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Planning for retirement can be tricky, and it’s definitely something you want to get right. Check out these potential pitfalls and how to avoid them.
Throughout his career in neonatology, Frank Bowen knew the one-on, two-off call shifts and the drama of the intensive care unit would very likely lead to early burnout.
“I always told myself that if I ever started wondering why I was still at it, I would get out,” Bowen says.
That moment came at 2 a.m. on a cold February morning in Philadelphia while he was driving to answer an ICU page. He was in his mid 50s - too young from both a financial-security and a vitality standpoint to retire to the golf course.
For a lot of physicians, reaching the point where practicing medicine is no longer a positive experience can be frightening. There’s the loss of identity and the feeling you’ve invested far too much in your career to quit now.
And then there’s the money. As more physicians work in salary-based practices, fewer have natural opportunities to own medical office buildings and side businesses - traditional areas where physicians built retirement wealth. Toss in a decade of a no-growth stock market, the demands of caring financially for children and elderly parents, and declining reimbursements, and it can amount to a pressure cooker.
Too often these stresses lead physicians into the number one retirement-planning mistake they can make: retiring too soon.
Here are five common mistakes that trip up physician retirement planning.
1. Pulling the trigger too soon
Bowen, now 68, knew then that he needed a career change, not retirement. So he went back to school, earned a master’s degree in medical management, and started consulting with medical practices on critical care management procedures.
A few years later he and his wife moved to Hilton Head, S.C., where he now works as the salaried executive director for Volunteers in Medicine, a national network of free clinics run by volunteer physicians.
With about 110 volunteer doctors (many of them retired) in his chapter of the organization, Bowen says he constantly talks with retirees who came to the same realization: that they needed more in their lives than golf. Some volunteers are also working part-time in practices as they wind down and plan their retirement income.
“Some [newly retired doctors] haven’t really planned and find themselves in financial straits,” he says. “Once you stop practicing, nobody pays you anymore and it sounds strange but not all of them realize that.”
Despite relatively high salaries compared with national averages, longer life expectancies mean more years of income to cover. And with later career starts because of the long training periods required of physicians, the retirement math just doesn’t add up.
Take just one leg of the traditional three-legged retirement stool: Social Security. The government program calculates benefits using your highest 35 years of earnings. If you have years of zeros or very low earnings in that equation, your lifetime benefits will be dinged, even if you paid in the maximum during your highest-earning years.
The upshot is if you feel yourself burning out, consider new or even part-time work options that will sustain you financially and emotionally, easing the drain on your portfolio and the number of years it needs to finance your life.
2. Claiming Social Security too early
This one often accompanies retiring too soon, and relies on the notion that it’s better to claim benefits early because the government program is clogged with baby boomers and the funds could run out.
However, particularly if you’re nearing retirement, do the math on how waiting until your full retirement age, or even age 70, will affect your monthly benefits. If the rest of your retirement nest egg is a liquid lump sum of stocks and bonds, Social Security could be the one asset you’ll have that will automatically rise with inflation. So don’t discount its value.
3. Banking on the past
Your senior partners may have waxed poetic about the wealth your practice’s retirement plan has generated, but don’t count on history repeating itself.
Most market prognosticators are forecasting years of more modest stock and bond-market returns, so be leery of financial advisers who show you retirement scenarios banking on annualized returns greater than eight percent.
Even though it’s tempting, don’t try to trade your way out of low returns.
“As clients, physicians are results oriented. If something’s not working they’re tempted to try something else, but in investments that’s called chasing returns,” said Casey Mervine, a Charles Schwab financial consultant in Torrance, Calif., with several physician clients.
4. Ignoring taxes
During your highest income-generating years, it can be natural to reach for every tax-deferral idea.
Yet with enormous government debt building, many financial advisers believe higher tax rates are on the horizon and are urging clients to think about building assets outside of traditional tax-deferred accounts. One way to do that is with a Roth 401(k) at work, if you have such a plan available. And as of this year, IRA rollovers to Roth accounts can be done without income restrictions.
Be careful if you pursue a rollover, however, because it will boost your taxable income in the year you convert the accounts and pay income taxes on the money. That could have implications for the alternative minimum tax, as well as college financial aid calculations.
Meanwhile, pay attention to which investments are located in each type of long-term savings account to minimize your tax bite.
Many doctors get a late start on saving for retirement, but when they do finally start making a good income, often fall short of putting enough away to make up for it because of pent-up spending desires.
“You really need to set goals about your lifestyle and share those with your family,” says Mervine. “The portfolios I see for physicians in their 40s and 50s are really not as significant as they should be, compared with other professionals. Just putting the traditional 15 percent into retirement accounts isn’t going to do it - you’ll probably need to save another 10 percent to 15 percent in a taxable account,” he says.
Remember that overspending isn’t just about a few luxury trips or a car. Major hits to wealth, such as a divorce in middle age, have to be factored into your plan.
Retirement planning can be emotional business, whether you’re already getting older or are young and deciding how much you can sacrifice today for the future. If you steer clear of these big pitfalls, however, you’ll be ahead of the pack.
Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. As a contributing columnist for the Chicago Tribune, she writes a weekly, syndicated retirement column called “The Journey” that appears in Tribune newspapers across the United States. She holds a bachelor’s degree and master’s degree from the Medill School of Journalism at Northwestern University. She can be reached via firstname.lastname@example.org.
This article originally appeared in the October 2010 issue of Physicians Practice.