Financial Considerations for Late-Career Physicians

Last month I addressed the unique financial issues faced by mid-career physicians. This month I would like to address those in their late careers. While there are no hard boundaries to early-, mid-, and late-career, let’s consider a late-career doctor someone who anticipates retirement in the next three to eight years, so typically age 50 to 65.

Determine Why You Are Working

By this stage in a career, savvy physicians who saved early and invested well are working only because they want to. They are already financially independent and could stop at any time. While there is still plenty of financial planning to do, it simply does not carry the same urgency as it does for a doctor who is working because he needs to. Thus, the biggest question for a late-career physician to address is “Can I Retire?” Luckily, this is a remarkably easy question to answer, at least in general. Simply take a look at your budget or spending plan and see how much you are actually spending. If you don’t regularly look at your spending, this would be a very good time to do so. Make sure you include “one-time” purchases like automobiles, vacations, and home improvements. If you are already in your late-career with children out of the house, your regular spending is not likely to change dramatically in retirement. Now, consider how much guaranteed (or nearly guaranteed) income you are receiving now (or will shortly begin receiving). This might include a pension, Social Security, or perhaps even income from businesses or rental properties. Subtract that from your income needs and multiply what is left by 25, since you can spend approximately 4% of your portfolio each year and expect it to last through a 30-year retirement with a high degree of confidence.

That calculation will tell you the size of the nest egg you will need to retire. For example, if you find you are spending $120,000 per year and your spouse expects a $20,000 per year pension and the two of you expect $40,000 per year from Social Security, that leaves $60,000 per year to be provided by your portfolio — $60,000 times 25 equals $1.5 Million. There are many nuances to this process, but that simple calculation will give you a pretty good idea about where you stand with regards to retirement.

If your nest egg already equals 25 times your spending, congratulations! You’re already probably financially independent (FI). If you’re close (say 15 to 20 times) and should easily arrive with a few more years of saving and investing, you know you are on track. However, if you are only at two to 10 times, it is time to make some serious changes in your financial lifestyle. These probably include cutting your spending dramatically so you have more money to invest (and need less to maintain that lifestyle) but may also include changing your investments, hiring a new advisor, working more, or even working longer. While cutting lifestyle is always unappealing, the alternative is far worse. A moderate cut now could stave off a drastic cut early in retirement.

Evaluate Life and Disability Insurance Needs

If you are FI, it is time to cancel your term life and disability insurance. If not, make sure your life insurance policy will last until you are. While term life insurance gets more expensive as you age, if you are in reasonably good health and only need a five or 10-year policy it is still usually affordable. Disability insurance is unique in that it typically only pays until age 65 to 67, or two years, whichever is more. So if you are into late 50s or 60s, you may find that it doesn’t seem like a very good deal any more, since every year you go without being disabled, the lower the potential benefits you may receive in the event of a long-term disability.

Simplify Your Portfolio

This may also be a good time to simplify your portfolio. You can do this in two ways — by reducing the number of investment accounts and reducing the number of investments. There are four good reasons to simplify your portfolio. First, it usually reduces the cost, in both time and money, of managing it. Second, simpler portfolios often outperform more complex ones. Third, as you age, you are likely to have diminishing capacity to manage your own investments. While this is much less likely in your 50s and 60s, and you can protect against that by bringing in a good advisor or a trusted, skilled family member, simplifying your portfolio can help dramatically. Finally, in most couples, the one managing the investments usually has the most interest and skill in doing so. If that person should die first, it can leave the remaining partner in a bad place. A simplified portfolio will be much easier for the remaining spouse and, potentially a new advisor, to manage.

Old 401(k)s can be consolidated into a single traditional individual retirement account (IRA). While this is generally a bad idea earlier in your career as a tax-deferred IRA precludes the use of a backdoor Roth IRA and in some states an IRA receives less asset protection than a 401(k), these become much less significant issues as you move into retirement. Many physician couples can enter retirement with nothing more than a Roth IRA and a traditional IRA for each of them, along with a joint Health Savings Account and a joint taxable (non-qualified) investing account.

The investments themselves can also be simplified. If you were an asset class junkie earlier in your career with 10 to 15 different asset classes in the portfolio, or worse, you directly own dozens of individual stocks, mutual funds, and investment properties, now is the time to simplify. Individual stocks, bonds, mutual funds, and even investment properties can be sold to simplify the portfolio. However, when simplifying, you need to be conscious of both transaction costs and tax costs. If you have many “legacy” stocks and funds with low basis, you are likely to be better off holding them and spending just the income, using them for charitable bequests, and leaving them for heirs than to realize the capital gains at this point. Likewise, it may be very costly to sell an investment property, but you can simplify by hiring a management company to take over some of the tasks you used to do yourself.

Finish Off Your Debt

Savvy physicians paid off their student loans in the first few years after residency and their mortgage in mid-career. They have often been debt-free for a decade prior to their late-career years. However, many physicians are still carrying debt at this stage. Paying off any remaining personal or investment debt prior to retirement can be a great idea as it improves your cash flow situation and reduces investing risk in retirement. Having a three-month vacancy in a rental property matters a lot less when you don’t have a big mortgage payment to make.

Evaluate Your Social Security Decision

Most physicians will qualify for Social Security payments beginning between age 62 and 70 and may also qualify for a pension from a former employer. Deciding when and how to take payments can be surprisingly complex and may require careful study or even professional advice. You also want to make sure you sign up for Medicare as you turn 65.

Social Security is actuarially neutral. That means if you die at your life expectancy, it doesn’t really matter if you begin taking payments at age 62 or age 70. However, delaying payments to age 70 is such a great way to increase your guaranteed income that it is almost universally recommended for healthy, single retirees who can afford to do so, even if it means spending down your tax-protected portfolio in order to do so. In addition to an approximately 8% per year increase in your payments, you also receive substantial protection from inflation and most importantly, living a long life. In fact, this insurance component of Social Security is probably the best reason to delay taking payments. If you die early, you probably won’t spend through your portfolio so it doesn’t matter when you take Social Security. If you live a long life, the backstop your increased, inflation-indexed Social Security payments will provide may turn out to be extremely valuable.

If you are married, Social Security planning becomes far more complicated by virtue of the fact that your spouse can opt to take their own payment or half of your payment, which is often higher for a one-physician family. Survivor benefits also complicated the picture. In addition, other available strategies including the recently outlawed file-and-suspend make it so it is often better for the spouses to claim benefits at different times (typically with the higher earning spouse claiming at age 70).

Estate Planning

Everyone needs a will; and most physicians ought to have at least a revocable trust by mid-career. As you approach retirement, however, it is time to get serious about estate planning. You need to determine if you are likely to owe federal estate tax (for 2017, an estate of more than $5.49 million for singles and $10.98 million for couples) or state estate or inheritance taxes (often with much lower exemption amounts). If so, there are many useful strategies you can use to direct money to your heirs or favorite charities instead of the tax man. You also want to avoid forcing your heirs to go through probate to get their inheritances by maximizing the use of beneficiary designations and trusts. In addition, you want to avoid making mistakes that will increase the income taxes your heirs must pay. For example, it is generally better for them to inherit your home rather than be listed as an owner prior to your death, as that eliminates the step-up in basis they would normally get at your death. Also consider any liquidity needs you may have related to any illiquid businesses or properties you may own.

Asset Protection

While asset protection may become less important to you as you stop practicing (and so can reasonably worry less about being sued above your malpractice limits, especially as the statute of limitations expires) this is also a period of life when you have the most to lose and the lowest ability to replace it by working more. It is important to make sure your home and other properties are titled properly, that you maintain adequate personal liability coverage, that you purchase a tail if you only carried claims-made malpractice insurance, and that you preferentially use retirement accounts over taxable accounts.

Consider Roth Conversions

Roth conversions can be a great way to get tax-diversification for your portfolio and to minimize future required minimum distributions. However, it is generally ill-advised to do these during your peak earnings years. If you gradually retire with several years of part-time work, or if there is a period of time between retirement and age 70, these can be great years to do Roth conversions, at least up to the top of the nearest tax bracket. Pre-paying your taxes in a lower bracket in this manner can reduce your overall lifetime tax burden.

Determining a Spending Strategy

Finally, as you approach retirement you should give some consideration to how you intend to spend down your assets. Different investors have different comfort levels with portfolio withdrawals as a primary source of income, but a good general strategy is to ensure you have enough income, preferably guaranteed income, to cover your needs and then let portfolio withdrawals cover your wants. While you can obviously adjust as you go (just as you did throughout your career), many retirees without pensions purchase a single premium immediate annuity (SPIA) with part of their portfolio in order to supplement the guaranteed income they get from Social Security. These can be purchased with or without an inflation-protection feature and with various benefits for a surviving spouse. A SPIA is essentially purchasing a pension from an insurance company. According to experts, the best time to purchase one is around age 70 where the mortality credits provide a significantly higher income stream than they would have earlier in life.

There have been many academic studies using past economic data to suggest various ways in which one can maximize their portfolio withdrawals without running out of money. However, a more practical approach used by many is to begin with withdrawing around 4% of the portfolio in the first year of retirement and then adjusting as you go. If portfolio returns early in retirement are good, more money can be spent, given away, or left for heirs. If early returns are bad, belts can be tightened to ensure retirees do not run out of money. This is much easier if most or all of your needs are covered by guaranteed sources of income such as Social Security, Pensions, SPIAs, and very safe investments such as a Treasury Inflation Protected Security (TIPS) ladder.

Late-career is the time to determine if you have enough to retire, how to take Social Security, and how best to spend down your assets in retirement. It is also a good time to surrender unnecessary insurance policies, update your estate plan, do Roth conversions, and pay off your debts. Just like early in your career, smart financial planning reduces stress and maximizes available financial resources.

Dr. Dahle is not an accountant, attorney, insurance agent, or financial advisor. He blogs as The White Coat Investor and is the author of the best-selling The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing.