Whether you are an ophthalmologist just finishing residency or one who is already in practice and considering a move, the process of evaluating new job opportunities can be a daunting one. The decision is extremely important, as it could affect you and your family for years, if not decades.
Unfortunately, many physicians—both new and established—do not have the time, tools, or experience to accurately evaluate employment opportunities, and are ultimately disappointed when circumstances are different from what they envisioned. Sadly but commonly, this situation often leads to significant personal and family stress, professional insecurity, and financial hardship.
According to various reports, more than half of all physicians will change jobs during their first 5 years of practice. Although factors such as family circumstances, location, and practice conditions can play a role in a young doctor’s decision to change jobs, dissatisfaction with one’s financial situation is one of the biggest contributors.
In this article, a pared-down selection from our most recent book, Wealth Planning for the Modern Physician, we present a simple method doctors can use to financially model their net worth in prospective job opportunities. We also discuss secondary financial factors to consider when comparing job opportunities, including state tax rates and benefit plans.
MONEY IS NOT THE ONLY FACTOR…
A job’s financial situation is not everything. Like many Americans, some physicians will gravitate toward the highest paying career opportunity, only to realize after a few years that one with a better lifestyle balance or a more suitable location would have been the better fit. It is important to focus on the big picture during your career search.
…BUT IT IS STILL IMPORTANT
Often, physicians leave a practice because their income expectations were different from what they ended up making. This situation is often made worse by complex compensation formulas, overhead costs, and partnership costs in some practice environments in our health care system.
THE TOOL EVERY PHYSICIAN SHOULD USE
Financial modeling, in the finance world, is the process of creating a summary of a company’s or project’s expenses and earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or decision. Executives frequently use these tools to guide decisions and estimate stock prices, relying on the current value of future cash flows. Despite these seemingly complex uses, the financial modeling process is relatively straightforward and may be of value to physicians—executives of a sort for their own careers—in their job decision-making.
At its core, financial modeling employs a simple sensitivity analysis, similar to those used by professional analysts, to financially simulate various “what if” scenarios. The purpose of financial modeling is to simplify complex compensation arrangements typically seen in physician employment and identify large discrepancies in compensation or risk to the doctor early in the job search process.
Microsoft Excel, or a similar spreadsheet program, is a great tool to create a financial model. You create a row in the spreadsheet for each job opportunity, with columns for each financial factor (salary, range of likely productivity bonuses, reimbursement for continuing education, etc.) in each year of employment.
Be sure to include a partnership buy-in amount in the year that will happen, and consider that a negative income number, as you may use cash flow from that year (or over a few years) for the buy-in. Ideally, when compared to a nonpartnership employed position, the cost of the buy-in will be more than made up over future years through higher income and practice profitability.
Another significant buy-in-early/pay-off-later scenario to model might be ancillaries, such as practice real estate, surgery center, or other related opportunity. It is important to include these in the model if such opportunities exist. These ancillaries are often very profitable and can make a significant difference in overall compensation for the physician.
SECONDARY FINANCIAL FACTORS
Do not ignore state and local taxes. State income tax rates vary widely across the United States, from 0% in Florida, Nevada, Texas, New Hampshire, and others, up to 13% in California, and more than 12% in New York when state and city taxes are combined.
Consider two different ophthalmology positions with identical income prospects in your financial model. One is located in California and the other across the border in Nevada. Given the difference in state taxes, the bottom-line difference for the physician could be in the six figures—every year! Compounded with even a conservative growth rate, this would mean millions of dollars of difference over a career.
As we describe in our books, proper use of benefit plans can be a significant factor in reaching long-term financial and retirement goals. By benefit plans we mean primarily qualified retirement plans and nonqualified plans, topics that go beyond the scope of this article.
All potential jobs are not equal in terms of the quantity and quality of the benefit plans offered to the physicians. Moreover, the long-term financial benefit of such plans can be extremely significant, allowing the doctor who has access to superior plans a more comfortable or earlier retirement. Physicians looking at different jobs should examine and understand the benefit plans that each position offers and attempt to quantify the long-term value of each.
Searching for a job, whether as a young or experienced physician, is one of the most stressful times in a career. Although financial aspects should never be the most important factor in choosing a position, too often doctors poorly understand their compensation expectations before signing, and this can lead to discontent later.
Financial modeling is an effective tool that can help physicians simplify the complex compensation arrangements often seen in physician contracts. Layering in an analysis of secondary financial elements, such as local taxes and available benefit plans, is worth the time and effort.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently; accordingly, information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
David Mandell, JD, MBA, is an attorney and author of more than a dozen books for doctors, including Wealth Planning for the Modern Physician. He is a partner in the wealth management firm OJM Group (www.ojmgroup.com).