Unquestionably, physicians are starting to take their retirement planning much more seriously. With life expectancy on the rise, greater economic uncertainty on the horizon, and lowered expectations for long term investment returns, many of us are looking at our retirement with a little more trepidation and little less anticipation. Obviously, the earlier you start planning and saving, the less you should have to worry about. But, it’s the physician retirement “gotchas” that can derail even the best laid plans, and many physicians, either through a lack of planning or a lack of knowledge, are simply not prepared to counter them.
The reality facing retirees today is that the cost of retirement is rising. And it’s not just rising food or gas prices. Health costs are increasing at a much faster pace, and while many people might plan for health expenses, they may not factor in the increasing cost of living longer. Not only do health costs increase as we age, so does the likelihood of requiring some kind of long term care assistance which can take a huge bite out of the budget or require the liquidation of assets. Other costs not anticipated by retirees include
- Caring for aging parents
- Financial support for children with money problems
- Dental care
- Increasing insurance premiums
- Prescription costs not covered by Medicare Part D
- Home repairs (if living in older home)
Your best planning move is to anticipate the unexpected and cushion your retirement budget by as much as third. Or, start now by building your emergency fund to two years worth of living expenses and maintain it as a separate account during retirement.
Underestimating Inflation and Taxes
For physicians who have come of age in the last couple of decades, they may have developed a complacency over the threat of inflation. Since the double digit inflation of the 1970’s and 1980’s, inflation has largely been under control. But, many economists expect that to change. But even if inflation remained as low as it is today, at around 3%, the cost of living would double over a period of 20 years which is becoming the typical life span of a retiree.
Taxes are also an afterthought for many retirees. The assumption that you will be paying taxes at a lower rate in retirement is no longer valid for many people. Considering that, except for income from tax-exempt bonds, every nickel of income received is taxed, even up to 85% of your Social Security benefits if your income is high enough (more than $44,000 for joint filers), taxes could take a much bigger portion of your income than you had anticipated.
Your best planning move right now is to incorporate worst case assumptions for taxes and inflation into your accumulation and income calculations.
Going Conservative Too Soon
There’s no question that most people have been spooked by the stock market in recent years. Between the market decline of 2001 and the crash of 2008, many pre-retirees lost a significant portion of their retirement funds. As a result, people have fled the stock market for safer investments, typically low yielding vehicles. Not only will this maneuver drastically reduce your chances of achieving your accumulation goals, it could seriously diminish your capacity to generate enough income over your lifetime.
It’s important to keep in mind that the biggest losers in the stock market declines were those investors who took their money out of the market. In 2009, by the time most people finally exited the market, it had already fallen by 40%. Then, they didn’t return to the market until it had risen more than 40% during its recovery. That’s 80% of investment returns those investors will never get back. But, for people who maintained a well-diversified portfolio of high quality stocks, esepcially those that paid dividends, they haven’t skipped a beat.
Your best planning move is to develop an asset allocation strategy around moderate growth investments stabilized with income oriented investment such as government bonds or annuities. Physicians under 40 should maintain at least a 70/30 balance which can be gradually adjusted to a more conservative ratio as retirement approaches. But, in order to ensure that your income will keep pace with inflation, you should consider maintaining at least a 30/70 balance in retirement.