For physicians with 15 or 20 years left to work before retirement, the planning is easy–as time is on their side. Adjustments can be made regarding savings rates, age of retirement, and future cash flow needs. When retirement is imminent within three years, the planning options are limited, and physicians must become realistic about what is mathematically feasible as far as generating sustainable cash flow to support their lifestyle. Here are some issues for physicians who are facing retirement within three years or less.
For physicians with 15 or 20 years left to work before retirement, the planning is easyÃÃ–as time is on their side. Adjustments can be made regarding savings rates, age of retirement, and future cash flow needs.
When retirement is imminent within three years, the planning options are limited, and physicians must become realistic about what is mathematically feasible as far as generating sustainable cash flow to support their lifestyle. Here are some issues for physicians who are facing retirement within three years or less.
Psychologically, this transition can be frightening for two reasons.
First, after spending a lifetime seeing patients every day, physicians suddenly will stop all work-related activities. They will face a full-time retirement with the uncertainty of what will keep them busy each day.
Second, for the first time since medical school, physicians will no longer receive a regular paycheck. Moving forward, accumulated savings and investments becomes their income. Suddenly, they are forced to spend savings.
Some questions that need to be asked:
• How much can I spend after taxes so my spouse and I will never run out of money throughout our lifetimes?
• Where should I take this cash flow from?
• Am I taking too much risk in my portfolio?
• Should I begin taking Social Security right away or wait?
These financial uncertainties can seem overwhelming. They are critical life-altering questions that need precise answers and must be carefully and thoroughly calculated.
Over the years, the slightest variations of an annual income can have a negative effect on the success or failure of not running out of money in retirement. As little as $10,000 per year in additional income can spell failure for a retirement plan.
Retirement brings up questions about long-term health care, estate and inheritance taxes, gifting, education of grandchildren, special-needs children or spouses, travel, second homes, monthly income needs, vacation planning, and incompetency issues. Waiting until a few months (or years) before retirement is not the prudent approach in planning for this phase of life.
However, if physicians are faced with a health-induced, immediate retirement, or are now retired and have never checked their personal circumstances via a well-planned analysis, it is never too late to have these calculations performed.
One of the first tasks in facing retirement is to examine current living expenses and decide if they will remain the same or not. Some expenses are fixed, while others will vary.
Most retirees have no desire to downsize their homes or lifestyles. Whether this is an option, it will be spelled out with a comprehensive analysis. In addition to current monthly expenses, there may be new expenses for entertainment, hobbies, and travel to cover the available time.
Lifestyle and cash flow are a function of a percentage of withdrawal from assets. Basic advice is to approach this with two goals. The first level is the way it would look if physicians had their wish. The second level is the way it would look if they had to deal with what was tolerable.
A completed retirement analysis will provide desired needs. Most times, what is prudent and acceptable will fall somewhere in between in order to achieve a suitable degree of probability of success.
There are always priorities to make things work: cash flow, remaining estate, amount of portfolio risk, retirement age. All have an effect on an acceptable probability of success for never running out of money that is based on investable assets and income sources.
The next step is to look at the retirement and non-retirement accounts and see how much volatility there is and if it is not too much (or too little) to achieve your goals.
When the data is compiled, computed, and analyzed, the level of standard deviation (risk) recommended will be dictated within a narrow range. This will represent the maximum amount of risk needed to meet goals given one’s exact circumstances.
Taking addition risk would be counterproductive, as the “consequence” of loss may prove devastating and would far exceed the “consequence” or benefit of the gain.
The next step is to create an efficient portfolio that produces an expected rate of return that commensurates with the dictated rate of risk. One should combine assets classes that:
1) Are not correlated and, therefore, would not all go up or down at the same time;
2) Have the asset classes under- or over-weighted according to the expectations of future market moves.
This is not a static process but a dynamic one that recommends rebalancing of asset classes and monitors the returns of managers compared to their performance against their peers and appropriate indices.
Finally, there are ways to purchase future lifetime-income streams to meet fixed recurrent expenses, and hedging strategies to protect the downside risk even if it means giving up something on the upside. Learning about these tools can help physicians plan better.
Cash flow should be established so that it is automatic and delivered the same a paycheck. This should eliminate stress and offer a sense of comfort. Remember, cash flow must increase to keep up with inflation or lifestyle will slowly diminish.
Once a retirement plan is established and running, it should be retested and monitored so current and future cash flow remains within the boundaries of what is considered an acceptable probability of success.
With this type of planning, the guesswork and fear is taken out of retirement. One’s finances can feel they are on auto pilot, leaving physicians to concentrate on how to enjoy their new professionÃ–retirement!
John J., John S, and Traudy F. Grande, CFPs, are the editors of the Money Matters column. They are owners and principals of Grande Financial Services Inc., Oakhurst, NJ, (www.grandefs.com) and registered principals of Wells Fargo & Co., member of SIPC. The Grandes advise doctors across the country on a diverse range of investment and financial matters. Readers may submit their financial questions to them at email@example.com or call 800/722-1258.
The views expressed in the Money Matters column are the views of Grande Financial Services, and should not be considered as investment advice. Grande Financial Services does not provide tax or legal advice. All information is believed to be from reliable sources; however, Grande Financial Services make no representation as to its completeness or accuracy. Past performance does not guarantee future results. Investing involves risk including the potential loss of principal.