and what they will cost, and adjust your expenses or standard of living accordingly. "Pay yourself first" is an expression supporting this idea of allocating monies to your goals first and then towards your standard of living.

3. Establish an Emergency Reserve.

Create a "rainy day" reserve. Set aside enough cash to get you through an unexpected period of illness or unemployment; three to six months' worth of living expenses is generally recommended. Because you may need to use these funds unexpectedly, you'll generally want to put the cash in a low-risk, liquid investment, such as a money-market mutual fund or cash equivalent.

4. Determine Children's College Education Funding.

Spouses' differing perspectives can result in disagreement about planning for education costs. For example, Anthony and his wife Wendy come from very different backgrounds: she from an extremely affluent family, and he from a middle-class family. As such, when they discussed having children and funding their education, it took some time to come to an agreement. Wendy wanted to plan to pay for everything because that was her experience; whereas Anthony felt it was important for the child to pay for his or her own education as he had. The key is to thoroughly discuss it in advance to determine a plan and course of action.

5. Determine Retirement Objectives.

(a) When do you want to retire?

(b) What is your retirement vision?

(c) Do you want to live on less, equal, or more income in retirement than you did pre-retirement?

6. Consider Parents and Inter-Generational Planning.

(a) Have your parents planned effectively for their future?

(b) Will you be financially responsible for them? If you are thinking about marrying, or are currently married, this is especially critical to address.

(c) What strategies exist for addressing this? Do they have a formal distribution plan? What is their plan for chronic debilitation?

7. Assess Risk Management Strategies.

Strive to protect against financial loss in the event of a death, disability of the wage earner, theft, or accidental loss of real or personal property, unforeseen liabilities, etc. In other words, a thorough understanding of the appropriate types and amounts of insurance coverage is important.

8. Assess Asset Protection Strategies.

(a) The first step is doing everything you can to prevent the lawsuit. However, in today's society, lawsuits seem to be unavoidable. Therefore, in addition to maintaining appropriate levels of malpractice and liability coverage, you should investigate strategies to help protect your family from personal financial loss.

(b) Are you in a position to consider more advanced planning strategies, such as trusts, offshore accounts, family limited partnerships, etc.?

9. Consider Housing Expenses.

(a) How much should you spend on your home?

(b) What tax efficiencies should be considered?

(c) Will you be "house poor?"

10. Become Educated.

(a) Books: The top five percent of income earners in 2010 earned $159,619 or more. This top 5% pays 60% of the overall federal tax revenue for this country. When reading books published for the masses, review the information critically, and seek advice customized to your situation. We have found that for our clients, the information from most books about finances may not necessarily apply to their situations. The reason for this is our clients are part of the top 5% of income earners. As such, they have specialized needs such as tax-efficient wealth accumulation, asset protection/preservation, and future estate tax and distribution concerns.

(b) Other Resources: People seek advice from a variety of people. As with books, it is important to critically evaluate each person's level of expertise. If you were having major surgery, chances are you would have a variety of specialists involved. The key is each specialist contributing where their specific skill set lies.

(i) Financial Planner/Investment Adviser Representative—we will address this later in the book.

(ii) CPA—typically provides specific tax or tax planning advice.

(iii) Attorney—the area of focus could include Asset Protection, Contract Review, and Estate Planning.

(iv) Family Member—perhaps a member of your family has financial success (maybe not) and provides advice. Is it specific to you and your situation? Is it up to date?

(c) The Virtual Puzzle: Pictures and anecdotes often make information easier to understand. We prefer to integrate these illustrative means with calculations. Often, advisors simply run basic calculations. Although this is a good starting point, the problem with basic calculation is the resulting plan is linear, which is not representative of taxes, inflation, and investment returns. Your individual goals are like the many pieces of a puzzle; as your goals change, the various pieces change, and subsequently the overall picture, i.e. the plan will change.

11. Develop the Blueprint and Action Plan.

Once you have established your goals, it is time to develop the blueprint. This blueprint serves as the foundation upon which all planning is built; it illustrates how to achieve your desired outcome. There is a significant difference between a financial plan and real life planning. No life experience is straight-line. There are many obstacles and speed bumps along the way. As such, your plan must have commitment and flexibility. Think of the action plan as a to-do list. When items are accomplished we check them off. As changes occur, expected or not, we check those off later.

12. Initiate the 20% Guideline.

First of all, we are not fond of general rules of thumb. However, through the years, one question surfaced time and time again from our clients: "Can you give me a general rule of thumb of how much I need to save?" Keeping in mind the uniqueness of each client's situation, we developed the 20% Guideline. This general guideline for saving is saving 20% of your net (after taxes and retirement plan) income. We establish a goal for our clients to carve out 20% for their plan (Pay Yourself First) before they increase their standard of living in an effort to help them achieve their goals on time. We will cover this in another chapter.

13. Implement the plan.

Maintain flexibility within a baseline. Begin with monthly savings/ investing towards your goals: basic savings, portfolio development, college education funding, retirement, intergenerational planning, etc. Additional income is then applied to new goals or opportunities.

14. Monitor and Adjust the Plan.

Annual reviews facilitate communication about the changes in your goals, as well as family or work situations. In addition, it also presents an opportunity to determine whether adjustments to your financial plan or implemented strategies are appropriate.

Chapter Four

Budgeting

As mentioned previously, budgeting is a critical foundational element of successful planning. This being said, we thought it wise to provide two examples of budgeting. One is certainly more complex than the other so it's up to you to determine which one you wish to utilize.

We will start out with the simpler of the two.

The second illustration is a tad more detailed.

• First, review your credit/debit card statements for the past year. Make certain to include all expenses. This exercise will help eliminate the "sometimes things just come up" excuse while also identifying savings opportunities when you say, "I had no idea I spent this much on X."

• Secondly, think of your money as going into three buckets each month:

• The key to this approach (as is true with savings/investing in general) is to automate everything.

• Set up two checking accounts: one from which to pay bills, the other for day-to-day expenses. The key is to pay yourself a salary for the amount you commit to spending on a daily, weekly, etc. basis.

• This approach will help assure that you carve out a portion of income for goals, keep your expenses within the parameters of your goals, and also enjoy life.

Chapter Five

Planning Considerations

What are the top planning considerations while in training? In our opinion, there are three planning strategies to evaluate while in training: one is investment-related; the other two are risk management-related.

• Fund a Roth IRA.

You might say, "Why is it so important to fund a Roth IRA when I have such limited resources available to me?" The primary reasons are two-fold.

* You might not be able to utilize a Roth once you complete training because you will make too much money. "Too much money?!" Yes, once your income exceeds certain levels (as of the printing of this book the income limits for a single household are $110k AGI and for married couples $173k AGI to fully contribute), it's quite possible the only years you are able to contribute to this vehicle is while in training.

* The benefits of compound interest in a tax-free account are significant when considering long-term growth and future tax brackets. In subsequent chapters we discuss this in greater length. Suffice it to say, having money in a tax-free environment is very important.

* As an example, if you were thirty years old and contributed $5k/yr (paid monthly) for a four year residency, at age 60, if the monies grew at 8%, you would have $186k tax free. If you waited to access the money until age 70, you would have $414,442. Recently at a presentation one of the attendees asked, "Am I totally hosing myself by spending the money I have on fun stuff rather than funding a Roth IRA?" My comment was, "You decide." We did the quick math providing the outcomes. Now it's time for you to decide if you are "hosing" yourself.

(Continues...)

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