The Executive Suite: Financial planning impacts from the pandemic

For many high-earners, the pandemic brought forth an important reminder of the fundamentals when it comes to building wealth.

As a very simple analogy, a financial plan can be compared to building a house. In the beginning stages of the process, most of the time is spent mapping out and building a stable and reliable foundation. It is then, after this layer is built, that the rest of the structure can be constructed with confidence. Without a strong and supportive base, the architecture of the rest of the house is almost negligible when it comes time to weather unexpected storms.

A pandemic is just one example of a catastrophic event to one’s financial plan. Like anything in life, financial well-being and success depends upon proper preparation ahead of time. With many physicians being unable to operate their practice for a few months or being forced to take reduced salaries from hospitals, there are several financial planning aspects that can come in handy when it comes to reducing this increased anxiety.

Proper emergency reserve

As cliché as they may sound, emergency, or “rainy day” funds, can make or break someone’s entire financial well-being. As physicians oftentimes have higher expenses, it is crucial to ensure they have more built up in reserves than the average consumer. This money should be built up in an extremely liquid, easily accessible account such as a savings account or money market fund.

There are a few factors that should be considered to help determine the perfect balance. If you have consistent and controlled spending that is relatively low, then this number can be smaller. If you also have additional sources of reliable income and a working spouse, then this number can be lowered even further. The goal should be 3-6 months of fixed living expenses. Alternatively, if expenses are high relative to income, you have a single source of income, and your spouse doesn’t work, then it is highly encouraged to aim for an emergency fund with 6-9 months’ worth of living expenses.

Health Savings Accounts

If there was one account that is the most underused for the value it provides, it’s the Health Savings Account. Employers generally offer these where employees can defer compensation into these investment accounts, like a traditional retirement account, and receive what is often known as “triple-tax” advantaged savings specifically meant for healthcare costs. This account can be viewed as an emergency fund to take care of deductibles and astronomical health costs. Review your employer benefits to see how you can begin contributing to one of these accounts.

Long-term Disability insurance

Arguably the most critical part of a financial plan is protecting one’s income, especially when it comes to high-income earners. Oftentimes, employers offer group disability policies that will cover 50-60% of base salary if the employee is unable to work for a period of time. It’s highly encouraged that doctors elect this; however, this is oftentimes inadequate.

It is also crucial to investigate purchasing a supplemental disability policy from an insurance company to bridge the gap between full income and the employer-provided coverage. 60% is unlikely to fill a family’s needs, especially since this payout is oftentimes fully taxable. Consider what would life look like for you and your family if you had to live off 50% of your normal pay?

Non-market-correlated savings

Catastrophes, like this pandemic, remind everyone of the importance of life insurance and the unfortunate risk of premature death. To protect one’s family, it is almost unanimously most efficient to transfer the risk to insurance companies, rather than attempting to manage this risk and insure one’s own self.

One of the overlooked aspects of a vehicle such as permanent life insurance is the unique living benefits it provides. The tax-advantaged cash savings, growing at a conservative, yet above-average rate of return is one example. This can be an effective arrow to have in your quiver in times of economic and market turbulence due to the guarantees it provides. Being unaffected by any financial markets, the cash value can be utilized to take advantage of investment opportunities that present themselves during market downturns.

Wills, health care proxy, power of attorney in place and updated

It is critical for everyone to have their basic estate documents in place and up to date, especially when it comes to complex financial situations. This not only becomes a great point of consideration when assets are likely to be passed down, but also throughout life and in the late stages when potential terminal illnesses come about, and outside decision makers need to be involved. Make it a point to have these documents reviewed periodically and update beneficiaries as life changes occur.