Preparing for retirement at different career stages

As he began to think about retirement several years ago, John Przybylinski, MD, an internist in Marshfield, Wisconsin, knew that letting his mind and body idle would cost him plenty after he stopped working. Avoiding boredom-and high medical costs-by staying mentally and physically fit was a must.

So before retiring in February, Przybylinski, 67, and his wife, Lennet Radke, mapped out a strategy. They met with a financial adviser, projected future living costs, and stepped up their hiking and biking trips.

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Earlier on the preparation-for-retirement spectrum, 41-year-old Lynn Stewart, MD, is focused on building a nest egg. She’s putting away about 30% of her gross pay in retirement accounts and owns a rental condo in addition to her home.  

As a county government-employed primary care physician in Austin, Texas, Stewart contributes to a pension plan that is expected to more than replace her current income if she retires at 57, though the exact amount she’ll receive  will depend on the financial health of the county. She also contributes to a deferred compensation savings plan. 

She avoided the common, substantial school debt many physicians incur because her parents covered that bill, and she’s part of a dual-income, no children household, but she has also steered clear of many of the costly trappings of being an attending physician, she says. 

“I probably earn a little less than the average [primary care] doctor, but that’s a tradeoff for excellent benefits and a [strong] retirement plan,” she says

Wherever they are on the path to retirement, many physicians face daunting challenges because of their later career starts and significant investments in training, not to mention the spending explosion that tends to occur after graduation.

“The number one thing at any stage is not to go hog wild on spending, which I did myself when I was a physician,” says Carolyn McClanahan, MD, CFP, a former physician who now is director of financial planning for Life Planning Partners in Jacksonville, Florida.

There are some steps physicians can take to improve their chances of success at each career stage, experts say.

Starting out: Save and tackle debt 

Most physicians launch their careers with substantial debt or very little savings, or both. Because many are also debt-averse, they tend to focus too heavily on debt repayment to the exclusion of retirement savings, experts say.

So crafting a debt management plan from the start that blends loan repayment with building retirement savings is a must, according to financial advisers.

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“One of the greatest points of obsession when we have a new resident or someone coming out of training is that the debt is all they can think about,” says Cathy Pareto, CFP, MBA, a financial planner in Coral Gables, Florida, whose clients include physicians and dentists. “I remind them this is an investment in themselves, their biggest asset, and it’s not a short-game strategy.”

Once one loan is paid off, rather than automatically starting on the next loan, young physicians should consider whether it makes more sense to start a tax-advantaged retirement account instead-particularly if it means receiving employer matching funds, she says. 

In a 2016 study, HelloWallet, a provider of personal finance management software and a unit of data firm Morningstar, found that while student debt reduces retirement savings-with each $1 of debt corresponding to 35 cents less at retirement-paying off debt early actually makes the problem worse.

The data firm modeled various payoff scenarios, accounting for different market returns and other factors. In most cases, savers were better off building their savings accounts instead of using extra cash to pay down loans early. 

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“We conclude there are very few circumstances in which paying off student loans early results in a higher net wealth at retirement,” say the study authors.  Of course, doing so would be the better strategy if financial markets perform poorly.

Adjusting expectations about lifestyle is also a critical step for physicians, says Liz Landau, MBA, founder of Landau Advisory LLC, in White Plains, New York. “By the time they get out of training they are a decade behind (the age where most planners recommend starting to save), so they need to save 20% to 25% of their income for retirement,” which often means little to nothing left for down payments on homes, she says. 

“Even my dual-physician couples are struggling” when it comes to saving, she says, noting New York’s high housing costs. “They went to better schools and earn a lot, but they’re in debt and living in a shoebox with a 5- and 7-year-old.”

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A physician starting to save at age 30-a typical age for primary care physicians after residency-needs to set aside 21% of income to be able to retire and count on roughly the same income in retirement as in the working years, says David John Marotta, CFP, AIF, president of Marotta Wealth Management Inc. in Charlottesville, Virginia. 

Depending on debt levels, that savings rate does leave a little room for a home down payment. But financial advisers stress that debt repayment and retirement savings need to come first, so they often recommend buying smaller houses than clients might  desire at first.

To get a handle on debt, the first step is choosing the best loan repayment plan. Is public service loan forgiveness going to be an option? Income-based repayment can also help lessen the impact of loans, though the financing costs sometimes mean borrowers will pay more in the long run. The U.S. Department of Education offers a list of possibilities here:
bit.ly/DOE-loan-options.

Deciding early on what type of practice model to pursue can help greatly in choosing how to pay down student debt, says W. Ben Utley, CFP, a financial adviser in Eugene, Oregon, and president of Physician Family Financial Advisors Inc. Utley routinely works with physicians ending training with about $200,000 in education debt.

Most of his clients don’t qualify for federal loan forgiveness based on public service because generally they go into private practice. But those who might qualify should look into starting repayment as early as possible and opting for the plan with the lowest possible monthly payment, Utley says. That helps push more debt to later years, increasing the chance it will be forgiven.

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Those whose work wouldn’t qualify for public service loan forgiveness should compare consolidation-loan providers, which refinance outstanding debt into a single payment. Some of the biggest include SoFi, LendKey, Common Bond, Darien Rowayton Bank and Earnest. 

Physicians juggling multiple loans should prioritize repayments, putting extra payments toward the highest-interest loans first, experts say.

Mid-career: Find a number and avoid distractions

By mid-career, physicians should begin thinking about how much accumulated savings it’s going to take to maintain the lifestyle they want, Marotta says.

Rather than estimating how much they’ll need as a multiple of current income, he suggests calculating annual retirement spending in today’s dollars, not counting Social Security. Often, that’s found by taking today’s spending and subtracting what clients are saving.

Many of his clients say they’ll spend less in retirement because they don’t have work-related expenses, but other expenses tend to materialize. If the number is $150,000, a typical amount for affluent households, that suggests a nest egg of $3.75 million, or 25 times their annual spending rate.

At age 51, physicians should have nine times the number, or $1.35 million, and by 55, it should be 12 times the figure, or $1.8 million, he says, assuming a retirement at 65. Of course, not everyone follows a straight savings path, particularly physicians who get a late start and who live in more expensive regions of the country. 

With one son in college and one in graduate school, Salvatore Volpe, MD, 51, a private practice internist in Staten Island, New York, admits he made some choices that probably preclude having a flush retirement. 

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Volpe, a member of the Medical Economics editorial advisory board, does economize in other areas, however. He collects recyclables to turn in for cash and often brings canned soup to work for lunch. While he hasn’t saved much for retirement, he does have disability and long-term care insurance.

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He hopes to work well into his 70s, giving him and his wife, a critical care nurse, time to save a little after the children are through college-and fewer years to finance retirement. 

That frugal lifestyle can be crucial once the college years have passed, because they won’t feel the need to hit a huge spending target.

Near retirement: Double down and consider home equity

Doctors who get a late start on saving have a couple of things going for them.

At age 50, when medical school debts are likely paid, savers can take advantage of catch-up provisions in IRAs and most workplace retirement plans. For 2017, those 50 and older can put an additional $6,000 in catch-up contributions into 401(k) plans and $1,000 in traditional and Roth IRAs. Workplace 403(b) plans also allow up to $6,000 in catch-ups, and certain employees with 15 or more years of service can put away even more, depending on the rules of the individual plan.

And even physicians carrying debt into their 50s can benefit more from saving aggressively instead of finishing off education debt, says HelloWallet’s Jake Spiegel, senior research analyst.

“Around age 60 is when it makes sense to repay student loans ahead of schedule at the expense of retirement savings,” he says. “A worker in his or her 50s can still benefit significantly from 10 to 15 years of compounding returns versus paying off student loans early.” After that, there isn’t enough time for compounding to make up for the debt being erased.

Meanwhile, late-career physicians who are beginning to reduce their work hours should consider whether it makes sense to convert some of their funds in traditional, pre-tax retirement accounts to Roth IRAs, in which after-tax contributions grow and are withdrawn tax-free in retirement.

The conversions require paying taxes on the money coming out of the traditional IRA, so if a physician will be in a lower tax bracket because he or she is working less, it creates an opportunity to convert at a lower tax rate.

Given the uncertainty of future tax rates, however, some planners are recommending holding off on that strategy to see if rates as a whole are reduced. Waiting for lower tax rates on conversions might be worth foregoing a year of account growth in a Roth, says Grant Bledsoe, CFA, CFP, a financial adviser in Lake Oswego, Oregon.

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Another late-career strategy is to consider tapping home equity using a reverse mortgage. A growing number of financial advisers and retirement income researchers-including the Center for Retirement Research at Boston College and Wade Pfau, a retirement income professor at The American College of Financial Services-is recommending taking out a reverse mortgage line of credit at age 62 and letting it grow over time as interest rates rise. The money can be used to pay living expenses in years when financial markets are down, allowing retirement accounts time to recover.

Josh Mettle, director of physician lending for Fairway Independent Mortgage Corp., says his firm recently worked with a physician in his mid-60s who has about $3 million saved for retirement. He’s cutting back on his practice hours but doesn’t want to begin Social Security payments or portfolio withdrawals too early because he comes from a family that tends to live long lives. His home is worth about $600,000, with about $100,000 left on a traditional mortgage. 

He’s now supplementing his income by $5,000 per month with a reverse mortgage line of credit. At age 70 ½, when he’ll be required to take at least minimum withdrawals from his retirement accounts, he can pay back the line of credit, taking a home interest tax deduction to offset the income taxes required on his IRA withdrawals. The payoff then creates more room on the reverse mortgage for later in life in case he runs into a need for cash again.  

It’s important to learn all the details and costs that accompany these home equity conversion mortgages. A good place to start is the National Council on Aging.

Finally, late-career physicians should consider how to think about portfolio risk as interest rates finally begin to tick higher and as their own timeline to withstand stock market volatility shrinks.

These steps are important, McClanahan says, but resisting the urge to spend is the most crucial move of all.