For this Monday Minute, I want to suggest some additional events common to physicians that may cause us to rethink the amount of our emergency fund. We often think about emergency funds as a backstop to keep us from going into credit card debt if we lose our job, have a large medical expense, home repair or other event. I’ve written about them here and here, in terms of possibly using a HELOC or taxable brokerage account in connection with a dynamic cash allocation plan to get a better return on your cash without losing the reason for having an emergency fund in the first place.
For doctors in particular, there are three additional reasons that come to mind for having an emergency fund, which could also impact the amount of cash that needs to be available. The first is a lawsuit or tax audit. Doctors are more susceptible to both than the general public, with audit rates close to 1% annually for doctors and the odds of an employment-related lawsuit probably the same or higher. Neither event is likely to be covered by insurance, so doctors will have to cover their litigation/audit defense costs out of pocket. Most attorneys charge a retainer, or upfront payment, for their services. Depending on the attorney you are working with and the complexity of the litigation, the retainer could be as low as $1,000-$2,000 or as much as $50,000 for a criminal tax investigation or other complex litigation. In any event, lawsuits are not cheap, and attorney fees are often incurred in large batches.
The second is the payment of malpractice tail upon separation of employment. Not everyone has this obligation, but any doctor who does needs to have a good idea of what the tail will cost, whether there are circumstances in which it may not have to be paid (such as moving to another job that uses the same carrier and would not require a tail), and whether the tail can be paid over time.
The final reason is to buyout a non-compete. Although every state is different, in some states buyouts, or liquidated damages, are commonly attached to a non-compete. The employer may be willing to negotiate an even lower amount upon separation, or extended payment terms, but I wouldn’t count on it. If you are practicing in your home town, have no desire to leave town if your job goes south, and are subject to a non-compete with a buyout, then make sure to factor the cost of the buyout in your emergency fund planning.