The Cascade Catastrophe Plan for Doctors: How to Tap Funds in an Emergency
By Katherine Vessenes, JD, CFP®, RFC
Some of our younger doctors have been fortunate—they haven’t had any real catastrophes in their lives. Our older doctors know something the younger ones don’t—things happen.
When it comes to a crisis, here are three large problems that you might encounter sometime during your career:
Disability: you are too sick or injured to work, so you have no income, and yet you still have bills to pay. Fortunately you can insure away this risk with disability insurance. We currently have four different clients who are either out on disability benefits now or have been. Fortunately, each was insured.
Pre-mature death of the breadwinner: your untimely death could leave your loved ones without a needed source of income. This risk can also be insured away with life insurance. Statistically this is less likely to happen. None of our doctors have died!
Job Loss: We have only had one doctor who didn’t have a job, a hospitalist in California. To be truthful, she really didn’t want to work, preferring the life of the princess since her husband was also a physician. Every other doctor we have, who suddenly became unemployed, found another job within 6 weeks. In every case—it was better: better pay, better conditions. Because physicians are in such high demand, even losing a job is not the disaster for doctors that it can be for other professionals. The key is to have enough funds to last during the transition.
Consequently, we usually recommend every doctor have easily accessed funds equal to three to five months fixed living expenses for an emergency/rainy day fund. Note this is not enough money for new furniture or a trip to Tahiti. It is enough to pay bills, mortgages, student loans, food, transportation and day care. The exact amount is up to you. It is how ever much you need to be able to sleep comfortably at night. Some doctors think $15,000 is enough. Others want $100,000.
Once you have an amount in mind, you need to think how to structure your savings to cover the short-term emergencies while you are still building wealth for the future. This is an interesting balancing act because funds designated for the distant future should get a higher return, because you are taking a higher risk. That means higher highs, but lower lows. Funds that you will need in the near future, should be invested more conservatively, so they won’t get the returns of your other investments, but they won’t have as much potential losses either.
I feel part of our job, as our doctors’ financial advisor, is to do worst-case scenario planning all the while building wealth for the future. Here’s what we suggest--every doctor should set up a series of accounts that can be tapped in an emergency. Each account is invested differently, with different levels of risk, to account for its purpose and how soon it is needed.
Step One: The emergency fund. This is an account at a bank. It is easily accessed and the money will be there when the doctor needs it. Currently the returns on these accounts are low. You will be lucky to a little over 1%, which doesn’t begin to keep up with inflation. We also suggest using plain old bank accounts as a place to park funds for bigger purchases you need to make within the next year.
This is the first stop in an emergency.
Step Two: The intermediate account (also known as the put and take account). These are funds are in a taxable, “non-qualified” brokerage account that are earmarked for a big purchase in the next two to eight years. It could be the down payment for the new house, the new car, college for the kids, a wedding, or big trip. We don’t include these funds in our calculations for retirement, because our doctors are going to spend this money, just not this year. My goal is to do better than the bank, or average about 2-3% per year. We won’t meet this goal every year, but we should over time. We use mostly bonds and some stocks. Doctors can access these accounts at any time. There are no surrender charges or penalties for pulling the money out.
We use this account, if we have been through the bank accounts and still need more money. We frequently call this the “back up” emergency fund, and it is particularly useful for doctors who feel most comfortable with large liquid sums at their disposal.
Step Three: The Wealth Accumulation Account (also known as the put and keep account). These funds are also invested in a taxable, “non-qualified” brokerage account. The difference is they are earmarked for retirement or financial independence, and as a result, we can take more risk with this money for those doctors who are still building their wealth. They are generally mostly stocks and some bonds, depending on the risk level of the doctor.
This is our third stop, if we still need more funds.
Step Four: The 401k/403b, retirement accounts. Most of our doctors can borrow up to 50% to a cap of $50,000 of their 401k or 403b accounts that they have with their current employer.
Once again, we would use these funds if necessary after depleting the other accounts.
Step Five: Roth Accounts or IRAs. We only use these if it is absolutely necessary as there is a 10% penalty and ordinary income tax on the gain, if funds are withdrawn before age 59 ½ in most cases. Doctors over that age will just have to pay the income tax. There are some exceptions if you are pulling out funds out of a Roth IRA depending on your unique situation.
This is the source of last resort due to the tax penalties.
So, as you are planning for your future, you should also plan for catastrophes.
©2019 Katherine Vessenes. No reprints without permission
Katherine Vessenes, is the founder and CEO of MD Financial Advisors who serve 500 doctors from Hawaii to Cape Cod. An award-winning Financial Advisor, Attorney, Certified Financial Planner®, Registered Financial Consultant, author and speaker, she is devoted to bringing ethical, fiduciary advice to physicians and dentists. She can be reached at Katherine@mdfinancialadvisors.com. www.mdfinancialadvisors.com