After years of self-sacrificial training and education, new physicians can find the sudden emergence of significant income a refreshing change of pace. But if that unfamiliar joie de vivre isn’t tethered to other financial realities — such as the truckload of education-related IOUs idling in the driveway — it can foster budget-smashing purchases.
One of many early decisions it’s important to get right is how much house to buy, according to Michael D. Paulus, CFP, CLU, ChFC, a financial adviser with Minneapolis-based North Star Resource Group.
Blogging for MD Magazine, Paulus urges new physicians to set aside a minimum 20 percent of their gross income for purposes such as paying down any debt with an interest rate greater than 8 percent. Achieving that benchmark is virtually impossible for a physician saddled with an outsize mortgage. A sensible mortgage is one-and-a-half to two times one’s total household income, Paulus writes, though physicians with high student loan debt should exercise greater caution.
In addition, physicians who are new to a community might want to delay buying a home until they are sure they are a good fit in their new positions. Having to sell a home soon after purchasing it is costly, Paulus points out.
“There is a lot of value in renting for six to 12 months while joining a new practice,” he writes. “You want to be sure that you can see yourself in the position long-term, and that your spouse/children are happy in the area.”
Passing the Practice Torch
When it comes to transitioning into retirement, failing to plan is planning to fail — in grand fashion.
Without a carefully defined strategy, even a successful practice may simply fade out, Tammara Plankers, Client Practice Services Manager for Wells Fargo Practice Finance, explained in a recent article in AMA Wire.
“When you don’t have an exit strategy, the practice can just start waning,” Plankers says. “Or sometimes an owner may get into a situation where they’re no longer effective or interested.”
Physicians should start mapping out a plan at least three years before they intend to retire, she urges, noting some factors that are key to those deliberations.
- Figure out the appropriate path to transitioning your practice. Selling all your assets has the benefit of ending your risk in the investment. But you might consider retaining the hard assets — such as the property and the facility — to provide continued income. You also may want to sell your interest in the practice to one of your associates, facilitating a smooth transition for patients and staff.
- Decide what kind of buyer you want. While selling to a hospital group is common these days, there are still quite a few solo practitioners looking to expand.
- Maintain a solid practice, including a strong patient base and upgraded equipment. A buyer will find the purchase more attractive if he or she can start earning income promptly upon taking the reins. That’s easier with a well-maintained practice.