Financial Advisors for Doctors: What To Look For

Doctors Need Financial Advisors With Specific Expertise

Many doctors may have high incomes but also have their own set of particular financial concerns-- and they need a financial advisor who can handle them. Despite high incomes, many doctors face significant medical school debt, the expenses of setting up a practice, high taxes (due to high incomes), and potential overspending. 

In 2023, according to the Education Data Initiative, the average medical school graduate had over $200,000 in debt, which can be a challenge for even higher-earning doctors, but can be especially challenging for newer doctors, who may not yet earn very high salaries. 

In this article, we’ll review several core areas that a financial advisor should review with their clients who are doctors, including investing, when and how to pay off your loans, 401(k), 403(b), IRA, and 457(b) retirement accounts, and even what to do when considering selling your practice or clinic before retirement. 

Investing for Doctors 

While you may have a high salary as a doctor, this doesn’t mean you should necessarily invest differently, at least when choosing investments. Investing as much as possible in high-quality stocks or ETFs and having a bond allocation aligned with your planned retirement age and risk tolerance is critical, just as it is for other investors. A great advisor can discuss the investment process with you and answer in-depth questions. 

In addition, avoiding serious investment mistakes is key. Many doctors might choose to invest in more exotic assets, like private equity, hedge funds, startups, and real estate, but this can often be more trouble than its worth. Just because you (might) a nice salary doesn’t mean you should invest like the ultra-rich, as the investment returns from these asset classes are often significantly less than the stock market. 

Like everyone else, doctors also need a retirement goal number-- which an experienced financial advisor can help you put together. 

Paying Off Medical School Loans

We just mentioned most doctors' have incredibly high student loan balances, but many don’t know how fast they should pay off their student loans. While it may seem counterintuitive, it can sometimes be worth it only to pay the minimum student loan amount per month while investing the rest of your funds. This is because, according to the Education Data Initiative, the average student loan interest rate is 6.54%. In contrast, the S&P 500, since it was created in 1957, has averaged returns of 10.26% per year (as of 2024). That’s a 3.72% difference, which can be significant when deciding whether to invest or pay off debts early and could lead to hundreds of thousands (or even millions) of dollars in lost potential investment returns. 

That’s why doctors should look closely at their medical school loan interest rate and compare it to the expected rate of return on their investment portfolio. This can be difficult to determine on your own, so it’s probably best to look at this with an experienced financial advisor or financial planner to see which option is better for your situation. 

Taxes, 401(k)s and Solo 401(k)s 

Taxes can be a major concern for doctors, often due to high salaries. However, doctors may not know all the ways that they can reduce their taxes. For example, many doctors who own their practice can set up a Solo 401(k) in addition to a Roth or Traditional IRA. If you’re a doctor, this can skyrocket your tax-free savings, especially considering the maximum 401(k) contribution limit in 2024 is an impressive $23,000. With a solo 401(k), you can contribute as both the employee and the employer, in essence, giving yourself your own employee match. This would allow you to invest an impressive $69,000 year in your 401(k). 

To put this example in action, imagine you started investing in the S&P 500 (which is reflective of the overall stock market) 20 years ago, started with just $1,000, and invested the maximum 401(k) contribution each month (about $1,916). Today, you’d have an impressive $1,906,000-- and that money all grew tax-free, regardless of how often you rebalanced your portfolio or switched investments. For a solo 401(k), where you also provide the full employer contribution ($5,750/month), that number would rise to an even more impressive $5.7 million. 

With capital gains taxes at 15% for individuals earning $47,026 to $518,900 $94,051 to $583,750 for married couples filing jointly, and 20% for those earning more, this can make a massive difference. 

In many cases, taxes due to portfolio rebalancing (selling some assets and buying others to balance your portfolio) can eat up 1-1.5% of yearly returns. In the case of our sample portfolio, this could easily be $150,000 in lost returns that would have been incurred if you invested in a regular (i.e., taxable) brokerage account.

403(b) Plans

If you work for the government or a non-profit, you may instead be able to contribute to a 403(b) account, which acts almost like a 401(k) but is intended for non-profit and religious medical professionals. However, if your employer offers both 401(k) and 403(b) plans, your maximum contribution (across both accounts) is still $23,000, or up to $69,000, including employee contributions.  

457(b) Plans 

Like 403(b) plans, if you work for the government or certain non-profits, your employer may offer you a 457(b) plan. Like a 401(k) or 403(b) plan, deductions are taken from your paycheck before taxes, reducing your taxable income and allowing your investments to grow tax-deferred. However, unlike 401(k)s and 403(bs), 457(b) plans don’t require you to be 59 ½ to start withdrawing contributions without a penalty. Instead, you can take funds out of your account without penalty (though you’ll still have to pay regular taxes) whenever you stop working at your employer. This can be ideal if you’re planning an early retirement or want to sell some of your investments to fund a major purchase, like a home or a child’s college education. 

There are two types of 457(b) plans: governmental and non-governmental. Non-governmental 457(b) plans do carry additional risks, however, as the money is not held in trust and could be taken by your employer’s creditors in the case of bankruptcy. In addition, funds cannot be rolled over into other retirement accounts, like an IRA or 401(k). 
In addition, there are a variety of other pros and cons of 457(b) accounts, all of which you should review with your financial advisor to ensure that you’re investing your funds in the safest and most tax-efficient way and providing some level of flexibility for emergencies. 

Owning (And Selling) Your Practice 

While many doctors work full-time jobs at hospitals and clinics, many have their practice, and, like any business, running a medical practice can come with its own set of financial concerns and intricacies. This can include deciding how much salary to take from the profits of the practice; in general, it’s ideal to take the smallest salary possible to pay less taxes, but this is something you should look at with both a financial planner and an experienced accountant (ideally a CPA). Depending on how your practice is structured, you may also want to make sure that you’re taking every deduction possible to lower your taxable income-- and, while this is more the area of an accountant than a financial advisor, a good advisor can probably give you a few tips and point you in the direction of a good CPA (if you don’t already have one). 

Another primary concern of doctors with private practices is how to sell them once they retire-- and what to do with the money. Each situation is different, so it’s hard to give broad advice. However, there’s a big difference between selling your practice or clinic to a fellow doctor (or doctors) working there and selling it to a stranger. Depending on how much your practice or medical clinic is worth, it could be more tax-effective to sell it to your fellow doctors or partners (if you have any)-- as long as they can afford it. 

This is because you can sell equity in your practice to them in chunks over, say, a 3-5-year period, reducing your taxable income. This does have risks, though, as spacing out your sale could lead to severe financial and legal issues if your colleagues decide to back out at some point. 

Therefore, a piecemeal sale should only happen if your practice has an extremely high value and you implicitly trust the doctors you sell it to. 

However, if you don’t want to sell your practice or clinic to colleagues (or don’t have any), you may need to work with a small business broker to find a willing buyer. Fortunately, there are small business brokers that specialize in selling medical practices, so you should be able to find someone willing to help you find a good buyer. However, it’s important to realize that business broker fees (especially for smaller businesses) can be quite expensive, with most fees running around 10%, though some brokers can charge up to 15%. 

In addition, you and your advisor (as well as your potential business broker) will also want to look at standard industry statistics to ensure you’re getting a good value for your practice. For instance, according to M&A advisory firm Existwise, primary care practices can sell for 0.5 to 0.7 times the total yearly earnings, while specialist practices often sell for 0.8-1 times total annual earnings. However, other advisor firms claim that practice can sometimes sell between 2.5 to 4 times earnings, so you’ll want to ask your advisor (and multiple business brokers) what they think a reasonable valuation is. 

The sale of your practice will also lead you to incur a significant capital gains tax burden during the year you sell it, so depending on how much you sell it for, you may want to consider taking a smaller salary that year to place yourself in a lower tax bracket (however, this is more a question for your accountant than your financial advisor). 

Finally, once you get your money (and hopefully, pay your taxes), the question arises of what to do with it. Keeping it under your bed won’t produce investment returns, so you’ll likely want to invest it as soon as (reasonably) possible with a qualified investment advisor. 

Leaving a Legacy 

Like most people, doctors often want to leave a legacy for their children and other family members, which will heavily impact their retirement planning process. While a certain number (say $2.5-3 million) may be enough for a 65-year-old couple to retire very comfortably, it may not be enough to leave a substantial inheritance to the couple’s children, especially if the retirees are high spenders, have medical issues, or live to a very old age, say, 95 or beyond. 

Therefore, even wealthier doctors may need to reduce their spending, save more for retirement, or adjust their investment strategy to make sure they can leave something to the people who mean the most to them. 

Doctors Have Unique Challenges, But an Experienced Advisor Can Help

Doctors face many unique challenges regarding their finances and financial planning. While doctor salaries are often high, so is medical school student loan debt, and deciding how and when to repay this can be a complex question. 

In addition, depending on a doctor’s career path, they may also have specific financial questions and needs. For instance, as we’ve mentioned, doctors who work for the government or non-profits may have different retirement account options, such as 403(b)s and 457(b)s as an alternative to 401(k)s. In contrast, doctors who own their practice may be able to open up a solo (401)k account and make contributions as both themselves and as their employer. 

Doctors who want to retire and sell their practice also face various questions and challenges, including how and for how much to sell their practice, how to ensure they stay in the ideal tax bracket, how to minimize capital gains from the sale of their practice, and how and when to reinvest the sale proceeds to generate income in retirement.