I recently partnered with Doximity Careers and Curative (a Doximity company where doctors can find their next long-term or local locum tenens opportunity) to produce a series of six blog posts on the Doximity Blog that are all about the financial ramifications of Locum Tenens work. We decided to compile them all into one big blog post here for your convenience. Click on the hyperlink below to go directly to each section.
- Why Would a Doctor Consider Locum Tenens
- Getting the Locum Contract Right
- Choosing a Business Structure as a Locums Physician
- Retirement Accounts for Locum Tenens
- Insure Only Against Financial Catastrophes
- Building Wealth as a Physician
#1 Why Would a Doctor Consider Locum Tenens?
Traditionally, few doctors knew much about locum tenens work and even fewer gave it any serious consideration as an option in their career. More recent generations have different views about their lives and careers, leading to a resurgence in locum tenens as an option for part or even all of a career. In all career fields, newer generations are far less likely to work for a single employer their entire career. They are more likely to rent their home than prior generations and are far more interested in achieving a nice work-life balance rather than climbing the corporate ladder. People are also more interested in travel and seeing different parts of the world. Medicine is not immune to these trends and locum tenens is at their forefront.
What is Locum Tenens?
Locum tenens is a Latin phrase meaning “to hold a place”. In medicine, a locum tenens physician is a temporary worker, who fills a place in a clinic or hospital for a period ranging from a few days to six months or more. These doctors serve a critical function in our health care system. There are communities and locations with critical medical needs that struggle to attract doctors as long-term residents. Even when they can attract doctors, those doctors often find themselves in a position where they are on call 24/7/365 and may not be able to take a real vacation for years. Locum tenens doctors are able to step in to provide a bit of respite for these doctors, allowing them to avoid burnout, obtain continuing medical education, and take a well-earned break.
The service provided by the locum tenens doctors is not simply a charitable pursuit. These exchanges are a win-win for all sides. The community and employer obtains a well-trained, motivated doctor who is willing to work hard and bring in expertise that could not necessarily be obtained by a doctor solely practicing in that community. The long-term doctor, if any, receives the support that allows her to maintain the position in the long run. The locum tenens doctor receives a great salary, unusually good benefits, a change of pace from their usual practice, and the opportunity to “try out” a new place to live. Locum tenens positions can range from a small town an hour away to more exotic locales like Alaska, Hawaii, or New Zealand.
The Many Benefits of Locum Tenens
Due to the difficulty of finding a long-term doctor for a position, employers generally have to pay locum tenens doctors very well. This higher income allows doctors to achieve their financial goals more quickly, whether that is to pay off their student loans, reach financial independence, or save up a down payment on a dream house. The position also generally covers substantial living expenses, including travel costs, a place to stay in the new town, and even a stipend for food. Credentialing and licensing costs are also frequently covered.
Different doctors consider locum tenens for different reasons. Some simply want a change of pace. The locum job allows them to do different procedures or see different pathology or a different population than their main job. It allows them to remember why they fell in love with medicine in the first place. They cherish the opportunity to see how a different clinic or hospital runs and return to their long-term job with renewed vigor and a few new tricks up their sleeve. Others are attracted by the travel aspect of the job. A locum gig allows them to see a new state or even country. Still others do it primarily for financial reasons. They exchange some of their vacation or sabbatical time for additional income.
Doctors approaching retirement may find locum tenens work particularly appealing. It may provide them the ability to dictate their schedule, allowing them to do part-time work, avoid call, or avoid working at night, on weekends, or holidays. Doctors at the beginning of their career will appreciate other benefits. For example, a doctor may work a half dozen or more locum gigs in order to find out what kind of practice she wants long-term. Many heavily indebted new doctors choose locum as an initial career due to the financial benefits. With no permanent home and stipends covering most of their living expenses, their higher income and lower expenses can allow them to pay off student loans and build wealth very quickly, especially if they continue to work anywhere near as hard as they did as a resident or fellow. “Living like a resident” for a few years after training will always be the key to building wealth as a doctor, and this is far easier to do as a locum doc than once you settle into a permanent position.
Additional benefits of locum work include getting away from office politics. As the “short-term” person, nobody is going to feel threatened by you. You will not have to serve on any hospital committees or go to partnership meetings. You will not have to hire, fire, discipline, or train the office staff. You can concentrate on your patients and the medicine you love without having to run a business. Many doctors find new long-term positions that started as locum tenens work. Most facilities who hire locum docs hire them serially. If you like the position, you can often stay as long as you want, and since you already know how much it is costing them to fund a revolving door of doctors, you can also negotiate a very good package that will allow administrators to focus on a different problem and you to make a great living.
Practicing as a locum tenens doctor is a great career option, whether you do it part-time or full-time, for part of your career or your entire career, close to home or on the other side of the planet. In the remainder of this series, I will discuss important financial considerations for locum tenens doctors, ranging from contracts to business structures to retirement plans. Done properly, locum work can provide a huge boost to your financial situation.
#2 Getting the Locum Contract Right
A locum tenens contract might be for a relatively short period of time, but it is still an important legal contract that you need to understand when you sign. Dealing with locum tenens contracts is actually easier than with a typical physician contract. Due to the shorter time period, you are likely to have the opportunity to see more contracts and negotiate much more often than a typical physician. That additional experience is valuable in knowing what a typical contract looks like and what possibilities there are for negotiation. Nevertheless, at least for your first contract or two, I recommend you have it reviewed by either legal counsel in the state where you will be practicing or by a national physician contract review service.
The review itself serves four purposes.
- The first is simply education. It will help you to know what the contract says.
- Identify problems and red flags in the contract. These can be items that are in the contract or items that are not in the contract but should be. These will need to be changed or clarified during the negotiation process.
- Make suggestions where negotiation may be possible.
- Finally, a contract review is often paired with physician compensation data and can let you know how competitive an offer is and help you to know what you are worth.
A Typical Physician Contract Has Three Main Components
#1 Job Description
The first component is a description of the job that you will do. The more specific, the better. Ideally, it will dictate where you will work, how many hours a day you will work, how many days a week you will work, how many patients you will see, what kind of breaks you will get, and how much call you will take.
While this section of the contract will vary by specialty, it is important to know what the expectations of the employer will be. Conflicts arise when your understanding is different from theirs. Consider the contract to be the written summary of your verbal communications. The employer should have no problem putting in writing anything that they told you verbally.
The second component of a contract is what you will receive in exchange for doing that work. This includes a salary of some kind. Make sure you understand exactly how it is calculated.
- It may be a simple hourly rate. Find out if you still get paid that rate if you stay late to do charts or do charts from home.
- It may be a “per shift” payment. Again, find out what happens if you stay late.
- If it is based on Relative Value Units (RVUs), find out how many RVUs other doctors in this position generated.
- If it is based on billing, find out about how much has been billed by other doctors and convert that to your income.
- If it is based on revenue, you will need to learn about the payor mix of the practice.
Will you be paid as an employee or as an independent contractor? If a contractor, it will be much easier to open your own retirement plan and acquire your own benefits package. Remember that independent contractors must pay both the employee and employer halves of payroll taxes like Social Security and Medicare, as well as cover their own benefits. That means you need to be paid more as an independent contractor than as an employee for the compensation packages to be equivalent.
In addition to salary, there are often many other benefits. A locums doctor may not be offered the typical “long-term doc” benefits like a 401(k) or health insurance. However, they are often able to negotiate for the employer to cover their travel and room and board. Airfare, a rental car, gasoline, hotel/apartment, and a food stipend are generally included. Make sure you know how each of these will be paid for. Malpractice insurance is also a large expense. Make sure you know who is going to cover it. If the policy is a claims-made policy instead of a stronger occurrence policy, who will be paying for the tail coverage when you leave? Will there be paid vacation or sick time?
#3 The Break-Up
The third important component of any employment contract is how the relationship will break up. What will happen if you do not like the job? What will happen if they do not like you? How much notice must you give and how much must they give you? What happens if you lose your license or hospital credentials? Under what grounds can they fire you for cause?
A particularly important aspect is the possibility of a restrictive covenant or non-compete agreement. Even locum tenens contracts can have a non-compete in them. If you are doing locums close to home or think there is even the remotest possibility of permanently relocating to that location, try to minimize the radius and length of any non-compete agreement.
Make sure there is also the possibility for you to contract directly with the employer if you decide to stay on after the initial locum tenens contract.
When everything goes well, a contract may be barely needed. However, when something goes wrong, a contract is critical. In either case, a contract is useful to remind both parties of what they agreed to. Have your contract reviewed and do not be afraid to negotiate it. There is no such thing as a “standard contract” and as the rare commodity, you likely have a better alternative than the employer trying to hire you as a locum tenens doc. Negotiate an agreement that you will be happy with and will enable you to enjoy your experience in a new environment.
#3 Choosing a Business Structure as a Locums Physician: Do You Know the Right Tax Structure for Your Locums Lifestyle?
For many physicians venturing out into the locum tenens world, this is their first time working as a non-employee. A major benefit of being an employee is that the responsibility for running the business falls on your employer, allowing you to simply concentrate on doing the job at hand. The employer takes care of benefits, insurance, and payroll costs and hassle. You have regular paychecks of your net income deposited into your bank account and are issued a W-2 form at the end of the year, ensuring simple tax preparation.
The Independent Locums Contractor
However, the vast majority of locum tenens physicians are paid as independent contractors. Neither the locums agency that helped connect them with the facility in need nor the facility is actually their employer. They are in business for themselves. The locums agency serves as one of the clients of the business owned by the physician. As such, the agency sends your company gross paychecks and generally does not provide a traditional slate of benefits. Your company now becomes responsible for determining and paying any taxes due on that income. The agency will send a simple 1099 form at the end of the year as required by law. While some doctors mistakenly refer to themselves as “1099 employees”, they are not employees at all. They are a completely separate business.
As a separate business, it is a good idea to:
- Get a federal Employer Identification Number (EIN), available from the IRS here.
- Open a separate bank account and perhaps even a credit card for the business so that your personal expenses and income and the business’s expenses and income are completely separated.
- It is also likely that you will need to make quarterly estimated personal tax payments to the IRS since there is no employer withholding taxes for you.
Many locums docs wonder what kind of structure this new business should take. The basic options include sole proprietorship, partnership, C corporation, S corporation, and limited liability company (LLC). In some states, a doctor providing physician services is required to form special entities called “Professional Corporations” or “Professional LLCs” (PLLC), however, there is little difference between a regular corporation or LLC and a professional one.
The Sole Proprietor
The simplest and easiest business structure is a sole proprietorship, and in fact, this is the structure that the majority of locums doctors will choose. So long as you have no employees, you do not even technically need an EIN with this structure. You can simply provide the employer with your name, address, and Social Security Number on a W-9 form and the paychecks and 1099s will be issued to you directly. You will report your business income and expenses on a simple Schedule C on your personal taxes. If your spouse is doing similar work, they can have their own sole proprietorship and when filing taxes you simply have two Schedule Cs included with your taxes. If you do not deliberately choose another business structure, by default you will be a sole proprietor.
What About Forming a Partnership with Your Spouse?
Some doctors wonder if a partnership might be the right business structure for their locum tenens work, thinking that if their spouse is doing something similar, they can just form a partnership and avoid a second Schedule C. However, the truth is that a partnership must file an entirely different tax return, a complex five-page partnership return (Form 1065). Thus, this is a terrible reason for forming a partnership.
Other doctors might wish to have their spouse do some of the work of their business, perhaps arranging the various jobs, lining up travel arrangements, and doing bookkeeping. They reason that if their spouse earns some money, they, as a couple, will have access to another retirement account and perhaps a larger Social Security benefit down the road. Even if you want to have another retirement account, this is probably a bad way to go about it. You can always just form a sole proprietorship and employ your spouse or even contract with your spouse’s sole proprietorship to get another retirement account without having to do a Form 1065. However, even this is likely a bad idea for a one doctor couple because the cost of that retirement account is simply too high. If your spouse has no other income, you will need to pay Social Security taxes (both the employer and employee half, 12.4% total although half of it is tax-deductible) on all of their income up to the 2020 wage limit of $137,700. That cost is likely to be higher than the benefit of having another retirement account, or at a minimum, will dramatically reduce the benefits of the account.
Should You Form a Corporation?
Other physicians wonder if incorporating may reduce their liability and save them taxes. However, the main liability of a locum tenens doctor is malpractice liability, and malpractice is always personal. Forming a corporation does not protect you at all from malpractice. It can protect your personal assets from business-related matters and lawsuits, but these are incredibly rare in a simple locum tenens situation. A standard “C Corporation” does not necessarily save you any significant amount of taxes either.
A C corporation pays its owners in one of two ways.
- It can hire them as employees and pay them on a W-2 like any other employee. If a C corporation pays you exactly what your sole proprietorship would make, there is no tax savings at all.
- A C corporation can retain some of its earnings and pay taxes on it at the corporate tax rate of 21%. The C corporation would then distribute its earnings to its owner, where it would be taxed again at qualified dividend rates (up to 23.8%). This double taxation is obviously very unattractive, not to mention the organizational, maintenance, and tax hassles of running a corporation, including filing a corporate tax return.
The S Corporation
As such, most doctors who incorporate make an S election and become an S Corporation. An “S corp” is a pass-thru entity, like a sole proprietorship, partnership, or LLC. So the taxes are paid on your personal return at personal tax rates. This avoids the double taxation issue. Like a C corp, the owner-employee usually receives a salary on a W-2 each year. However, anything leftover from business profits becomes a distribution to the owner. Unlike the salary, the distribution is not subject to payroll taxes such as Social Security and Medicare. Thus, the owner is incentivized to keep her salary as low as legally possible in order to minimize those taxes. The IRS does require a reasonable salary to be paid, which means a full-time locums doc is likely to at least be paid the Social Security Wage Limit of $137,700. This means that the only tax savings comes from saved Medicare taxes, less than 2.9% (since half of it is tax-deductible as a business expense) of the distribution. So unless the distribution is going to be quite large, at least a six-figure amount, it likely is not worth the costs and hassles of incorporating. In addition, if a locums doc has another job as an employee, both employers will be required to collect and pay Social Security taxes, again creating a double taxation situation. While you can file to get the employee half of those taxes back, the employer half cannot be recouped. Thus it would be a very bad idea for a locums doc with another W-2 job to form an S Corp for their locums work as it would increase their tax burden rather than decreasing it.
The Limited Liability Corporation (LLC)
An LLC is a wonderful entity that can reduce business liability with much less hassle than incorporating. However, just like with incorporation, there is no protection afforded from malpractice. Malpractice is always personal. The IRS does not recognize LLCs either, so an LLC must choose to be taxed as a sole proprietorship, partnership, or corporation anyway. An LLC can be a great entity for a non-clinical side gig or to house your real estate investments, but there is little reason to form one just to do some locum tenens work. You will look plenty legitimate with an MD or DO behind your name; nobody is going to be impressed if it also says “Corp” or “LLC” there. However, if filing taxes as an S Corp makes sense for you, forming an LLC and then electing to file as an S corp may be less hassle than incorporating.
As you can see, most doctors doing locum tenens work should simply do so as a sole proprietor. However, if you are a full-time locums doc and can justify a salary significantly lower than your business profits to the IRS, you may wish to file taxes as an S Corp (probably by forming an LLC) in order to save a few thousand dollars on Medicare taxes. Whichever entity you use, be sure to treat it like a real business and keep its finances separate from your personal finances. This will prevent problems in an audit, allow you to capture all possible deductions, and facilitate easy preparation of your tax returns. If you are still unsure of the best path for you, discuss it with an accountant and business attorney in your state.
#4 Retirement Accounts for Locum Tenens
5 Tax-Advantaged Accounts for Independent Contractors
Most locum tenens physicians are independent contractors. Unlike employees, who often have a retirement plan such as a 401(k) provided by their employer, independent contractors are required to set up all of their own benefits, including retirement accounts. This represents both a challenge and an opportunity.
There are five tax-advantaged accounts that are worth discussing for independent contractors:
- Individual 401(k)s,
- Personal defined benefit (cash balance) plans,
- Backdoor Roth IRAs, and
- Health Savings Accounts.
Each has its own set of rules and contribution limits and it is worth being familiar with all of them. There are essentially three tax advantages available, and each account offers a combination of them.
The first tax advantage is being able to contribute to the account with pre-tax dollars. This is often the largest tax deduction for a physician. For example, if a physician has a marginal tax rate of 40%, a pre-tax contribution of $50,000 would reduce her tax bill by $20,000! In addition to this large tax deduction, most doctors who contribute to pre-tax accounts during their peak earnings years will be able to withdraw money in retirement at lower tax rates in retirement. They will “fill the tax brackets” with those retirement withdrawals, allowing a significant arbitrage between the high marginal rate at which they made the contribution and the lower effective tax rates at which they withdraw the money later.
The second tax advantage is to not have to pay taxes on the dividends and capital gains that an investment produces as it grows. This makes the investments more tax-efficient and produces a higher return by eliminating the tax drag that normally occurs in a non-qualified (i.e. taxable) account.
The third tax advantage available in some accounts is to allow for tax-free withdrawals. When available, withdrawals from these accounts are completely tax-free. Having a mix of pre-tax and tax-free accounts allows a retiree to essentially choose their own tax rate.
The mainstay of retirement planning for an independent contractor is the individual 401(k). An individual 401(k) is for a business without employees (other than a spouse). While similar to the 401(k)s offered by a typical employer, the individual 401(k) is simpler, cheaper, and requires no significant testing for highly compensated employees.
In 2020, an independent contractor under 50 can contribute their first $19,500 in earnings to the 401(k) as an “employee contribution”. If 50+, they are allowed another $6,000 “catch-up contribution” as part of the employee contribution. In addition to this contribution, the independent contractor can also contribute another 20% of earnings as an “employer contribution” up to a total account contribution of $57,000 ($63,000 if 50+).
While the $57,000 limit is a per-401(k) limit, the $19,500 limit must be shared across all 401(k)s, so an independent contractor who also has an employee job with a 401(k) may only be able to make employer contributions. While the employer contribution is always a pre-tax contribution (with fully taxable withdrawals), the employee contribution can be either pre-tax or Roth. Roth contributions go into a separate account and benefit from tax-free withdrawals in retirement.
Defined Benefit/Cash Balance Plan
For independent contractors interested in very large pre-tax contributions, it is worth considering a personal defined benefit or cash balance plan. These are technically defined benefit plans, but act as another 401(k) masquerading as a pension. The costs are a bit higher than a 401(k), but it is possible to make pre-tax contributions as high as $100-200,000 per year.
Another common retirement account used by independent contractors is the SEP-IRA. These accounts have two small advantages over an individual 401(k).
- You can make your contribution up until Tax Day, giving you additional months to fund it while still getting a deduction.
- The required paperwork is also simpler than with an individual 401(k). However, there are no Roth contributions, you often need to earn more money to max out the account at a full $57,000, and it can cause you pro-rata issues if you are also doing Backdoor Roth IRAs.
Backdoor Roth IRA
You do not have to be an independent contractor to do a Backdoor Roth IRA, but like most doctors, it is a good idea for independent contractors to also max out this account. The 2020 contribution limit is $6,000 per year ($7,000 if 50+) and you can also fund one for your spouse, even if your spouse does not work.
It is called a Backdoor Roth IRA because high earners are not allowed to contribute directly to a Roth IRA. They must first contribute to a traditional IRA, a contribution for which they usually do not receive a deduction due to their high income and their work-related retirement account. Then they can move that money to a Roth IRA, a transfer called a Roth conversion. This is technically a taxable event, but since they did not get a deduction for the original contribution, there is no tax cost to the conversion. However, due to the way this conversion is reported to the IRS (on IRS Form 8606), it is critical that the investor have no money in a traditional IRA, SEP-IRA, or SIMPLE IRA on December 31st of the calendar year in which the conversion is done or else the conversion will be pro-rated and lose much of its benefit. For this reason, most independent contractors should be using an individual 401(k) instead of a SEP-IRA and should transfer any IRAs into that 401(k) to prevent pro-ration. Roth IRA contributions and earnings are tax-free when withdrawn in retirement.
Health Savings Account (HSA)
Finally, the most tax-advantaged retirement account available to investors is not even a retirement account, it is a Health Savings Account (HSA). With a 2020 contribution limit of $3,550 ($7,100 family) these accounts are the only triple tax-free account out there. You get a pre-tax deduction, just like with a traditional 401(k) contribution. The money is protected from taxes as it grows and if spent on health care either now or in retirement, comes out tax-free. Even if you spend it on something besides health care, after age 65 there is no penalty, you just have to pay taxes on it as if it were a pre-tax 401(k).
Besides reducing taxes and thus boosting investing returns, each of these accounts can also improve your estate planning and asset protection. Locum tenens doctors should take advantage of the retirement accounts available to them. Doing so will allow them to build wealth faster and in turn allow them to focus on their patients, families, and own wellness.
#5 Insure Only Against Financial Catastrophes
Locum tenens doctors are often on their own for their benefit packages. Unlike some employees, who may be offered several kinds of insurance as part of their benefits, locums docs are likely to only be offered malpractice insurance, if anything. However, insurance is a critical aspect of any financial plan. Just because you do not have an employer offering it, does not mean you do not need it.
Insurance can be purchased to protect you against all kinds of events. However, as a general rule, you should only insure against financial catastrophes. Financial catastrophes are those very expensive possible outcomes that you cannot afford to pay for yourself. Being hit by a truck and having to spend 2 weeks in an ICU is a financial catastrophe. Dropping your phone in the toilet or having to replace your leaf blower should not be.
On average, insurance is a losing proposition. It must be for an insurance company to stay in business. An insurance company only has two sources of income—the premiums it receives from its policyholders and the investment return on its portfolio of money that has not been paid out as insurance benefits. With this income it must pay all of the insurance benefits, cover all of its expenses, and, if it is a for-profit company, leave something extra for the shareholders of the company. Thus, it cannot pay out in benefits every dollar it receives in premiums. On average, it must pay out less. Since insurance is a losing proposition, you should not buy insurance that you do not absolutely need.
A traditional emergency fund consists of three to six month’s worth of cash in a savings account. By having an emergency fund, you can afford to self-insure against many small losses and save yourself the cost of insuring those items. With an emergency fund, you can afford to use insurance policies with higher deductibles and thus lower premiums, spending less on insurance in the long run.
There are five financial catastrophes that most doctors will need to insure against, at least for part of their lives. These include:
- and loss of expensive property
We will examine each in turn and consider the implications for a locum tenens doc in particular.
Liability insurance is traditionally divided into two categories, professional and personal.
Professional liability primarily refers to malpractice insurance. This will often be covered by the locum tenens agency. Make sure you understand what kind of policy they are providing. Make sure the limits are typical for your specialty in the area you will be practicing. If the policy is not an occurrence policy, make sure the locums agency or the client facility will be covering the cost of the tail insurance. If they will not, check with your current insurance policy to see whether they can cover that risk for you for a reasonable additional premium.
Personal Liability Protection
In addition to professional liability, you could also have personal liability for events that occur outside of work. Auto insurance requires a small amount of liability coverage to be carried by all drivers. However, the amount required by law would not even replace many of the cars driven on the road today. It is wise to carry a high multiple of the minimum required amount. Homeowners or renters insurance also includes a personal liability benefit. In addition to these two policies, most doctors should purchase a $1-5 Million umbrella policy, which sits on top of their auto and homeowners/renters policies and provides additional personal liability coverage. Luckily, umbrella policies are much less expensive than malpractice insurance.
Health insurance is used to protect against injury and illness. Neither the locums agency nor the client facility is likely to provide you health insurance, so expect to need to purchase this on your own. Since doctors don’t usually qualify for any tax subsidy on their health insurance, they can simply go to a health insurance broker in their state to purchase a policy. As a self-employed person, those premiums are at least tax-deductible. If your chosen plan is a designated High Deductible Health Plan, you will also have access to a Health Savings Account, a triple tax-free investing account designed to be used for health care expenses throughout your life. If your locums job is just a side gig, you may be covered by the health insurance from your main employer.
Individual disability insurance with a true own-occupation, specialty-specific definition of disability can easily be purchased from an independent insurance agent. This critical coverage protects your most valuable asset (your ability to earn money as a doctor) against disability from illness or accident. Individual policies are portable and can be taken from job to job. Locums doctors cannot rely on an employer or locums agency to provide this important coverage.
Premature death of a breadwinner is a risk best covered by term life insurance rather than the more expensive whole life insurance pushed by many commission-hungry agents. If purchased when you are young and healthy, millions of dollars of term coverage can be purchased for just a few dollars a day. If you have dependents, you need to get this coverage in place as soon as possible. You can be certain it will not be provided to you as an independent contractor. It is most easily purchased from the same agent who sold you your disability policy.
Insuring Personal Property
Expensive personal property that you cannot afford to easily replace should also be insured. Expensive automobiles, boats, airplanes, and recreational vehicles should be covered. Most importantly, your house and personal possessions should be covered using a homeowner’s policy. If you are a full-time locums doc without a permanent dwelling, be sure to get a renters insurance policy. Remember that computers, jewelry, and firearms are typically excluded from these policies and must have separate coverage.
If you cannot afford to pay for it yourself in the event of tragedy, you need to insure it. This includes your health, life, ability to work, expensive property, and liability. Insuring only against catastrophe will provide smart protection while freeing up your income to build wealth and provide the lifestyle you desire.
#6 Building Wealth Working Locum Tenens
Most of society assumes that physicians are wealthy. In reality, most physicians are “HENRYs”—High Earners, Not Rich Yet. The general public, politicians and even the IRS sometimes mistakes income for wealth. Just like other citizens, physicians often live hand to mouth or worse and never build real wealth. Wealth is measured by net worth—a calculation of everything you own minus everything you owe. Surveys of physicians consistently demonstrate that only half of physicians are millionaires. Of even more concern, surveys show that 25% of doctors in their 60s are still not millionaires and 11-12% of them have a net worth under $500,000! Obviously completing a 20-30 year career earning a six-figure salary and having less than half a million to show for it at the end is a serious financial catastrophe.
Most entering medical students do not go into medicine for the money, but they all assume that they will become wealthy as a by-product of their career choice and hard work. Despite their high incomes, the process of building wealth as a doctor is not automatic. There are a few required steps.
Four Steps to Financial Security
- Earn a lot of money
- Don’t spend a lot of money
- Make sure your money works as hard as you do
- Protect your money from financial catastrophes
By following these four steps, every doctor should be able to not only be a millionaire by the end of their career, but should be able to maintain their pre-retirement standard of living throughout retirement.
The first step is to maximize income. Many doctors are surprisingly naïve about their value. The range of income even among full-time doctors within the same specialty can be hundreds of thousands of dollars. Understanding your value, negotiating to make sure you are receiving it, and improving your efficiency can all result in a higher income. Additional sources of income include both clinical and non-clinical side gigs as well as investments.
Have a High Savings Rate
The second step is where you play defense. The less you spend, the more of that gross income you can carve out and use to build wealth. At a minimum, 20% of an attending physician’s gross income should be dedicated to retirement savings, inside a retirement account if possible, outside if not. Early retirement will likely require a higher savings rate. Paying off student loans and saving for college, vacations, cars, or recreational toys is all in addition to that. The vast majority of a six-figure income does not go toward true needs, so budgeting for high earners is really just a process of weighing your wants against each other to decide what you value most.
Put Your Money to Work
Once you have money to invest, you want it working hard. Minimize taxes, transaction costs, and advisory costs. Capture the market return by using index mutual funds instead of day trading stocks or trying to find a guru to beat the market. Ensure you are taking adequate amounts of risk, which usually means a majority of the assets in your portfolio are invested in riskier, but higher returning, assets like stocks and real estate. Maintain good investor behavior—rebalancing the portfolio periodically, not selling low in market downturns, and staying the course with your written investing plan.
Protect Against Financial Catastrophe
Finally, it is important not to lose all of your money in one fell swoop. Selling low in a market downturn is one method of doing this, but there are plenty more. Death, disability, and divorce commonly devastate the finances of physician families. Be sure you have adequate life, disability, health, property, and liability insurance policies. Avoid losing your license or credentialing due to inappropriate or illegal behavior. Take basic asset protection steps like maxing out retirement accounts and titling your property properly and remember date night may be your best asset protection technique. The old saying goes, “One House, One Spouse, One Job” and it contains a lot of truth. It is expensive to change houses and jobs, but divorce can be absolutely devastating. In a divorce, you typically divide both your assets and your future income in half! When combined with increased expenses, that can make it very difficult to build wealth, especially if you do it more than once.
Since wealth is measured by net worth, you can build wealth both by investing and by paying off debt. Often, your best investment is paying off debt. Paying off a 7% student loan provides a guaranteed 7% return, far higher than you are likely to find with any other investments offering guaranteed returns. With lower interest rates and riskier investments, you may find that you are willing to carry debt a little longer in order to invest. Be careful how much leverage you take on in your life, though. Experts recommend you owe no more than 15-33% of your net worth, and most doctors come out of school with far more than that. Nobody ever declared bankruptcy without debt and the majority of physician multi-millionaires have little to no debt. The same character traits that lead them to save and invest large portions of their income also lead them to pay off their debts much faster than required.
There are essentially five financial tasks that can be done in life: earning, saving, investing, spending, and giving. All require education and continual effort to do well. As you develop financial literacy, become more disciplined, and gain experience, each will become easier and you will find that you can use your physician income not only to build your own wealth, but also to bless the lives of those around you. At the end of the day, your hearse will not have a trailer hitch. While financial security is important, never forget that money is simply a tool and should be put to its best possible use.
What do you think? What else do you think doctors should know about the financial ramifications of doing locum work that wasn’t covered here? Have you done locums? What did you learn from the experience? Comment below!
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