Beyond Retirement: Using Deferred Compensation to Achieve Your Financial Goals

Throughout their careers, physicians often have to navigate complex compensation structures. Deferred compensation plans, like your call pay plan, are designed to help manage income and taxes, but they can also be powerful tools for achieving financial goals before retirement. This post explores how you might leverage your call pay plan to fund the purchase of a second home or your children's education, while highlighting the drawbacks to be considered as you weigh your options.

Understanding Your Deferred Compensation Plan

Your deferred compensation plan allows all or a portion of your call pay income to be set aside and taxed later. This can be particularly beneficial for high-income earners looking to manage their tax burden. Distributions usually begin after a predetermined period, often 3 or 5 years, depending on the specific plan rules. Understanding the specifics of your plan is crucial before making any decisions.

Using Deferred Compensation for Pre-retirement Goals

While the most common application of deferred compensation is retirement planning, its structure can be advantageous for achieving other financial objectives:

• Second Home Purchase: If you dream of owning a vacation home or investment property, you could use distributions from your deferred compensation plan to supplement your down payment or even purchase the property outright. This can minimize interest payments and build equity faster.
• Funding Education: The rising cost of education is a major concern for many families. If your plan allows, you could align your distribution schedule with your children's college years, providing a substantial source of funds for tuition, room and board, and other expenses.
• Starting a Business: Many physicians have a goal of opening their own practice or pursuing other entrepreneurial ventures. Accessing your deferred compensation distributions at the appropriate time can provide the necessary capital to launch your business without jeopardizing your long-term financial security.

Weighing the Pros and Cons

Before deciding to use your deferred compensation for pre-retirement goals, carefully consider the following:

Pros:

• Tax Deferral: The tax-deferred growth of your investments helps you enhance your returns over time, providing you with more funds to put towards your goals than you might have had otherwise.
• Flexibility: Some plans offer flexibility in distribution timing, allowing you to align withdrawals with your specific financial needs.
• Funding Major Expenses: As discussed, deferred compensation can be a powerful tool for funding large expenses without depleting other savings.

Cons:

• Lack of Liquidity: Deferred compensation plans are not designed for easy access to funds. Distributions are typically scheduled. Early withdrawal is not always allowed and may result in penalties. This lack of liquidity is a major consideration.
• Tax Implications: While you defer taxes now, you will eventually pay taxes on the distributions as ordinary income. It's crucial to understand the potential tax burden and plan accordingly.
• Investment Risk: Deferred compensation plans usually involve investment options, which carry inherent risks. Market fluctuations can impact the value of your deferred funds.

Making the Right Decision

Using your deferred compensation for pre-retirement goals requires careful planning and a thorough understanding of your circumstances and your plan’s rules. Consult with a qualified financial advisor to:

• Analyze Your Plan Documents: Understand the specific distribution rules, investment options, and any potential penalties.
• Assess Your Financial Goals: Determine if using deferred compensation aligns with your overall financial plan and timeline.
• Evaluate the Tax Implications: Project the potential tax burden of distributions and develop strategies to minimize it.
• Develop a Comprehensive Financial Strategy: Integrate your deferred compensation into your broader financial plan to ensure you are on track for both short-term and long-term goals.

Deferred compensation can be a valuable tool for physicians, offering both tax advantages and the potential to achieve financial milestones. However, it's essential to approach its use strategically and with a clear understanding of the associated benefits and risks. If you’d like to learn more about how to make the most of your call pay plan, schedule a call with one of our certified financial planners.