Money Minutes for Doctors #9 - The Catastrophic Financial Plan

Welcome to the 9th installment of our monthly podcast dedicated to financial education and wellness, Money Minutes for Doctors. This month we sit down with Ms. Katherine Vessenes, JD, CFP®, RFC, Founder and President of MD Financial Advisors, to talk about an often neglected topic in financial planning, what to do when encountered with the unspeakable reality of a catastrophe. In the past six months alone, communities on the east and west coasts of the United States have absorbed natural disasters that have left cities and towns in shambles. The human toll is staggering and many families are left to start from scratch following devastating circumstances. While catastrophes come in many forms: disability, loss of a loved one, job loss, loss of home, etc…planning for the worst does not have to be as painful as the topic implies.

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About Ms. Vessenes:

Ms. Vessenes works with over 300 physicians and dentists from Hawaii to Cape Cod. Her firm uses a team of experts to provide comprehensive financial planning to help doctors build their wealth and protect their wealth while reducing taxes now and in the future. Katherine is a longtime advocate for ethics in the financial services industry; and has written three books on the subject of investment strategies. She has received many honors and awards including: numerous tributes from Medical Economics as a top advisor for doctors, multiple 5-Star Advisor Awards, honored as a Top Woman in Finance, in addition to being selected to be on the CFP® Board of Ethics. Katherine can be reached at: Katherine@mdfinancialadvisors.com or 952-388-6317. Her website: www.mdfinancialadvisors.com.

Quick Summary: 

When it comes to a crisis, there are three main problems that you might encounter sometime during your career:

  1. Disability: you are too sick or injured to work. Fortunately you can insure away this risk with disability insurance.  

  2. Pre-mature death of the breadwinner: your untimely death could leave your loved ones without a needed source of income. This risk can also be insured away with life insurance.

  3. Job Loss: Every other doctor we have who suddenly became unemployed, found another job within 6 weeks because physicians are in such high demand. The key is to have enough funds to last during the transition.

Consequently, we usually recommend every doctor have easily accessed funds equal to three to five months fixed living expenses for an emergency/rainy day fund:

  • Enough to pay mortgages, student loans, food and other fixed expenses.

  • The exact amount is variable and depends on how much you need to be able to sleep comfortably at night.

Structure your savings to cover the short-term emergencies while you are still building wealth for the future. This is a balance between funds designated for the distant future (therefore higher risk to reach higher returns) vs. funds that may be needed in the near future (invested more conservatively with lower potential for loss). 

A five-step approach to protect you and your family from potential loss: 

  • Step One: The emergency fund. This is an account at a bank. It is easily accessed and the money will be there when needed

  • Step Two: The intermediate account (also known as the put and take account). These are funds are in a taxable, “non-qualified” brokerage account that are earmarked for a big purchase in the next one to eight years such as a down payment for the new house, the new car, college for the kids, etc.  The goal is to do better than the bank (avg 3%/yr).  Accounts are mostly bonds and some stocks that can be accessed anytime.   

  • Step Three: The Wealth Accumulation Account (also known as the put and keep account). These funds are also invested in a taxable, “non-qualified” brokerage account and are earmarked for retirement.   They are generally mostly stocks and some bonds, depending on the risk level of the physician.

  • Step Four: The 401-k/403-b, retirement accounts. Most of our doctors can borrow up to 50% of their 401-k or 403-b accounts that they have with their current employer.

  • Step Five: Roth Accounts or IRAs. We only use these if it is absolutely necessary as there is a 10% penalty and ordinary income tax on the gain, if funds are withdrawn before age 59 ½ in most cases. This is the source of last resort due to the tax penalties.

An alternate approach, step 2 + if you will, may be cash value in permanent life insurance policies. This may be preferable to taking funds out of brokerage accounts, particularly if those accounts are at a loss, and frequently the loan provisions are more favorable than borrowing from a bank.