Doctors Have Many Options for Retirement Savings

FINANCIAL PLANNING

Doctors Have Many Options for Retirement Savings

For many people, the most important part of financial planning is preparing for retirement. Their goal is to be able to stop working yet still have enough money for a comfortable

lifestyle, even if retirement stretches out for decades.

In this area, physicians may have some advantages. "Many

doctors have the unique opportunity to be employed by a corpo-

ration at the same time they may

No matter where you invest, you should decide how much money you will have to accumu-

have some level of private practice," says Diahann Lassus, president of Lassus Wherley & Asso-

late for your retirement. Will ciates, a wealth management

$100,000 be enough? Will you firm in New Providence, N.J.

need $1 million or more? When do you reach the point where you've accumulated enough wealth to support yourself comfortably without earned income?

"They may work for a hospital but have a private practice as well. If so, they may have the opportunity to participate in the corporate benefits with a 401(k)

plan, profit-sharing plan, deferred

compensation, and so on. At the same time, they can establish their

own pension plans."

Whether or not you can "double-dip" in this manner, there cer-

tainly are many ways in which you can save for retirement.

Employer-sponsored plans allow you to save for your retirement

on a tax-deferred basis; you can invest outside of these plans,

too, for additional retirement funds.

No matter where you invest, though, you should decide how

much you'll have to accumulate for your retirement. Will

$100,000 be enough? Will you need $1 million or more? When

do you reach the point where you've accumulated enough wealth

to support yourself comfortably without earned income?

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"You need to get an idea of what you'll want to spend," says

Brent Brodeski, managing director of Savant Capital Manage-

ment in Rockford, Ill. "The rest is math."

In fact, that math can be quite sophisticated. Financial plan-

ners often use "Monte Carlo simulations," putting each client's

future prospects through various "what-if" scenarios, and

those scenarios may be grim.

Two numbers are crucial for calculating how much money you'll need to save for your

"One of our clients had to go into a nursing facility after retirement." says Stuart Welch

retirement. First, how much III, a financial planner in Birm-

money will you want to spend ingham, Ala. "Not only is he

after you retire; second, how large an investment portfolio have you accumulated. The ratio of these two numbers generally will determine whether retirement is feasible.

paying $6,000 a month to be there, it costs another $9,000 to hire extra help. He has assets, so he can afford it, but these are the types of negative scenarios that may occur."

Weighing multiple outcomes,

including such worst-case scenarios, financial planners hope to

find a confidence level of 90 percent or greater that you will be

able to maintain your lifestyle to age 90 or beyond. In such cal-

culations, two numbers remain crucial for answering the "how

much is enough?" question. First, how much will you want to

spend after you retire; second, how large an investment portfo-

lio have you accumulated. The ratio of these two numbers gen-

erally will determine whether retirement is feasible.

Playing the Percentages

For some advisers, the maximum amount that a retiree should draw from his or her portfolio is 4 percent a year, assuming he or she is young and in good health. From there, you can back into a retirement goal. Someone retiring at age 70 can be a little more aggressive with the draw, because of the shorter retirement period, so this individual might go up to 6.5 percent or 7 percent.

That is, if you retire at age 60 with a $1 million portfolio, you could comfortably withdraw $40,000, assuming a 4 percent withdrawal rate, while a much older retiree might withdraw as much as $70,000 (7 percent). Retirement projections usually assume

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that these initial amounts increase each year to keep up with inflation. Turning these numbers around, in order to retire comfortably, you should accumulate 15 to 25 times the amount that you wish to spend in retirement, if you want to avoid running short of money.

"If you assume a retirement in the 60-65 age range, living until the late 90s, and spending $125,000 to $150,000 per year, aftertax, and there's no pension, you'd probably need $2.5 million to $3 million," says Marilyn Bergen, co-president of CMC Advisers, a financial planning firm in Portland, Ore. She notes that the amount needed would be at the upper end of that range if the portfolio is held mainly in an IRA, because withdrawals probably would be taxable.

Calculate Your Retirement Needs

Performing a retirement savings needs calculation can positively impact retirement planning and savings behavior, according to the Employee Benefit Research Institute (EBRI), a Washington, D.C.-based research organization.

EBRI conducts an annual survey on retirement confidence. In its most recent survey, 44 percent of those who perform such needs assessments say that they have changed their behavior as a result. For example, those who make a calculation report that they're increasing their savings (52 percent), changing the allocation of their money (13 percent), starting to save less (11 percent), researching other savings methods (10 percent), reducing debt (5 percent) and opening new accounts (5 percent).

One tool to help estimate how much you'll need to save for a comfortable retirement is the "Ballpark E$timate," an on-line tool sponsored by and the American Savings Education Council (ASEC), both programs of EBRI. The Ballpark E$timate comes in two formats--an interactive on-line version that provides instant results and a print version that can be downloaded and printed out. Both are available free on the Web at ballpark/.

Both versions take into account projected Social Security benefits and earnings assumptions on savings. The on-line version allows individuals to customize several key factors in calculating how much they need to save for retirement: how long they think they will live, when they expect to retire and other variables as well.

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Are you on track to accumulate a portfolio of $1 million, $2

million or more? And if not, what can be done for your bantam

nest egg? Invest in financial stocks and REITs and domestic

small-value funds and emerging markets bond funds, the top per-

formers of the last decade, in order to juice up returns? That

hardly seems prudent--you shouldn't shoot for higher returns by

being too aggressive.

As Dave Foster, of Foster & Motley, a wealth management

firm in Cincinnati, puts it, "You might tell yourself, `I can retire,

but in order to meet my spending goals I need to earn 11 percent

a year on my investments.' That

Each year you continue to work is a powerful variable in reaching retirement goals--it is

may work, but I wouldn't count on it."

Instead of aiming for unrealis-

another year in which you can tically high returns, you should

fund your retirement while be hardheaded about the choices

you're not consuming assets. If you continue to work, the multiple of spending has to go down, when calculating how much is enough.

you face. "It's really important in these kinds of situations to admit, `I don't think I can retire when I'd like to retire, and live the way I'd like to live,'" Mr.

Foster says.

One option that may be practical for many physicians in such

a situation is to keep working. Each year you continue to work

is a powerful variable in reaching retirement goals--it is another

year in which you can fund your retirement while you're not con-

suming assets. If you continue to work, the multiple of spending

has to go down, when calculating how much is enough.

Take the example of Dr. X., who first met with a financial

planner about 15 years ago. He had less than $400,000 in assets,

and he didn't see how he could afford to retire. So his planner

encouraged him to work another year. This went on, one year at

a time, for over a decade. The doctor slowly accumulated more

assets while he bought some time, and eventually he could retire.

Another possible approach is to liquidate nonfinancial assets

to provide additional capital. The continued strength of the hous-

ing market may mean that real estate will play a large role in

some physicians' retirement plans. "We've looked at reverse

mortgages and have found that they're not competitive as financ-

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ing arrangements," Mr. Welch says. "However, we have a lot of clients who own two homes. Sometimes selling one of those homes will help provide money for retirement."

Doctors who own just one home also may discover retirement funds there. "We have suggested downsizing a personal residence and even moving to another area of the country where housing is less expensive," says Mr. Welch. "The tax code helps because you can sell a house and exclude some capital gains from your taxable income." This tax break, which applies to a primary residence after two years' occupancy, permits an exclusion of $250,000 for single taxpayers and $500,000 for married couples.

Not every physician will be willing or able to keep working or cash in home equity. Many doctors, though, can increase the pace of pre-retirement investing to build a larger retirement fund.

Investments Held in IRAs, by Type of IRA, 2004

(Percent of U.S. households owning each type of IRA)

Traditional Roth

IRA

IRA

EmployerSponsored

IRA*

Mutual funds (total) Stock Bond Hybrid Money market

66%

73%

52%

54

57

38

27

21

22

21

14

16

28

20

22

Individual stocks

39

30

28

Annuities (total) Fixed Variable

32

17

20

24

13

12

20

12

12

Bank accounts

28

17

17

Individual bonds

16

13

13

Other

6

4

2

*Includes SIMPLE IRAs, SEP IRAs, and SAR-SEP IRAs. Note: Multiple responses included. Number of respondents varies.

Source: 2004 IRA Survey, Investment Company Institute.

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