How physicians can avoid a personal liquidity crisis


We see it often—a call from a “wealthy on paper” physician who suddenly finds themselves facing a short-term need for cash but holding mostly illiquid assets. You might have a net worth of $7 million, but perhaps $2 million is tied up in your primary residence, another $1 million in a vacation home or investment real estate, $2 million in a 401(k) or IRA, $500K in life insurance cash value, and additionally you’ve built $1.5 million worth of potential equity in your practice.

What happens in that situation when there’s an unplanned financial emergency such as a healthcare crisis, tuition expenses, an unexpected tax bill, or major practice expenditure? 

How do you tap into those significant assets you’ve accumulated to generate cash flow without experiencing a major loss of market value? 

Illiquid investments such as real estate, life insurance cash value, private equity investments, and hedge funds may offer the potential for enhanced returns. But it’s vital that you also manage a flexible and diversified balance sheet. This should typically include an appropriate percentage of your wealth in assets that can be converted to cash without heavy penalties, taxes, or opportunity costs.

The idea of leveraging you 401(k) or IRA rarely sits well with the IRS. Retirement accounts should never be considered ‘break glass in case of emergency’ liquid assets. Not only will cashing out tax-deferred assets trigger an automatic 10% IRS penalty (if you haven’t yet reached age 59½), the income tax that such a transaction generates can be substantial. Most importantly, depleting these plan assets may also have a significant, adverse impact on your ability to achieve important goals later in life. While nearly four in 10 physicians (38%) put more than $2,000 away each month in tax-deferred accounts, three in 10 (31%) fail to save anything each month in a taxable investment account.Disclosure 1

Why cash flow planning matters

After years of undergrad, med school, residency, and fellowship—years where your income lagged and your debt exceeded that of peers who pursued law, business or other professional careers—it’s only natural to want to play catch up and buy that big house and nice car when that first $400,000 salary contract is signed. Thoughts about improving your longer-term financial picture by reducing your debt burden or catching up on your retirement savings often get pushed into the ‘I’ll get around to that in a little while’ category.

Instead, consider a more flexible and effective approach that involves developing a thoughtful action plan for managing debt, cash flow and long-term savings. As with any aspect of planning, the sooner you start building liquidity, the more freedom and flexibility you’ll have down the road. For younger physicians it often comes down to a matter of lifestyle choices. 

Do you really need the bigger home, the vacation property and the new car right away? 

Or can you delay those for a few years and focus first on getting your financial house in order? 

Even if you’re well established in your career and suddenly facing a liquidity crisis, there may still be ways to tap into the assets you’ve spent decades accumulating in order to generate cash without creating a major disruption to your financial plan.

Strategies for avoiding asset liquidation

Perhaps you’ve reached a point where your income is peaking, most of your debt is paid off, and you’ve been diligently investing a sizable portion of your income into relatively illiquid retirement plans, investment real estate, land purchases, life insurance policies and private equity. Where do you turn when and if a sudden unexpected cash crisis arises?

One potential temporary solution is to leverage short-term borrowing against other assets you already own using portfolio-secured lines of credit, equity lines of credit on real estate holdings and/or margin loans.Disclosure 2 This can provide you with a relatively quick and sizable infusion of cash at reasonable borrowing costs, without requiring the sale of illiquid assets. In order to create longer-term liquidity and flexibility, however, the right asset mix and thoughtful preplanning should be done early and reviewed often.

“We regularly work with established physicians to explore ways to extract liquidity from a variety of assets including equity in a practice or the real estate the partners own,” explains Todd Matthews, another advisor with Truist Wealth Medical Specialty Group. “Whether it’s recapitalizing owner-occupied real estate holdings, creative practice buy-in structures, or leveraging the cash value of life insurance there are many ways to stimulate cash flow.” In certain situations, it may even make sense (based on your cash flow needs and situation) to recapitalize personal real estate holdings to generate additional liquidity. As wealth increases, so does the complexity of the deals, and in turn, the liquidity needed to support them.

Increasing wealth brings new opportunities

As their wealth grows, many physicians begin exploring commercial real estate investment opportunities such as multi-family properties. While essentially an illiquid asset, multi-family properties have the ability to both appreciate like a stock and generate income to enhance cash flow and liquidity—all while delivering portfolio diversification, inflation hedging, and overall risk mitigation.

It’s an investment that also presents many tax and estate planning benefits. Because it can be depreciated over time, commercial real estate can offer significant tax advantages. And given its illiquid nature, interest in a property typically can be placed in a trust at a discounted value, making it an excellent way to transfer wealth across generations.

Keep in mind, though, that real estate investing can be challenging, and sufficient liquidity is required for maintenance and reserve funds. Just as different bonds have varying credit qualities (from AAA to high yield), different commercial properties come with distinct risk-return profiles that need to be factored into your investment decision. The opportunity for substantial returns is compelling, but extensive due diligence, expertise, and guidance should be sought to ensure that the risk-return tradeoff meets your personal needs and expectations.

Where do you start?

The demands of your profession afford little time to sit down and carefully analyze your changing wealth picture and evolving financial needs. Your priorities are your family and your practice—as they rightfully should be. Be purposeful in planning not just for the probable but also for the possible. Having a reasonable liquid reserve needs to be an essential component of every financial plan.

Loans offered by Truist and Truist Wealth are subject to credit approval, eligibility and credit qualifications.

Have a current liquidity challenge or need a more thoughtful cash flow planning strategy? 

Talk to your advisor or reach out to Truist Wealth Medical Specialty Group to find out how we can help.