Protecting Your Most Important Asset

Abstract:

We routinely meet physicians who have a difficult time identifying their most important asset. Many assume that their home, pension plan, or investment portfolio is the most important asset they own. However, the most important asset for most physicians is the ability to work in their profession. After all, you could lose many of your financial assets and be able to replace them simply because you can continue to earn an income from the practice of medicine. Thus, the foundation of your financial plan will address this most important asset.

When constructing a financial plan, many physicians complain about the overwhelming (and often conflicting) amount of available information. The wealth of information combined with numerous strategies suggested by various professionals often generates a paralysis that results in nothing being accomplished.

The best way to avoid this paralysis is to divide the plan into small, easily accomplished steps. The first step is to determine the appropriate process for building your financial plan — a plan for the plan!

Picture the pyramids of Egypt. Pyramids are built on a large solid base. As they rise into the sky, they begin to narrow until they reach the apex. This basic design has allowed the Egyptian pyramids to withstand the test of time.

Would the Egyptians have had the same results had they started with the apex at the bottom and ended up with the broad base on top? Of course not, but this appears to be the investment architecture many physicians use every day. Think of the pyramid as your financial plan.

Hazard Protection: Protecting Your Most Important Asset

The base of the pyramid serves as the financial foundation on which everything else is built. Consider the base to be the fundamental strategy of your financial plan and the apex to be the strategy you will consider only after all of the previous strategies have been completed successfully.

The key is to build a strong foundation that will serve as your pyramid’s base. This base should address the most basic of all your financial concerns and should focus on your most important asset.

We routinely meet physicians who have a difficult time identifying their most important asset. Many assume that their home, pension plan, or investment portfolio is the most important asset they own. However, the most important asset for most physicians is the ability to work in their profession. After all, you could lose many of your financial assets and be able to replace them simply because you can continue to earn an income from the practice of medicine. Thus, the foundation of your financial plan will address this most important asset. Let’s call this section of the pyramid “hazard protection.”

Who was the first financial advisor to contact you when you completed your residency? Was it a stockbroker or maybe a municipal bond broker? We would guess not. Why? Because at that time in your career, you hadn’t accumulated enough excess investment dollars to generate commissions for these financial salespeople.

The odds are your first contact was with an insurance agent. The agent probably talked about the effect your premature death or disability would have on your family. He or she likely explained that your most important asset was your ability to earn income and that you must insure against that loss.

This does make a great deal of sense. Physicians have an excellent economic life value, meaning that the present value of your expected earnings in the future is quite high. For example, assuming a 3% discount rate, the economic life value of a physician expected to earn a mere $150,000 per year for 35 years is approximately $3,319,775.

What can impact this most important asset? As far as we have seen, only two uncontrollable situations: death or disability.

What if you die? Physicians, particularly new physicians, may be deeply in debt due to student loans or a first home or office mortgage. If you are married and are the main income earner, you may need a life insurance policy. The life insurance proceeds would allow your spouse to pay off debt or fund your children’s education, as well as create some sort of regular income for the surviving family.

But what if you couldn’t work due to disability? There would be no lump-sum payment to support your family as there is with a death benefit. The problem is that, unlike death, in disability you are still a consumer, but a consumer without an income. Did you know that the odds of incurring a disability during our working years are much greater than the odds of dying?

This is why it is important to have the correct risk management plan. It is the only way to manage those uncontrollable situations. Protecting your most important asset — your ability to practice medicine — is critical to your financial plan.

Estate planning is another aspect of hazard protection. Regardless of your current income or the size of your estate, you must make decisions today that will affect your family in the future.

If you have children, you need to name guardians (those who will care for children or other dependents) and trustees (those who will manage the property). You should put your postmortem desires in writing with regard to who should receive particular assets at your death and how.

Building the Base

You are probably beginning to realize that a solid foundation is not the exciting entry into financial planning you may have imagined. Let’s face it, who wants to think about hazards such as disability and death as their bright career is just beginning or is in full swing?

Because this can be a stressful and somewhat time-consuming task, many physicians simply ignore the base and head straight for the apex — those speculative investments that promise spectacular returns and tax write-offs. By the time these individuals understand why the pyramid is not built inversely, it often is too late.

Excerpted from The Prescription for Financial Health: An Authoritative Guide for Physicians, 2nd Edition by Joel M. Blau, CFP, and Ronald J. Paprocki, JD, CFP, CHBC.