As a locum tenens physician, things are slightly different on the financial planning side compared to your colleagues in academic medicine or private practice. An expert in this field, Chad Chubb, CFP, CSLP—founder and lead advisor at WealthKeel—contributed the following post to the OnCall Solutions blog to help provide insight.
Sure, you have to do more things on your own now regarding your financial planning, but truthfully, this position can be financially advantageous for physicians. In this post, we will take some time to dig into two vital topics for you to focus on as a locum physician.
While it might sound complicated, you can find yourself better off by taking your financial future into your own hands with a locum position. By the end of this post, you will have the insight you need to take your financial plan bull by the horns!
You may be wondering why we would start with insurance. To help you feel comfortable with everything you are about to read, I will mention that we don't sell any products or insurance—and we are listed as a top-10 advisor in the country by Dr. Dahle. I start with insurance because what would happen to you or your family if you could not earn an income tomorrow? It would be pretty bad, possibly devastating for locum tenens physicians.
Let's take a few minutes to review the most common three insurances for locums: disability insurance, term life insurance, and umbrella insurance.
Without a doubt, if you are sitting there without any disability insurance, you need to stop reading and contact an independent agent to get a policy application submitted as soon as possible. (If their company's initials are NWM, you need to run and get a 2nd opinion.)
Pro-Tip: If you have any medical conditions, discuss them with the agent/broker before you apply for disability insurance as a locum tenens physician. The last thing you want is an official decline in your records.
Additional Pro-Tip: If you are reading this and still in training, ask your HR Department if you have access to a policy called a "GSI," which stands for Guaranteed Standard Issue. The main benefit is it involves no underwriting, so if you have some medical items, this may be your only chance to lock in a great deal and policy. Also, if you are a female, this may be your only chance to lock in a "unisex" rate, which will save you A LOT of money now and in the future (like a lot!).
Disability insurance for locum tenens physicians is a bit complicated because the fine print is vital—and your state, your specialty, your sex, your health, and other items can all dramatically affect the policy.
Larry Keller (listed on the WCI page) was nice enough to write a guest post for our blog last year, and he did a great job covering all the details. I won't duplicate the info here, but here is the link if you want to read more.
Emphasis on the word "term," Sure, your 2nd cousin who sells insurance will tell you permanent life insurance is the best thing since sliced bread, but don't take the bait. Instead, buy term and invest the rest. I could stop here, but let's add a few more details.
If you have a family or someone who relies on your income or cosigned on your student loans, I can likely make a case on why you need life insurance. When I speak with resident programs, I tell them that $3,000,000 - $4,000,000 in term life insurance should not catch you off guard. I have built hundreds of plans for physicians—and that is a common range. Heck, we see higher often as well. Your individual circumstances are essential here, but I am just trying to provide some guide rails.
If none of those three scenarios apply to you, then sure, you may be able to punt on the life insurance topic for now.
As a doctor, you have an extra target on your back. Heaven forbid you are to hurt someone with your car, or someone gets injured on your property—they will likely sue. And any decent attorney will quickly find out that you are a doctor, and then the dollar signs appear in their eyes.
An umbrella policy is the easiest (and very affordable) way to protect yourself. An umbrella policy will add extra liability insurance on your car and home (renter or homeowner). We suggest starting with $1,000,000 and increasing to always match your net worth (round up). The good news is that this coverage is low-cost; on average, you are looking to pay $250 - $300 per YEAR for a $1,000,000 policy. Now, this will vary based on you, your history, and your state, but that should be a "fair estimate" for most.
We can't cover it all, but here are a few bonus topics on risk management & asset protection for physicians in links to other posts from us:
We are fortunate to work with many locum docs, and this seems to be one of the more frustrating topics when they first come to us. They are so overwhelmed that they have done nothing to save for retirement—or they may have opened the "wrong" accounts. I use the quotes because while they are still saving, they may not be optimizing their savings.
We will discuss three accounts that locum tenens physicians should be familiar with.
First up is the one we don't want to see. However, if you have this account, don't worry. The SEP-IRA is ubiquitous for 1099 earners. The problem is the SEP IRA ruins the Backdoor Roth IRA from something we call the pro-rata rule. Essentially, to complete a Backdoor Roth IRA cleanly, you can not have ANY balance in an IRA, SEP IRA, or Simple IRA.
If you have a SEP IRA, you can easily convert it (rollover) to a Solo-K. What is a Solo-K? Well, keep reading.
Our favorite account for 1099 earners! It is sometimes called an individual-k, solo-k, and even a Keogh Plan. Whatever the name, it is an excellent retirement account for 1099 earners.
The solo-k operates similarly to 401ks provided by employers, except they are designed for businesses with no employees (besides the owner's spouse).
In 2022, these accounts allow you to save up to $20,500 ($27,000 if age 50 or older) in "employee" contributions, just as a standard 401k would. In addition, since you are technically both the employee and employer, you can make a further "employer" contribution. As of 2022, your contribution can equal 20% of your net income, up to $61,000—this maximum includes the employee and employer contributions.
You can also set up your solo 401k to allow for Roth contributions for your employee contributions—the employer portion will always be pre-tax. However, given your significant income as a locum tenens physician, usually, we would favor the pre-tax contributions.
In defense of the SEP IRA, you can also save $61,000 (2022) to that account, but the major downside is that it blocks one of our favorite strategies in the Backdoor Roth IRA.
To this day, I am still a bit shocked as to why we see so many SEP IRAs for physicians. My best guess is that:
You get bonus points if you have heard of a cash balance plan (CBP)! A CBP is a defined benefit plan, whereas a 401k is a defined contribution plan. There are many defined benefits plans, but CBP is the most common we see and use with our clients.
In full disclosure, you will want to be earning some serious income before starting a CBP. You should be maxing out the Solo-K for $61,000 (2022), your Backdoor Roth IRA for $6,000 (2022, under age 50), and likely saving a good amount to a taxable account. If you check these boxes and still have excess funds to invest, a CBP may be your new best friend.
Cash balance plans are built out over ten years. So in a perfect world, you are timing this with your ten highest earning years (or highest tax years, but good luck predicting those rates).
This gem has the advantage of being able to make significantly higher pre-tax contributions. These contributions can range from $100,000 to $200,000 per year. Here is one of our favorite calculators from July Business Services.
For example, here are a few numbers for a physician in the early 30s making $500,000/year. They are estimating that between a 401k with profit sharing and a cash balance plan, this physician can save $162,883 per year (pre-tax!).
We can't cover every financial consideration in a single post, but we can offer a few bonus topics on retirement savings in the following links to other posts from WealthKeel:
Here are two other posts that we wrote for our locum physicians that add more context to the above topics:
Yes, as a locum tenens physician or hospitalist, you are a business owner, which undoubtedly comes with its own advantages and disadvantages. However, from a financial planning perspective, we think it gives you much more flexibility and the ability to save even more for your longer-term goals. You are in a beautiful spot; enjoy every moment and take full advantage of your opportunities!
Written by Chad Chubb, CFP, CSLP
Founder and lead advisor