Data & Research December 2, 2015

Doctors Seem Financially Fit, But Fall Short

Nearly half of physicians believe they cannot afford to max out their workplace retirement savings plan.
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While the financial well-being of physicians may seem healthy on the surface, nearly half fall short of recommended retirement savings rates, according to data from Fidelity.

Many doctors appear to live financially comfortable lifestyles, yet their retirement savings are not all they should be. According to Fidelity Investments’ analysis of physicians’ workplace savings plans, doctors are saving on average a healthy 19.8% (employer and employee contributions). That’s a rise of nearly five percentage points from 15.3% in 2012. However, a more thorough examination of doctors’ retirement savings reveals where many fall short.

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Many aren’t saving enough for retirement: Despite strong average savings rates, nearly half (48%) of doctors surveyed are saving less than Fidelity’s recommended savings rate of 15% with an average of only 9%.

Almost half aren’t taking full advantage of retirement savings opportunities through their employer: 48% are not maxing out their contributions to a qualified workplace plan, such as a 403(b) retirement savings plan, a number that’s even higher for female physicians (58%) than their male counterparts (45%). More than two-thirds (71%) are not contributing to a non-qualified retirement plan, such as a 457(b).

Older and mid-career doctors are more likely to have a mix of investments that may not be appropriate for their age. Many pre-retirees (39%) are very aggressive in their equity allocation making their savings more susceptible to market fluctuations. At the same time, more than one-third of physicians in their 40s are too conservatively allocated, thus limiting their potential for growth during their longer-term savings horizon.

NEXT: More challenges for doctors

Why are there so many practitioners falling behind the positive financial progress of the “average” physician? According to Fidelity’s Money FIT Physicians Study, 45% of physicians feel they cannot afford to max out their workplace retirement plan.

Although doctors are among the most highly compensated professionals (Fidelity’s business data shows physicians earn an average of $300,000 per year annually), industry research reveals that 84% of medical students graduate with student debt averaging more than $176,000, with many also juggling expensive practice-related costs. Nearly two-thirds (61%) of physicians are at least a little confused about how to navigate their financial path for the future.

“While physicians are expected to be confident and knowledgeable about their medical specialty; that confidence doesn’t always extend to financial matters. In fact, most are looking for help from an expert when it comes to long-term financial planning,” says Alexandra Taussig, senior vice president, Fidelity Investments. “Health care employers can play an important role in addressing physicians’ financial health by actively promoting the opportunities to get guidance through their workplace retirement savings plan and encouraging annual financial checkups.”

The findings draw on research conducted online in 2014, which can be accessed on the Fidelity website, and are supplemented by analysis of 13,330 physicians’ workplace savings plans recordkept by Fidelity.

Client Service December 1, 2015

Advisers Called On to Consider Clients’ Cognitive Decline

Assistant professor at the University of Missouri suggests advisory clients’ decisionmaking is often impaired by cognitive decline—putting the impetus on advisers to watch for clients’ mental dips.
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Michael Guillemette, an assistant professor of personal financial planning in the University of Missouri’s College of Human Environmental Sciences, has published a new paper that should give financial advisers a moment’s pause.

The paper cites data from Pew Research to show there were 75.4 million Baby Boomers living in the United States, as of year-end 2014. As this generation continues to age, Guillemette says dialogue will necessarily have to increase between advisers and clients on how to manage concerns associated with aging, “such as the decline in cognitive ability and retirement decisions.”

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Guillemette’s research suggests older individuals with lower cognitive abilities “are susceptible to behavioral biases, such as being adverse to upfront costs.” He notes that risk aversion, along with lower cognitive ability among older Americans, might even explain the lack of demand for certain retirement savings products—especially those with a high up-front cost relative to the overall value of the product.

“Some financial products, such as annuities, have upfront costs,” Guillemette explains. “With a pure-life annuity, an individual will pay an upfront cost that is typically $50,000 or higher and in exchange will receive monthly payments for life. The risk associated with annuities comes from the uncertainty of death. If the full amount of the annuity is not paid out prior to the death of the recipient, the money is lost. In our study, an upfront cost caused people with lower cognitive abilities to shy away from future risky decisions.” (Also see “Income Planning Requires Annuity Know-How.”)

Guillemette says he has worked with co-authors Chris Browning and Patrick Payne, from Texas Tech University, to measure plan participants’ cognitive function by “evaluating respondents’ working memory and numeracy.” The analysis considered two hypothetical risky financial prospects, both with equivalent expected returns, but one situation included an upfront cost and the other had no upfront cost.

“Results from the study show that individuals with lower cognitive ability exposed to the perceived upfront cost were less willing to take subsequent risk,” Guillemette says. “Results from the study might help explain the low demand for annuity products among older Americans. The results might also explain why companies choose to break up upfront costs in order to increase sales. For example, a large phone company now has a program where you pay for the full cost of the phone over several years.”

The full study was published in Applied Economics Letters, and a short summary published by University of Missouri is here.

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