Doctors Have Many Options for Retirement Savings

1 Doctors have many Optionsfor Retirement SavingsFor many people, the most important part of financial plan-ning is preparing for Retirement . Their goal is to be able tostop working yet still have enough money for a comfortablelifestyle, even if Retirement stretches out for this area, physicians may have some advantages. Manydoctors have the unique opportunity to be employed by a corpo-ration at the same time they mayhave some level of private prac-tice, says Diahann Lassus, pres-ident of Lassus Wherley & Asso-ciates, a wealth managementfirm in New Providence, They may work for a hospitalbut have a private practice aswell. If so, they may have theopportunity to participate in thecorporate benefits with a 401(k)plan, profit-sharing plan, deferredcompensation, and so on. At the same time, they can establish theirown pension plans. Whether or not you can double-dip in this manner, there cer-tainly are many ways in which you can save for plans allow you to save for your retirementon a tax-deferred basis; you can invest outside of these plans,too, for additional Retirement matter where you invest, though, you should decide howmuch you ll have to accumulate for your Retirement .

2 Will$100,000 be enough? Will you need $1 million or more? Whendo you reach the point where you ve accumulated enough wealthto support yourself comfortably without earned income? PLANNINGNo matter whereyou invest,you should decide how muchmoney you will have to accumu-late for your Retirement . Will$100,000 be enough? Will youneed $1 million or more? Whendo you reach the point whereyou ve accumulated enoughwealth to support yourself com-fortably without earned income? You need to get an idea of what you ll want to spend, saysBrent 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 sfuture prospects through various what-if scenarios, andthose scenarios may be grim. One of our clients had to gointo a nursing facility afterretirement. says Stuart WelchIII, a financial planner in Birm-ingham, Ala.

3 Not only is hepaying $6,000 a month to bethere, it costs another $9,000 tohire extra help. He has assets,so he can afford it, but these arethe types of negative scenariosthat may occur. Weighing multiple outcomes,including such worst-case scenarios, financial planners hope tofind a confidence level of 90 percent or greater that you will beable to maintain your lifestyle to age 90 or beyond. In such cal-culations, two numbers remain crucial for answering the howmuch is enough? question. First, how much will you want tospend 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 the PercentagesFor some advisers, the maximum amount that a retiree shoulddraw from his or her portfolio is 4 percent a year, assuming heor she is young and in good health. From there, you can back intoa Retirement goal. Someone retiring at age 70 can be a little moreaggressive with the draw, because of the shorter retirementperiod, so this individual might go up to percent or 7 is, if you retire at age 60 with a $1 million portfolio, youcould comfortably withdraw $40,000, assuming a 4 percent with-drawal rate, while a much older retiree might withdraw as muchas $70,000 (7 percent).

4 Retirement projections usually assumeFINANCIAL numbers are crucialforcalculating how much moneyyou ll need to save for yourretirement. First, how muchmoney will you want to spendafter you retire; second, howlarge an investment portfoliohave you accumulated. The ratioof these two numbers generallywill determine whether retire-ment is these initial amounts increase each year to keep up withinflation. Turning these numbers around, in order to retire com-fortably, you should accumulate 15 to 25 times the amount thatyou wish to spend in Retirement , if you want to avoid runningshort of money. If you assume a Retirement in the 60-65 age range, living untilthe late 90s, and spending $125,000 to $150,000 per year, after-tax, and there s no pension, you d probably need $ million to$3 million, says Marilyn Bergen, co-president of CMC Advis-ers, a financial planning firm in Portland, Ore. She notes that theamount needed would be at the upper end of that range if theportfolio is held mainly in an IRA, because withdrawals proba-bly would be a Retirement Savings needs calculation can positivelyimpact Retirement planning and Savings behavior, according to theEmployee Benefit Research Institute (EBRI), a Washington, organization.

5 EBRI conducts an annual survey on Retirement confidence. In itsmost recent survey, 44 percent of those who perform such needsassessments say that they have changed their behavior as a result. Forexample, those who make a calculation report that they re increasingtheir Savings (52 percent), changing the allocation of their money (13percent), starting to save less (11 percent), researching other savingsmethods (10 percent), reducing debt (5 percent) and opening newaccounts (5 percent).One tool to help estimate how much you ll need to save for a com-fortable Retirement is the Ballpark E$timate, an on-line tool spon-sored by and the American Savings EducationCouncil (ASEC), both programs of EBRI. The Ballpark E$timate comesin two formats an interactive on-line version that provides instantresults and a print version that can be downloaded and printed are available free on the Web at versions take into account projected Social Security benefitsand earnings assumptions on Savings .

6 The on-line version allows indi-viduals to customize several key factors in calculating how much theyneed to save for Retirement : how long they think they will live, whenthey expect to retire and other variables as well. Calculate Your Retirement NeedsAre you on track to accumulate a portfolio of $1 million, $2million or more? And if not, what can be done for your bantamnest egg? Invest in financial stocks and REITs and domesticsmall-value funds and emerging markets bond funds, the top per-formers of the last decade, in order to juice up returns? Thathardly seems prudent you shouldn t shoot for higher returns bybeing too Dave Foster, of Foster & Motley, a wealth managementfirm in Cincinnati, puts it, You might tell yourself, I can retire,but in order to meet my spending goals I need to earn 11 percenta year on my investments. Thatmay work, but I wouldn t counton it. Instead of aiming for unrealis-tically high returns, you shouldbe hardheaded about the choicesyou face.

7 It s really importantin these kinds of situations toadmit, I don t think I can retirewhen I d like to retire, and livethe way I d like to live, option that may be practical for many physicians in sucha situation is to keep working. Each year you continue to workis a powerful variable in reaching Retirement goals it is anotheryear in which you can fund your Retirement while you re not con-suming assets. If you continue to work, the multiple of spendinghas to go down, when calculating how much is the example of Dr. X., who first met with a financialplanner 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 plannerencouraged him to work another year. This went on, one year ata time, for over a decade. The doctor slowly accumulated moreassets while he bought some time, and eventually he could possible approach is to liquidate nonfinancial assetsto provide additional capital. The continued strength of the hous-ing market may mean that real estate will play a large role insome physicians Retirement plans.

8 We ve looked at reversemortgages and have found that they re not competitive as financ- financial yearyou continue to workis a powerful variable in reach-ing Retirement goals it isanother year in which you canfund your Retirement whileyou re not consuming assets. Ifyou continue to work, the multi-ple of spending has to go down,when calculating how much arrangements, Mr. Welch says. However, we have a lot ofclients who own two homes. Sometimes selling one of thosehomes will help provide money for Retirement . Doctors who own just one home also may discover retirementfunds there. We have suggested downsizing a personal resi-dence and even moving to another area of the country wherehousing is less expensive, says Mr. Welch. The tax code helpsbecause you can sell a house and exclude some capital gainsfrom your taxable income. This tax break, which applies to aprimary residence after two years occupancy, permits an exclu-sion of $250,000 for single taxpayers and $500,000 for every physician will be willing or able to keep working orcash in home equity.

9 many Doctors , though, can increase thepace of pre- Retirement investing to build a larger Retirement (Percent of households owning each type of IRA)Employer-TraditionalRothSponsoredIRA IRAIRA*Mutual funds (total)66%73%52%Stock545738 Bond272122 Hybrid211416 Money market282022 Individual stocks393028 Annuities (total)321720 Fixed241312 Variable201212 Bank accounts281717 Individual bonds161313 Other642*Includes SIMPLE IRAs, SEP IRAs, and SAR-SEP : Multiple responses included. Number of respondents : 2004 IRA Survey, Investment Company Held in IRAs, by Type of IRA, 2004 Saving more now can be the difference between driving a Lexusor a Toyota after continuing to work or selling a home, other sourcesof income should be recognized while seeking the how-much-is-enough number. The biggest fallacy of using a 4-percent with-drawal rate, which is then indexed for inflation, is that everyonehas some income, says Mr. Foster. A couple might have a goalof $70,000 worth of retirementincome, for example.

10 If that cou-ple has $20,000 coming fromSocial Security benefits, theyonly need $50,000 from theirinvestment portfolio,and$50,000 per year from a portfo-lio is a much more reasonablenumber than $70,000. You also may rethink some ofyour views about retirementinvesting. I try to retrain peopleto think about cash flow ratherthan income, says Eleanor Szy-manski, head of EKS Associates, a financial planning firm inPrinceton, Our whole culture thinks in terms of income, ofreplacing income in Retirement , but it s really cash flow that peo-ple need. Is this merely hairsplitting? Not really, according to Ms. Szy-manski. When people think of income, she says, they makethe connection with fixed-income in their portfolios. They rethinking about interest and dividends, but the amounts they llreceive from those sources can be erratic. By changing the focusto cash flow, we can make them more comfortable about hold-ing equities, where long-term returns may be greater.