When it comes to financial planning, professionals such as doctors are sometimes at a disadvantage where extended study periods and student loans delay their ability to save. Here’s how to figure out their needs.
For doctors who specialise, total duration of studying often exceeds 10 years. In some cases, this can be offset by enhanced earning potential, but it isn’t always the case. As an intermediary, it’s helpful to understand their savings challenges to help them get back on track.
Most young doctors tend to have a late start to retirement savings. During their first 10 years of practising medicine – when the power of compound investment growth has the biggest impact on retirement accounts – they’re often saddled with student loan payments, childcare expenses, mortgage loan payments or new practice expenditure, which makes it challenging to save. The result is that they need to invest much more, later on.
Public vs private sector doctors
Different considerations apply for doctors in the public versus those in the private sector. Public sector medical practitioners earn a fixed income, work set hours and are members of the Government Employee Pension Fund (GEPF). From the first month of employment, they can start building up their savings.
In the private sector, the doctor’s income doesn’t go into their pocket, as one might think. Any earnings have to cover the business expenses (office premises, staff and equipment), medico-legal cover and retirement funding – as he or she has no pension fund – which will require significant investments.
Doctors starting a practice
It isn’t uncommon for some healthcare professionals to lose money until a strong patient base and steady referral network are established. Practitioners who plan well, secure appropriate funding and can adapt to the fluctuating climate of the healthcare sector, stand a better chance of making a success of their businesses.
Some doctors who successfully start a practice follow the ‘1 000 day in business’ rule. If starting a profitable practice is a long-term goal, they’ll need to have a savings plan in place to save enough to sustain the business for 1 000 days. If it’s not profitable at that point, they might need to reconsider.
A holistic plan
If your client earns more than R1,27 million a year, they can contribute the maximum amount of R350 000 to their RA, which saves them R157 000 in tax per annum. This is the optimal scenario. But what if they haven’t saved enough and are approaching the age of 50 with no retirement savings? They’ll need to start maximising their contributions. Additionally, they may need to look for ways to keep working past 65.
Successional planning is also important. If your client is handing over a practice, they need to groom someone to take over, get familiar with their client base years before the handover, and buy into the value of the business, which will give them more money to contribute to retirement savings.
Also, while savings are important, they’d be well advised to look at their financial plan holistically, taking into consideration different elements, for example, their need for life cover, income protection and lump sum disability cover – since the loss of the ability to earn an income is the single biggest risk a young person faces.
So if your client is time-starved and has delayed saving due to factors beyond their control, it’s worth taking a moment to give them a little extra TLC – because catching up on lost time is extremely difficult.