Table of Contents
August 10, 2023
4 min read
The Greek philosopher Heraclitus is quoted as saying, “the only constant in life is change.”
Recognizing this adage, physicians should consider prioritizing flexibility in their long-range financial planning — as flexibility will allow them to adapt to changes over time and make it more likely that financial goals can be successfully achieved. In fact, there are five key planning factors that can be significantly impacted by change and, therefore, require built-in flexibility.
Income and cash flow
Because few of us can accurately predict our incomes for the near and long-term future, flexibility must be part of retirement planning. How can individuals incorporate income and cash flow in their planning? Living below one’s means and prioritizing saving (each month, quarter and year) can be fundamental to weathering any temporary or even long-term hits to income and cash flow.
David B. Mandell
Another tactic is the implementation of a savings vehicle that allows uneven funding from year to year. In the area of qualified retirement plans (QRPs), one example would be a defined contribution plan that allows flexibility in the amount of each individual’s annual investment. This is in contrast to defined benefit plans, which require a certain level of funding and can entail underfunding penalties. More relevant still are nonqualified plans, which allow for contributions that are much higher than defined plans when an individual’s income is high but can be skipped entirely during years in which income wanes.
Another asset class that allows flexibility is certain types of permanent life insurance. For example, a universal life policy offers the benefits of flexible funding from year to year, tax-deferred growth, and asset protection.
Significant changes to the tax code in recent years underscore the importance of flexibility in retirement planning. Taxes will continue to change, and tax rates may look very different in 3, 5, 10, 20 or 30 years. A tax diversification approach can help alleviate potential issues. While many financial planners advocate diversification of asset classes among investments, it is equally essential to diversify the tax rate exposure to one’s wealth.
When we look at investment plans from the perspective of tax diversification, we see that most investors have inadequate investments in asset classes or structures that will be immune to future increases in income or capital gains taxes. Assets such as permanent life insurance, tax-free municipal bonds, Roth IRAs and other vehicles should be part of any wealth-building plan.
The bottom line is that individuals need to have enough flexibility to be prepared for the possibility of tax rate changes, for better or worse, during their investment timelines.
In this context, market means more than the small sample of the stock market in the United States that is represented by the Dow Jones Industrial Average or even the S&P 500 index. There is volatility in all securities, commodities, real estate, and other asset marketplaces domestically and globally. Values in all classes often go up, but they also come back down.
Savvy investors understand that portfolio diversification is key to reducing portfolio risk. Rather than staying within a specific area, such as securities or real estate, diversification must cross investment classes, especially in a volatile market. A balance of asset classes — international and domestic, traded and untraded, correlated to markets and noncorrelated — constitutes a flexible long-term approach.
This concept also applies to how a financial plan relies on inflation assumptions, as inflation is also a dynamic variable and a crucial one for retirement planning.
Any planning designed to shield wealth from a legal claimant, creditor or even a soon-to-be-former spouse is typically not effective if it is implemented only when the threat becomes reasonably foreseeable. In other words, asset protection planning must be put into place before there is a problem. The challenge is that the physician often wants to maintain ownership of, control of, and access to his or her assets at times when there is no looming liability threat.
Fortunately, with comprehensive asset protection planning, utilizing exempt assets, legal tools, insurances and proper ownership forms, these goals can typically be accomplished. Individuals can generally build flexibility into financial plans using tools that protect wealth if and when there are liability threats but still allow ownership, control and access to that wealth when the coast is clear.
Health is one of the most important elements in planning. At one extreme, being in good health is a blessing that allows individuals to be more productive, to create more wealth and to enjoy it. At the other extreme, poor health can keep individuals from earning a living and even lead to premature death, which can have a devastating economic impact on the surviving family. Because of this, it is imperative that a conservative wealth plan considers potential changes in health.
Both disability and life insurance are essential to achieving that objective. Securing the proper insurances protects an individual’s ability to earn, with options that provide a regular income stream in the event of disability and offer financial protection to heirs in the event of death.
There is a broad scope of disability and life insurance products available to physicians. A professional advisor — along with a comprehensive financial plan — can help to ensure that adequate coverage is obtained, based on the physician’s income, debt, assets, family situation, tax rate, state of residency and goals.
No one can accurately predict future tax rates, the performance of the market, or one’s income and health. For this reason, building flexibility into a financial plan to account for changes in all of these important factors is essential.
Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com. He can be reached at 877-656-4362 or [email protected].