Many young orthopedic surgeons, fellows and residents look at their financial situation and don’t think of themselves as owning any significant assets. This may be understandable, as most young orthopedic surgeons have low income during their training years and, even when having higher incomes once they are in practice, may be saddled with significant debt from student loans. Nonetheless, the fact is that millennial orthopedists all have a valuable asset they must recognize and protect, which is their ability to practice medicine in their specialty and the potential future income this will generate.
In our initial column, we focus on protecting such a valuable asset. In medical training, young physicians hear the adage, “First, do no harm.” Our analogy is, when it comes to a long-term financial life, “First, protect what you have.”
Asset: Present value of future income
In the financial world, there is a concept of “present value of future cash streams,” which is ubiquitous, applying to valuation of stocks, bonds, loans and other income sources. Essentially, assuming some interest rate, one can calculate a present value of a stream of future cash flows. Applying that concept to a young orthopedic surgeon’s lifetime income stream, it quickly becomes apparent that many millennial orthopedists are “present value” millionaires and should plan accordingly.
For example, let’s assume an orthopedic surgeon has a starting salary of $300,000, including benefits. If this surgeon plans on practicing for 30 years, the present value of this annual income is $5,517,613, even if that surgeon never makes more than $300,000 per year, including inflation. An asset this valuable is worth protecting.
Risk to present value
Disability income insurance is conceptually straightforward; if the insured physician becomes disabled, the policy will pay the disabled physician. For millennial orthopedists (and physicians into their 50s, typically), this protection is critical because they have not accumulated the savings to support themselves and their families in case they cannot work as an orthopedist.
When considering purchasing individual disability income insurance, orthopedists must determine what their true need is, not how much coverage they can get. Unfortunately, many orthopedic residents, fellows and young orthopedic surgeons over-insure themselves. If your expenses are $3,000/month, but an insurance agent says you can get $5,000/month of coverage, you are over-insuring yourself if you purchase a policy with that coverage. Although having more coverage than is needed is not always wrong, it is more important to control expenses to build the proper budget.
Surgeons will want to make sure they are purchasing the right type of coverage. The definition of disability should be occupation-specific so a physician who is unable to practice medicine can receive benefits even if he or she is able to work in another profession. Another important part of the disability insurance contract is a residual or partial disability rider, which provides coverage if the physician suffers a partial disability or illness, but can still work part-time in his or her occupation. Typically, there must be an income loss of 20% or more for this rider to take effect. In the event of a long-term disability, having a cost-of-living rider as protection against inflation is also important.
Millennial orthopedic surgeons should beware of group disability insurance available through their employers. Often, group insurance is not occupation-specific, has short benefit periods, does not have a partial or inflation protection rider, and can be cancelled at any time. While that is not the case with all such policies and employers, group insurance is generally inadequate for a young physician and should be supplemented with personal coverage.
Focus on dependents
Millennial orthopedic surgeons with financial dependents — typically, children or spouses, but sometimes other family members — should also focus on protecting their future income value against death.
Much like disability income insurance, first determine your death benefit needed to ensure you are being cost-efficient. What expenses would need to be covered in the event of your death? A mortgage, education funding for children, spousal income support and car loans are among expenses that may need to be covered.
Young surgeons, fellows and residents who need to purchase life insurance should probably consider term insurance as their best option. Term insurance is inexpensive and provides a death benefit for a period of time (10, 20 or 30 years). It is just one type of life insurance and it is generally best for a young physician with a specific coverage need.
Permanent life insurance, called “cash value insurance,” with products like “whole life,” “universal life” and others, can be attractive to millennial orthopedists seeking a tax efficient means of saving that provides growth and distributions that are tax-free. For these reasons, permanent insurance is often selected, even by young physicians, as a wealth accumulation and protection tool. We will address this tool further in upcoming articles.
At the outset of their medical careers, physicians in training are told, “First, do no harm.” This article applies that concept to the financial life of millennial orthopedic surgeons and focuses on the asset of future income.
Wealth Protection Planning for Orthopaedic Surgeons or Wealth Management Made Simple are available free in print or by e-book download by texting OT19 to 555-888 or at www.ojmbookstore.com. Enter code OT19.
For more information:
Sanjeev Bhatia, MD, an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Illinois, can be reached at email: firstname.lastname@example.org.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com. You should seek professional tax and legal advice before implementing any strategy discussed herein. He can be reached at email@example.com or 877-656-4362.