Retirement planning secrets for physicians

How much you need to retire: ©Cozine - stock.adobe.com

Think about your retirement dream. Is it sitting on a Caribbean beach, drink in hand, staring out across the water? Is it a house on a mountain overlooking a pristine lake? Or is it traveling to Europe twice a year to the trendiest locations?

Now think about the reality. Can you afford any of that? Or will retirement be living in your existing house without enough money to replace the worn carpet in the bedroom? Will it be continuing to work part time at a job you don’t like because you have no other choice?

To make sure you are choosing from the former and not the latter, financial planners say you need to have a plan that gets you to where you want to be, and the sooner you start, the better.

How much you need to retire depends on what your plans are. A retirement full of European trips is a different financial calculation from one in which you go camping in a state park a couple of times a year. There is no magic retirement number that applies to everyone because it all comes down to spending.

“I get asked all the time, ‘How much money do I need to retire?’” says Joel Greenwald, M.D., C.F.P., wealth adviser, Pine Grove Financial Group. “I don’t know. I have clients that spend $4,000 a month in retirement. They have plenty of money and could spend more. I have clients that spend $20,000 a month in retirement. How much you need all comes down to how much you spend because obviously the person who spends $4,000 a month versus the person who spends $20,000 a month is a different input.”

The basics

One simple target physicians can aim for is to save 20% of their gross income. Greenwald says if you can put that 20% in a diversified portfolio, that will help fuel long-term financial growth if you start early in your career.

“If they save more than 20%, they’re going to have the flexibility to cut back or retire early,” Greenwald says. “If they choose to save 15%, that’s fine. Maybe they’re prioritizing current spending, but they’re going to be working more years than their peers. It’s just as simple as that. The people who save 30% to 35% of their income are financially independent earlier and can cut back their [full-time job] earlier. The ones who never listen and are constantly saving 10%, they’re not growing their wealth and they’re going to be stuck working into their 70s.”

You can start calculating how much you will need to retire by looking at how much you are spending now. Expenses such as life and disability insurance and tuition for your children probably won’t be there when you retire, but an increased travel budget might cancel out those savings. For younger doctors, there may be too many current costs — student loan payments, child tuition payments, day care expenses — to do an accurate forecast, hence the simple 20% saving rule. Once you are in your mid-50s and it becomes clearer what you need month to month, a more accurate forecast can be created.

However, the financials can get complicated because of taxes. Greenwald gives the example of a doctor with $4 million in their portfolio, but it is all in an employer’s pretax retirement plan that gets rolled over to an individual retirement account upon retirement.

“The problem with that is it’s not really $4 million because the government has to get its cut,” says Greenwald.

If the physician needs $6,000 a month for expenses, it may require an additional $1,000 withdrawal to cover taxes. And then if you suddenly need a new roof on the house, a new car, and you decide to take a dream trip to Europe, it might require a $100,000 withdrawal to cover everything for that year. This increase will push you into a higher tax bracket, resulting in even more lost money.

“It’s not only how much money you have when you retire, but that it’s in different tax buckets, and ideally not all of it is in pretax accounts, but again, it all gets back to spending,” says Greenwald.

Jamie Malone, C.F.P., C.P.A, wealth manager, CW Advisors, says he assumes someone will live to be 100 and will need 30 to 35 years of retirement income. By looking at how much a person is spending per month now, and by estimating what they will need in retirement based on the lifestyle they want to live, an overall savings goal can be established. “What we’ve found most helpful is to come up with a game plan and each year check in with how that’s going because life happens, things happen,” says Malone. “With any spending, you have to look at how it impacts the longer term. I don’t know if there is a magical retirement number out there, but there is probably a reasonable range for most people that they would feel comfortable with.”

One thing all physicians can do is to make sure all their investment accounts line up with their strategy and aren’t being ignored, says Malone. “Someone will say, ‘Oh, I have this old 401(k) sitting around that’s invested in bonds or cash that’s been earning nothing for the last 15 years,’” he says, adding that the person missed out on 15 years of compound growth. “That one hurts a little bit because it’s been a long period of time.”

For physicians in their 60s, there’s one strategy that can really help: keep working — at least a little. For example, Greenwald says a 63-year-old physician may be fed up and doesn’t want to work as hard as they have been, but maybe doesn’t have the money to retire yet. One feasible solution is to drop from full-time to half- or three-quarters-time work. “You’ll have more time to do the things you want to do, but keep having an income such that you don’t need to tap your retirement portfolio for another two, three, four or five years. That’s very powerful.”

Even if you have to tap your retirement for $2,000 a month while working to cover the difference, that’s still better than taking out $10,000 a month to cover all expenses, says Greenwald.

Unfortunately, not everyone starts saving for retirement early enough or has the discipline to invest enough income to retire when they want to. One doctor who was in his early 60s came to Greenwald. He was very unhappy and wanted to retire but he had never saved much. “You can run the numbers up, down and sideways; there’s no way he can retire, but he’s really unhappy,” he says. Others have approached him with the attitude that they just need to retire in a few years regardless of financial circumstances. “They think I don’t understand and that they’ve been doing their job for 30 years and just need to be done or that I’m not being fair. Their numbers don’t work, so this idea of
‘I deserve to be done at a certain time’ doesn’t always turn out well.”

Malone says one of the most basic financial tools can help someone now be successful in retirement later.

“This is something that a lot of people don’t do, but even having a simple budget before retirement and using that into retirement — I found that those have been some of the most successful people managing retirement and not feeling like it was a big hurdle,” says Malone. “A budget can help you know what you’re really spending and then trying to align that with what really matters to you with where your money goes. I think for most people, that’s really where the opportunities are: ‘I’m spending money on things that don’t align with what’s most important to me and I’m not even aware of it.’”

A budget helps provide a framework of your spending habits, which can help you calculate how much you need to have saved to retire, says Jeff Pratt, C.F.P, C.R.C, financial adviser, Finity Group.

“Here’s an extreme example: If someone comes to me and says, ‘I want to retire and I only have $250,000,’ on paper, that looks tough,” says Pratt. “But if they only need $1 a month to live on, they’re OK. Someone else might say, ‘I have $5 million invested and it looks pretty good,’ but then they say they need $1 million a month to live on, that’s not going to work. The dollar amount that people think they need to retire is out there, but it’s only as good as what your monthly cash flow needs are.”

The safety margin

Nothing strikes fear into a retiree more than unexpected expenses. Years or even decades of savings can be wiped out without the proper planning to cover unexpected expenses that might come after retirement. Coming from the health care environment, doctors know all too well how a medical emergency can quickly balloon into hundreds of thousands in bills and worry it could wipe out their nest egg.

“A lot of people, even physicians, are worried about this catastrophic health care event that’s going to bankrupt them,” says Greenwald. “But if you have good insurance, which is either through your work or you’re on Medicare with a supplement, health care expenses are pretty predictable. There shouldn’t be a horrible, catastrophic out-of-pocket health care bill for $500,000.”

Health care plans will have a cap on how much you have to pay out of pocket, so that’s a predictable expense. However, there may be bigger threats lurking, such as inflation, that can wreck a poor retirement plan. Recently, 40 years of very low inflation was followed by a spike up to 9%.

This is where Greenwald says a margin of safety in a retirement plan comes in. Retiring at age 65, it’s feasible for either you or your spouse, if not both, to live to be 95. “You don’t want to run a financial plan when you spend your last dollar the day you die or assume everything is going to be great for the next 30 years because there are just too many unknowns,” says Greenwald.

A good plan should take into account that inflation might spike or that some other expense may need to be paid without endangering the overall retirement plan.

A standard financial rule is to have three to six months of cash available while you are working to cover unexpected expenses, but Pratt says retirees should push that to 12 to 24 months for an emergency reserve fund. “That way, in those moments when you have those unexpected things come in, you’ve got that cash cushion built up that you can draw from on a regular basis,” says Pratt.

In some cases, a home equity line of credit might be the best option to pay off a large expense, says Pratt. Even though there would be interest to pay on the loan, it might be a good choice if the only other option was to completely deplete your cash reserves or be forced to sell investments in a down market.

As for inflation, a diversified portfolio can help because stocks are usually a good hedge against inflation. “You don’t want to be in all bonds or all annuities because if you are getting $10,000 a month in annuity payments and inflation goes up, your $10,000 is going to lose its purchasing power pretty quickly,” says Greenwald.

Overlooking inflation and its future effects on your portfolio is one of the biggest mistakes Pratt says he sees people make. “Someone will look at their budget and say, ‘I need $11,000 a month now, and in retirement I’m pretty confident it’ll be $9,000 from an after-tax standpoint,’” says Pratt. “OK, but what is $9,000 a month inflated at 3.25% inflation over X amount of years? When you look at that, you can now start understanding what that means to your portfolio.”

Inflation isn’t all bad, though. Malone points out that when inflation is high, fixed-income investments have a higher yield than when inflation is low, so having a good portfolio mix can help offset some inflation losses.

Regardless of the inflation rate, if you understand your spending habits around your lifestyle now, it can help predict what you need later. Greenwald says you don’t have to plan for major lifestyle upgrades in retirement because people don’t suddenly become different people after they stop working. “If you’re a spender, you’re going to be a spender,” he says. “On the other hand, if you accumulated a lot of money because you weren’t a spender, it’s really hard to get these people to start using it – not just for the sake of using it, but to enjoy their life more.”

No matter your current situation, it’s important to set goals and stay focused on them.

“I would simply impress the importance of not letting the short-term noise of the day, of the week, of the month get in the way of your long-term financial goals, especially around retirement,” says Malone. “Most people are going to be saving little by little, month by month, and I think it’s important to stick to the long-term plan. You want to review it, you want it to be refreshed, it can be revised. But stick with it and do not let the whims of the day affect your actual execution of working toward saving toward your long-term objectives.”