Physicians Need a Financial Check-Up

Even with stronger earnings and savings rates than the general working population, an analysis from Fidelity Investments shows many physicians face the prospect of steeply reduced income in retirement.

While physicians rank among the most highly compensated professionals, with an average annual salary of $299,000, many are not on track to support a financially secure lifestyle in retirement, according to a new report from Fidelity Investments. The report analyzes the retirement savings behaviors of some 5,100 physicians and 95,500 other health care professionals using proprietary Fidelity data, and finds the retirement outlook for doctors is surprisingly bleak in terms of traditional readiness measures, especially income replacement ratios.

The findings challenge the assumption that because physicians earn high average salaries, they should be financially prepared to retire in comfort. In reality, based on Fidelity’s analysis, physicians are on track to replace only 56% of their income in retirement, considerably lower than the income replacement rate of 71% Fidelity suggests for those earning more than $120,000 annually. The lower percentage, Fidelity explains, could force significant lifestyle changes for doctors late in life.

Fidelity researchers say the 15% income replacement shortfall is attributable to a number of factors limiting physicians’ ability to save more for retirement, such as a shorter savings horizon, since doctors often don’t begin careers until their 30s. And many physicians carry substantial student loan debt from undergraduate and medical school, which interferes with early-career savings efforts, when dollars have the most time to grow before retirement.

When it comes to investing behaviors, the report finds younger physicians are demonstrating age-appropriate asset allocations in defined contribution (DC) retirement plans, while their older peers appear to be investing too aggressively and leaving critical savings exposed to market volatility.

Other findings suggest Internal Revenue Service-mandated contribution limits for tax-deferred retirement accounts are also holding back physicians from saving more. This implies a need for increased access for physicians to non-qualified (i.e., non-tax-deferred) retirement plans, Fidelity says.

The report does reveal some good news for doctors. Physicians’ average total savings rate, from both employer and employee contributions, is quite healthy, at 14.9% of annual salary. Not surprisingly, older physicians are saving more than their younger peers, with those age 60 to 64 saving 16.3% on average, compared to younger physicians, age 30 to 39, who are saving 13.1%.

Fidelity points out that, because of their high salaries, physicians are likely to receive lower Social Security benefits than other segments of the U.S. labor force, suggesting they should consider saving more than those who earn less.

Rick Mitchell, an executive vice president for tax-exempt retirement services, says Fidelity’s latest analysis reveals that physicians are not as financially prepared for retirement as one might think. He says the results are a clear indication that physicians need more financial guidance.

The analysis suggests physicians and other employees with higher salaries generally need to save at an even higher rate than other workers—15% or more in most cases—as Social Security benefits cover less of their income needs in retirement. In fact, according to the Fidelity report, Social Security benefits for physicians ages 60 to 67 are projected to account for a much smaller portion of retirement income (12%) than non-physician health care professionals covered in the analysis who are in the same age range and average $60,000 in annual salary (30%).

Fidelity says this means physicians need to consider ways to save more. To start, physicians should save up to the IRS limits, which allow employees to contribute up to $17,500 for those younger than 50 years old and $23,000 for those over 50 in their qualified workplace retirement plans. Surprisingly, Fidelity says many physicians are not maximizing this savings opportunity, with 60% of physicians under 50 years old and 30% of those age 50 and older not saving up to these limits last year.

And even for physicians saving up to the IRS cap, savings challenges remain given their salary levels, as these physicians cannot contribute 15% or more of their annual salaries without reaching the limit. To address this, Fidelity says plan sponsors and advisers should consider offering alternative saving plans, such as a non-qualified 457(b) plan, to help physicians increase retirement savings.

Best Practices to Help Improve Physicians' Retirement Readiness

To assist in improving retirement readiness, the report offers a list of best practices for sponsors and advisers working with physician participants to consider. Fidelity says physicians can improve their retirement outlook by doing the following:

  • Save up to the 402(g) limit of $17,500 (and $23,000 for those 50+) in 2014 in qualified retirement savings plans, and maximize Health Savings Accounts (HSAs) if the plan offers them;
  • Take advantage of other savings vehicles, such as non-qualified DC savings plans, IRAs, tax-deferred annuities and brokerage accounts; 
  • Target a total retirement savings rate of 15% or more annually; and
  • Seek professional guidance to develop savings rates goals, ensure asset allocation is age-appropriate and create a retirement income plan.

Best practices for employers to help physicians in the workplace include the following:

  • Use plan analytics to assess the retirement readiness of both physician and non-physician populations, and adjust the retirement program design accordingly; 
  • Provide additional retirement savings opportunities for physicians, such as a non-qualified 457(b) plan, which are widely used in the nonprofit health care sector; and
  • Provide physicians with one-on-one guidance outlining opportunities for increasing savings and allocating their assets. 

Fidelity also urges employers to define key metrics to measure progress, including percentage of physicians with total savings rate of 15% or more, percentage of physicians with age-based asset allocation, and income replacement rates for physicians and non-physicians.