When do therapists retire (and how?)

One of the more common questions we get when providing financial planning for therapists in our practice is the question of when therapists retire.  There’s a great lack of clarity about when and how to retire from a therapy practice, as well as what therapist retirement options are.

Before we get into the blog, it may be a good idea to check out the following blogs about finance for therapists:

Financial tips for therapists starting a private practice!

How does a therapist decide on a fee structure?

How to expand your therapy practice to another state

How much do therapists make?

According to the Bureau of Labor Statistics, the average psychologist salary was $82,180 in 2020. However, the range is very broad and varies in accordance with geography and the type of position held. Salary tends to increase more with educational level. In our experience, we have seen psychiatrists making $200,000 or more a year. For a more in depth look at how much therapists make broken out by occupation, check out this therapist salary blog by Zencare.

Incidentally, we have also seen an uptick in psychologist earnings since the pandemic, as the mental health issues caused have sought many to seek counseling.

When do therapists retire?

The question of at what age psychologists retire has many dimensions. As a financial planner for therapists, we have seen many therapists well into their 70s and retire in their late 70s! It’s not uncommon for mental health professionals to retire late in the game, from what we’ve seen.

Therapy can be a very long term career. There is no forced retirement, as there is for many other professions, and you can work more or less along the day in accordance with your work-life balance goals. We know of one therapist who works three days a week and makes a sizable living, well into six figures.

The question of how a psychologist retires is another story. As we discussed above, therapist salaries can be pretty rich in some cases. Hopefully you’ve been saving along the way.

There is a certain path that therapist retirement planning usually follows, and we’ll get into that in a minute. But first let’s talk about retirement savings options for the self-employed.

How does a business owner retire?

As many therapists in private practice own their own firm, let’s talk about how business owners retire, in general, before discussing the options that therapists should consider for their retirement.

Here are the usual sources of retirement income for a business owner:

  • Proceeds of sale of business
  • Social security
  • Distributions from IRA, 401(k), or Defined Benefit Plan
  • Continued income from a stake you retained in the business after partial sale

Many therapists in private practice are relying upon the savings they’ve accrued along the way, from either their own personal savings accounts (brokerage accounts, IRAs) or 401(k) or Defined Benefit plans that they’ve set up for themselves and their employees.

The path of retirement planning therapists follow (usually)

Here is the retirement planning progression we usually see therapists, mental health professionals, psychologists, and owners of private practices follow.

When therapists start out, they usually have sizable school debt and a modest salary. There aren’t many opportunities for saving. However as their careers progress and they move up the pay scale, they eventually start being able to put away some money in their employer-sponsored 401(k) or 403(b) if one is available.

These plans usually contain Target Date Funds, which adjust automatically to decrease risk as the therapists gets closer to retirement. Most therapists aren’t really that familiar with these funds, and the risks that come with them, which are well worthy of discussion. Best to consult a financial advisor about your asset allocation instead of just assuming what the fund presumes is correct for you. The mix of stocks vs. bonds and other asset class isn’t a one-size-fits-all type thing; it varies in accordance with your risk tolerance.

If you are employed at a mental health practice that does not offer a 401(k) or 403(b), you’ve probably gone on your own and opened up an IRA or taxable brokerage account. There are two major retirement account types a therapist would typically consider in this scenario:

Roth IRA – tax advantaged retirement account in which people can contribute $6,000 if under 50 and $7,000 if over 50. Income limits apply and contributions are made with after-tax money.

Traditional IRA – contributions are made with pre-tax money. Limits the same as Roth.

If you’ve been able to consistently put away money, the balances may be significant. Most therapists wait until about five to ten years before retirement to talk to a wealth manager, but we believe that financial planning for therapists is best done as early as possible, especially if you are in private practice or considering doing so.

Retirement planning tips for therapy private practice owners

If you have struck out on your own and are in private practice employing as a solopreneur, here are some retirement options for self-employed therapists.

SEP IRA – a retirement account established by a business owner allowing them to save up to 25% of net earnings. Easy solution for business owners.

Solo 401k – this business retirement account is a little more involved than a SEP IRA and allows the owner to contribution $61,000 in 2022. Can only be used for businesses with no employees.

Let’s say you already struck out on your own, grew your practice, and are now employing other therapists. It may be time to think about setting up an employer-sponsored retirement plan for your therapists, one into which you may also contribute.

The major types of retirement plans for therapy private practices are:

401(k)/403(b) – popular type of retirement plan for employer and employees to contribute to, with limits. Some companies set up a match whereby employee contributions are matched by employer contributions.

SIMPLE 401(k) – As long as your therapy practice has less than 100 employees, a SIMPLE plan is an option. The rules are a bit stringent, however. You can’t have any other retirement plans for your practice, and you are required to make contributions for your employees.

Defined Benefit – A defined benefit plan potentially allows you to put away more money on a pretax basis than other types of plans. And they’re not just for the behemoth – defined benefit plans can be great for private therapy practices! There’s a lot to it, though – we provide a deeper explanation here in our blog about business owner investing mistakes.

This is all quite a bit to contemplate, and is certainly not a decision to be taken lightly, as there are legal and tax implications for getting involved with these structures, both initially and on an ongoing basis. It is best to talk to your compliance, legal, tax, or financial advisor.

Financial planning for therapists – tips to follow

The financial mistakes that therapists tend to make are roughly on par with the ones other types of business owners tend to make: not starting to save and/or invest early enough, not taking advantage of compounding, tying up too much money in illiquid investments, etc.

As financial advisors for therapists, psychologists, and private practice owners, we believe that mental health is a noble profession, and a successful career in this field, if managed correctly, can be enough to take of your financial needs. 

If you are a therapist looking for financial advice or thinking about retirement, contact us for a chat.

Sources

Zencare. Therapist Salary: How Much Do Therapists, Psychiatrists, and Psychologists Make?. Retrieved from https://blog.zencare.co/therapist-salary/

Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, Psychologists,
at https://www.bls.gov/ooh/life-physical-and-social-science/psychologists.htm (visited February 10th, 2022).