The Most Important Elements of Your Financial Plan

As authors of seven books for physicians, we have consulted with thousands of doctors, including many dermatologists, during our combined 35-plus years in practice. From this experience, we have become intimately familiar with how most physicians build their financial plans (what we call “wealth plans”). Too often, they have ignored the most important factor in a sophisticated long-term plan—flexibility.

Because so much of life doesn't work out exactly to plan, it would seem obvious that flexibility should be fundamental to a wealth plan. This is especially so in the financial arena, since many factors that may make the difference between hitting your financial goals or not are beyond your control.

In this two-part article, we will examine the important factors for which your wealth plan must provide flexibility. Let's examine the first two factors in this first part.

1. CHANGES IN INCOME/CASH FLOW

Dermatologists may see their income fluctuate significantly based on a number of factors. For those whose practice is primarily paid by Medicare or insurers, cuts in reimbursements can have a tremendous impact on the bottom line. For those who primarily practice cosmetic dermatology, the state of the economy is the key driver—recessions mean fewer dollars patients can spend on cosmetic medicine.

How do you incorporate income/cash flow flexibility into a wealth plan? By living below your means and prioritizing saving each month, quarter, and year. These two elements may combine to position you to weather any temporary or even long-term hits to income/ cash flow.

Another important tactic here is to implement savings vehicles that allow for uneven funding/investments. As an example, in the qualified retirement plan (QRP) arena, this might mean using defined contribution plans that allow flexibility in contributions each year—as opposed to a defined benefit plan that can require a certain level of funding or cause underfunding penalties. Even more relevant would be to utilize “hybrid” or fringe benefit plans that may allow much higher contributions than defined contribution plans when income is high but can actually be skipped entirely in years where income wanes.

Another example here would be in the asset class of permanent life insurance; one that has the benefit of taxdeferred growth and top asset protection in many states. Here, funding flexibility would favor a “universal life” type policy, where, as above, funding is flexible year-to-year, over a “whole life” type policy, where funding must occur each year.

62 PRACTICAL DERMATOLOGY AUGUST 2014 2. CHANGES IN TAX RATES

Right behind the number one factor of cash flow/income, the number two planning element that one should build flexibility around is taxes. Since 2013, many dermatologists pay a top marginal tax rate of more than 50 percent, when federal and state incomes taxes, as well as self-employment taxes are considered. This doesn't include capital gains taxes, dividend taxes, or local property or sales taxes.

Examining these charts, it seems quite possible that we could see tax rates continue to rise even more. If they even return to mean rates of the 20th century, we will experience a sharp increase in tax rates. Thus, it makes sense to build in flexibility for this possibility.

At our firm, we approach this through a process of “tax diversification.” While most firms focus only on asset class diversification in the context of investing, we believe it is crucial to layer on top of this focus a concentration to diversify a client's wealth to tax rate exposure.

As an example, we might look at a client's qualified retirement plan (QRP) assets as those that are subject to future income tax increases, since, to get access to QRP funds; you have to pay ordinary income taxes. Further, most personallyowned assets are subject to future capital gains tax increases; from securities to real estate to closely held business interests to commodities or artwork. As capital gains tax rates increase, the value of these assets decline, at least in terms of how they might assist you in retirement.

Applying a “diversification” approach, we find that most physicians are inadequately invested in asset classes or structures that are immune to future income or capital gains tax increases. Whether these options are in the form of cash value life insurance, tax-free municipal bonds, ROTH IRAs or others, they should be part of every doctor's wealth plan. Bottom line, you need to have flexibility against the possibility that tax rates increase, especially if those increases are significant.

CONCLUSION

Because risk and uncertainty are prevalent over the long term, flexibility is a crucial element of a conservative, yet creative, wealth plan. In this article, we looked at two key elements around which any plan should build flexibility; changes in income and fluid tax rates. In part two of this article, we will examine three additional elements: changes in the “market,” in liability, and in health.

For a free hardcopy of For Doctors Only: A Guide to Working Less & Building More, please call (877) 656-4362. If you would like a shorter free Kindle, iBooks, or Nook ebook download of our “highlights” version, you can download it at (http://www.fordoctorsonlyhighlights. com)

David B. Mandell, JD, MBA, is an attorney and author of five national books for doctors, including FOR DOCTORS Only: A Guide to Working Less & Building More, as well a number of state books. He is a principal of the financial consulting firm OJM Group (www.ojmgroup.com) along with Jason M. O'Dell, MS, CWM, who is also a principal and author. They can be reached at 877-656-4362 or mandell@ojmgroup.com.

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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein..