Ready to retire?'Ask yourself, at what age do I want to achieve financial independence. . . .'
It's never too early to start saving for retirement
By Bonnie Booth
At 43, Jeffrey D. Ackman, MD, is already making financial preparations for the day when he no longer practices medicine full-time. He participates in the retirement plan offered by Shriner's Hospital in Chicago, where he is assistant chief of staff, and supplements the plan with personal investments.
Financial planning experts agree that Dr. Ackman is on the right track to a fiscally healthy retirement because he has started early-a move that has become even more important in the era of managed care.
"The (retirement) issues for young doctors are quite different than for doctors approaching retirement age," said Cynthia K. Hinds, vice president of Hinds Financial Group in Lakewood, Colo. "In the past, most doctors didn't start saving for retirement until their mid 40s. By that time their compensation levels were such that they could start allocating a significant amount of money to their retirement. I'm not sure that's true now."
Joel M. Blau, CFP, president of Chicago-based MEDIQUS Asset Advisors, Inc. agreed. "Most doctors start thinking about retirement planning when they are in their early 50s, but they should be thinking about it right away," he said. "It's difficult to think about it right after medical school because of the debt load. But, the sooner you start, the easier it is. You're able to accumulate money at a quicker pace and able to take advantage of tax breaks."
Starting early is important, but the first step to sound financial planning for retirement is the same at any age and applies whether you are planning to retire at the traditional age or thinking of retiring early.
"You need to do a projection that takes a look at what your current liquid net worth is and at the value of your investment portfolio and come up with some goals," said Blau. "Ask yourself, at what age do I want to achieve financial independence and how much income will I need per month at that point to satisfy my lifestyle. This absolutely has to be the starting point. You don't build a house without a blueprint or travel across country in a car without a road map."
Blau said there are several computer software programs available to help physicians figure the calculations. He said a good rule of thumb is to figure you will need 70 to 75 percent of your current expenditure budget when you retire. And don't forget to account for inflation.
"The biggest mistake physicians make is not incorporating inflation into the equation," he said.
Once the financial goals have been set, the time element comes into play. "It was Albert Einstein who said that compound interest was the greatest mathematical discovery of all time," said William Kane, MD, faculty member of the Academy's course on retirement. "In my opinion, time is the most critical element of compound interest."
Financial planners agree that the earlier physicians start to save for retirement, the more likely they are to achieve their financial goals. Ray F. Miller, MD, started planning for his retirement immediately upon starting his practice. He told his financial planners that he wanted to retire at age 55, but in the back of his mind he assumed he wouldn't retire until he was older. Today, at age 56, he said the earliest he will be able to retire is 58.
"My advice to younger surgeons is to live below your income, save as much as you can and make it your goal to be able to retire before the date you are actually planning on retiring," said Dr. Miller, who practices at the St. Luke's Work Well Clinic in Cedar Rapids, Iowa.
Orthopaedic surgeons in practice today are also facing the fact that their practice arrangement may change several times over the life of their medical career and that could make retirement planning more complicated.
"Doctors are beginning to understand they can't not participate in the management of their practices," said Hinds. "They have to have better business sense. Selling your practice, or your portion of a practice, is an issue. It's not very different from when you are getting married. It's a lot easier sometimes to get in than it is to get out. Being able to create exit strategies that will account for the contribution that the doctor has made to practice can be very hard to do."
Blau said physicians need to figure retirement issues into any decision to change their employment situation.
"A lot of time should be spent investigating the type of retirement plans that are going to be available," said Blau. "If you're merging with a hospital or a large group, what you want to know is what the new entity is going to do for you. Are they going to match your contributions or is it going to be all your own money?
"If you have to terminate your own plan and join another, you also have to decide whether to move money from your present plan to a new plan which may or may not be allowed," Blau said. "You may want to rollover the funds into an IRA."
For those physicians who want to retire early, say at age 50 rather than at age 65, boosting the value of the practice, so its sale brings a good price, can help achieve that goal.
Ways to do that include developing a number of attractive managed-care contracts that show potential buyers you have worked with insurers to keep costs low, keeping track of your net income compared with that of others in your field so you can show that your income is above average, keeping accurate and organized records that can be easily examined and making sure your office is well-managed and running smoothly. Also, experts caution that the practice should not get more than 15 percent of its revenue from any single managed-care source.
Financial consultants also agree that physicians who want to retire early have got to boost their savings, either by working more or spending less. In addition, they should also pay off their debts, contribute the maximum amounts to their retirement plans and invest aggressively outside their retirement plans.
Don't forget that retirement, at any age, brings additional expenses, including the cost of life and health insurance which may have been provided at a discount rate through their practices or provided as a fringe benefit, if the physicians were employees.
"More physicians are considering getting out at as early as age 50 or 55," said Blau. "With most pension plans you have to be 59 1/2 to withdraw without penalties. The question becomes, how am I going to fund that time between my retirement and age 59 1/2?"
Additional savings is one answer, but Blau said there is a way to remove money from a qualified pension plan prior to age 59 1/2 without incurring the 10 percent penalty for early withdrawal.
In the past, the only way to avoid paying a penalty for early withdrawals from an IRA or qualified retirement account was to agree to take substantially equal distributions for the rest of your life. A new provision of the tax code has changed that.
"Let's say somebody is 54 and wants out of medicine," Blau said. "They can start taking distributions based on actuarial figures and now they only have to take that amount for five years or to age 59 1/2, whichever is later."
But Blau reiterates that the key to a financially successful retirement at any age is getting started now, if you haven't already.
"The No. 1 reason doctors fail to achieve their personal
financial objectives is procrastination," he said.
To retire early