Despite being among the most highly compensated professionals, with an average annual salary of $299,0001, many physicians are not on track to support a financially secure lifestyle in retirement, according to a new report from Fidelity Investments®, the leading provider of not-for-profit workplace retirement plans for the health care industry. The report analyzes the retirement savings behaviors of 5,100 physicians and 95,500 other health care professionals using proprietary Fidelity data, and provides suggestions for employers and physicians to help improve retirement readiness.
The findings challenge the assumption that because physicians earn high average salaries, they should be financially prepared to retire. In reality, based on Fidelity’s analysis, physicians are on track to replace only 56 percent of their income in retirement, considerably lower than the income replacement rate of 71 percent2 Fidelity suggests for those earning more than $120,000 annually. The 15 percentage point income replacement gap could be attributed to factors limiting physicians’ ability to save more for retirement, such as a shorter savings horizon, since they often don’t begin careers until their 30s; plus, many carry substantial student loan debt from undergraduate and medical school.
The report also reveals good news: physicians’ average total savings rate, from both employer and employee contributions, is quite healthy at 14.9 percent. Not surprisingly, older physicians are saving more than their younger peers with 60-64 year olds saving 16.3 percent, compared to younger physicians (age 30-39) who are saving 13.1 percent.
Other key findings from the Fidelity report:
- Because of their high salaries, physicians are likely to receive lower Social Security benefits, suggesting they should consider saving more than those who earn less.
- Younger physicians are demonstrating age-appropriate asset allocation in defined contribution retirement plans, while many older peers may be investing too aggressively.
“This analysis reveals that physicians are not as financially prepared for retirement as one might think, which is a clear indication that employees at all income levels need financial guidance,” said Rick Mitchell, executive vice president, Tax-Exempt Retirement Services, Fidelity Investments. “Physicians work hard, and the well-being of their patients are at the center of everything they do. That’s why they should enjoy the peace of mind of knowing their retirement plan has been given a ‘clean bill of health,’ and we are working closely with our health care partners to help their employees—including physicians—achieve retirement readiness.”
Maximize Savings Opportunities to Help Improve Physicians’ Retirement Outlook
Even with a strong total savings rate, which includes both employee and employer contributions (14.9 percent), and falls within Fidelity’s recommended 10-15 percent, the analysis suggests physicians and other employees with higher salaries generally need to save at an even higher rate of 15 percent or more, as Social Security benefits cover less of their income needs in retirement. In fact, according to the Fidelity report, Social Security benefits for physicians age 60-67 are projected to account for a much smaller portion of retirement income (12 percent) than non-physician health care professionals covered in the analysis who are in the same age range and average $60,000 in annual salary (30 percent).
To reduce the income replacement gap, physicians should consider finding ways to save more. To start, physicians should save up to the IRS limits, which allow employees to contribute up to $17,500 for those younger than 50 years old and $23,0003 for those 50+ in their qualified workplace retirement plans. Surprisingly, many physicians are not maximizing this savings opportunity. In fact, 60 percent of physicians less than 50 years old and 30 percent of those age 50+ did not save up to these limits—a lost opportunity to increase retirement savings.
Even for physicians saving up to the IRS cap, savings challenges remain given their salary levels, as they cannot contribute 15 percent or more without reaching that limit. To address this, plan sponsors should consider offering alternative saving plans, such as a non-qualified 457(b) plan, to help physicians increase retirement savings.
Asset Allocation: Older Physicians More Aggressive With Retirement Savings
The report also uncovers another positive trend: younger physicians tend to invest at levels appropriate to their age, with 58 percent of early-career physicians (30-39 years old) demonstrating an age-appropriate asset allocation in defined contribution plans. However, investing behaviors tend to shift with age. In contrast, only 41 percent of physicians age 50-64 demonstrate age-appropriate asset allocation, and 42 percent of older physicians age 60-64 tend to be overly aggressive, an indication they may be overcompensating to make up for lost time.
“Especially given their shorter savings horizon, we encourage physicians to seek guidance on their appropriate investment mix at all stages of their professional life,” said Mitchell. “Additionally, considering physicians’ high salaries, there’s an opportunity for employers to offer alternative non-qualified savings plans to health care professionals, which would provide additional options to help increase their retirement savings rate to more than 15 percent.”
Best Practices to Help Improve Physicians' Retirement Readiness
To assist in improving retirement readiness, the Defining Excellence: Physicians’ Savings Behaviors and Retirement Readiness report, which is now available online, offers additional details of these key findings and best practices.
Among the suggestions for physicians:
- Save up to the 402(g) limit of $17,500 (and $23,000 for those 50+) in 2014 in qualified retirement savings plans, and maximize Health Savings Accounts if the plan offers.
- Take advantage of other savings vehicles, such as non-qualified defined contribution savings plans, IRAs, tax-deferred annuities and brokerage accounts.
- Target a total retirement savings rate of 15 or more percent annually.
- Seek professional guidance to develop savings rates goals, ensure asset allocation is age-appropriate and create a retirement income plan.
Best practices for employers to help physicians in the workplace:
- Use plan analytics to assess the retirement readiness of both physician and non-physician populations and adjust the retirement program design accordingly.
- Provide additional retirement savings opportunities for physicians, such as a non-qualified 457(b) plan, which are widely used in the not-for-profit health care sector.
- Provide physicians with one-on-one guidance outlining opportunities for increasing savings and allocating their assets.
- Define key metrics to measure progress, including: percentage of physicians with total savings rate of 15 percent or more, percentage of physicians with age-based asset allocation and income replacement rates for physicians and non-physicians.
In addition to the report, Fidelity also provides guidance through a series of educational Viewpoints articles offering insights into topics such as non-qualified deferred compensation plans, target income replacement rates and measuring retirement readiness.
Fidelity’s Services for the Tax-Exempt Market
Fidelity serves more than 4 million plan participants in more than 2,000 workplace savings plans across the not-for-profit market, including health care, higher education, research, foundations, faith-based, K-12 and other not-for-profit organizations. Fidelity’s comprehensive suite of 403(b) retirement services includes plan design resources, recordkeeping services, consulting and participant communication, education and guidance. With retirement planning professionals and an array of tools and resources to educate plan sponsors, Fidelity helps employers in the tax-exempt market maximize retirement benefits plans and increase employee retirement readiness.
About Fidelity Investments
Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of $4.5 trillion, including managed assets of $1.9 trillion, as of January 31, 2014. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.
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1 “Physicians’ Savings Behaviors and Retirement Readiness,” Fidelity Investments, January 2014
2 Fidelity recommends a replacement income guideline of 85% for individuals earning $120,000 or less
3 IRS 402(g) contribution limits for 2014. Each year, the limits may be changed by the IRS based on inflation tracking.
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