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| From Physicians Financial News® Planning for Early RetirementDonald Jay Korn, Contributing Editor[Physicians Financial News 17(8):s10, s26, 1999. © 1999 PFN Publishing, Inc.]
"Everyone wants to retire early, and that's especially true of physicians," says James P. King, a financial planner in Walnut Creek, Calif. "Forget 65 or even 60. Today, doctors are looking to retire at 55 or 50." The idea of retiring in your 50's may seem attractive, but there's a flip side: When you're no longer working, you're no longer earning a living. Yet most retired doctors intend to maintain a comfortable lifestyle in retirement, so the money has to come from somewhere. Indeed, one of the main reasons that doctors hire financial planners is to tell them when it's prudent to retire and how much they should save during their working careers. In a typical scenario, a planner will get an idea of how much a client spends now and how much is likely to be spent in retirement. A physician who plans to spend $100,000 a year, for example, might be told that a retirement fund of about $2 million will be necessary. Think Long-Term Once the target has been set, the question is how do you get there from here. That is, if you have $400,000 saved up at age 40 and you want to retire with $2 million at 55, how much should you invest each year, how do you allocate your investments and what kinds of returns should you expect? Generally, planners will advise physicians to contribute substantially to retirement funds and to invest most of that money in the stock market. "Almost universally," says Ron Kelemen, a financial planner in Salem, Ore., "my clients develop a `siege mentality' as they approach retirement age. They develop a short-term outlook, so they want to convert everything to cash or `safe' investments." In truth, few young retirees will live for only a few more years. According to the Internal Revenue Service, a 60-year-old couple has a joint life expectancy of nearly 30 years. "You could be retired longer than you worked," says Mr. Kelemen. "Therefore, you need to think long-term. With a paid-off mortgage, the kids out of college, a retirement plan, Medicare and Social Security, you may have less need for liquidity during retirement than during your working years. After you stop working, your investments will have to work even harder, and that means maintaining a strong commitment to stocks in your portfolio." How can you tell whether your planner is making the appropriate recommendations to help you attain a desirable retirement? "There should be a considerable amount of information-gathering," says Michael Halloran, a financial planner in Needham, Mass. "The adviser should ask you about the way you live now and the way you'd like to live in retirement. Then, today's dollars should be adjusted for inflation, to get a more realistic projection of retirement spending." Mr. Halloran says he now uses a 2.5 to 3 percent inflation rate in his projections; that's the rate that prices have climbed during the 1990's. Other factors should be considered, too. If you are planning to sell a big house in the Northeast and retire to a smaller place in Arizona, you may free up a considerable amount of capital that can be used for retirement expenses. You or your spouse may expect an inheritance and you may anticipate receiving money from the sale of your practice. "I'd err on the conservative when taking such items into account," says Mr. Halloran. "If you expect to receive $100,000 from the sale of your practice, I'd use $50,000 for the projections. You never know what the future might bring, and it's better to be surprised on the upside." In addition, says Mr. Halloran, you should project some possible need for long-term care. "That's a real wild card. You or your spouse may get a stroke and have to spend years in a nursing home. Therefore, you should plan to pay premiums for long-term care insurance or to pay for care out of the money you've accumulated." The important thing, says Mr. Halloran, is that a financial planner brings the facts to light so that you truly understand your options. "Judging from my clients, doctors will do what's necessary. If they want to retire at a certain age, they'll invest more and spend less. They'll hold onto the old car for another year if that will help them meet their goal." Post-Retirement Plans Besides helping you to set objectives and advising you about asset allocation, financial planners can offer more assistance with your retirement planning. "A key issue is what you plan to do with your life after you `retire,' especially if you retire at 50 or 55," says Thomas Zanecchia, a financial planner in Denver. "Some people just want to spend their time sailing and skiing. If that's the case, you'll have to live off your investments, so you should plan accordingly." Not every retired doctor is looking forward to a 20-year vacation, though. "Some doctors want to teach, others want to start a business," says Mr. Zanecchia. "One of my clients developed a component for artificial knees, as part of his practice. He wants to retire and set up a manufacturing company. In many instances, a financial planner can help you with such new pursuits." Moreover, an astute financial planner will be able to help you find tax-advantaged ways to put money aside. Most physicians will want to save through a tax-deferred retirement plan, such as a profit-sharing plan or a 401(k). However, there are several plans to choose from, with varying features. "Some plans can be skewed so that most of the benefits go to the physician or physicians," says Avery E. Neumark, director of employee benefits at the accounting firm of Rosen Seymour Shapss Martin & Company in New York. "Other plans, which offer more to employees, may be valuable in terms of employee recruitment and retention." In general, most tax-deferred retirement plans allow no more than $30,000 per year to be contributed to any employee's account, including that of a sponsoring physician. If you'd like to contribute more, consider a "defined-benefit plan," despite the extra administrative expense. "In the right circumstances, a physician who's over 50 can contribute $65,000 or more to his or her own account and very little for other employees," says John M. Peterson, partner in the Norfolk, Va., office of the accounting firm of Goodman & Company. What are those circumstances? "You should be considerably older than your employees without other accumulations in tax-deferred plans," Mr. Peterson says. "Next year, a new law will go into effect that will make defined-benefit plans even more attractive because you'll be able to combine them with other types of plans." There are other ways to provide additional retirement savings on a tax-deferred basis. With a variable annuity, you can invest in mutual fund lookalikes called subaccounts and not pay tax until you withdraw the money. "If you're healthy and have a genuine need for life insurance, you may prefer variable life insurance," says Mr. Halloran. Again, you can invest among several subaccounts without paying tax each year. Within limits, you can then tap this investment fund tax-free, via loans and withdrawals, if you need retirement income. At your death, your beneficiaries will receive a death benefit, free of income tax. Of course, not every dollar saved for retirement will be held in a retirement plan or an insurance contract. Doctors likely will have personal portfolios, with stocks, bonds and mutual funds, and planners can help there as well. "Tax-efficiency is a key concern for physicians," says Mr. Zanecchia. "Doctors will owe less tax each if they use a buy-and-hold strategy for their individual stocks. In mutual funds, index funds may be attractive because they don't trade actively and thus don't generate large taxable gains for investors." In the real world, says Mr. Zanecchia, most doctors will have a relationship with a broker before they retain a financial planner. "I don't want to interfere with those relationships, as long as the client is satisfied. In fact, I'll send copies of my reports to the client's broker, if that's desired. However, I will monitor the broker to see that the client's best interests are being served. Some brokers have their own agenda, so I make sure my clients aren't being sold the firm's proprietary products or stocks that are being pushed without a good reason." A good broker may help you build up a prodigious portfolio for your retirement, but adding a financial planner to your team can provide another pro to propel you along the proper path. |
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