Retirement Readiness

How to prepare for retirement

Are you ready to retire?

That's not a question you should wait to ask yourself when your hair is gray and your shingle weathered. According to financial planners, business consultants, and even experienced practice administrators, physicians should take concrete steps toward a viable retirement from the moment they start their practice. This is because physicians face a retirement double-whammy: they start making money later in life, yet they tend to retire earlier.

"Doctors don't get their first real jobs until their 30s, and then they have a lot of debt," says Marc Singer, a principal at Singer Xenos Wealth Management in Coral Gables, Fla. "They're finally getting up to zero net worth at age 40. But at that point, they may not be far from retirement, since many specialties, like neurosurgery, require top physical skills. What if you feel yourself coming off that peak at 55? Most doctors retire much younger than age 65. You could well have a working life expectancy of 20 years, not 40."

Indeed, financial planners and consultants notice a trend of doctors retiring younger. A 2000 survey in American Medical News showed that 38 percent of doctors age 50 or older planned to retire within one to three years. While financial security is a top concern, there are also operational factors to work out with your practice or partners in advance. And many physicians tend to make one of two mistakes: putting off planning for retirement, and investing too aggressively in an attempt to make the most of their money.

To gauge your retirement readiness, ask yourself the following questions:

Do I have enough money to retire?

This is the first question most physicians ask themselves, and the answer is almost always no. It's not just their late start and relatively short working life that convince many physicians they're financially unprepared for retirement. With insurance premiums high and reimbursements low, even successful doctors believe they will never have enough money to retire.

"It's not uncommon to hear doctors say they will never retire, no matter what, because they can't save money in today's practice environment," says Singer. "They say, 'I'll just work until I die and then my wife will get the life insurance.'"
How much money do I need?

You can't know if you have enough money to retire until you know how much money you'll need over the span of your retirement. Physicians, like most people, tend to underestimate this amount.
"Most people spend more when they retire -- more on recreation and more on their own medical care," says Sidney A. Blum, president of Successful Financial Solutions in Northbrook, Ill.

"Credit card debt becomes more of a liability. You can't say, 'I'll spend less once I retire,' because you're fooling yourself. Before you retire, you've got to realistically figure how much you'll need per month."

"People don't want to come down in their lifestyle once they retire," agrees Marilyn M. Gunther, a certified financial planner and senior partner at the Center for Financial Planning in Southfield, Mich. "To avoid this, you have to look at all income sources: Social Security, fixed pensions, and investable assets available for retirement only (as opposed to assets set aside for children's education, for example). Then add a 3 percent inflationary factor for income (income should go up 3 percent per year) and a 5 percent to 6 percent investable return on assets. Once you look at all these factors, you can figure out whether you can meet your objectives by the age or year you've chosen to retire."

Sometimes basic expenses are overlooked. "Make sure you have long-term care insurance -- that's very important," says Blum. "You'd think doctors would be particularly aware of this, but often they aren't."

How do I save enough money to retire?

Once you come up with a realistic figure for your retirement income, how do you ensure that you meet that goal? This is the part that makes many doctors nervous. How can they generate two million dollars in just 20 years? Saving and seemingly staid methods of investing, like mutual funds or money market accounts, don't seem aggressive enough, and doctors are often led to invest in more risky schemes.

"Doctors tend to invest too aggressively," says Singer. "We call it the catch-up syndrome --  you're 35 and just starting out while your friends are on their second house and a nice 401(k). Doctors feel like they have to take excessive risks just to catch up. So they invest in programs with promises of unrealistically high rates of return.

"A rule of thumb is the 5 percent rule: assume the best you'll do on your money is 5 percent a year --  that's the most you can live on. If you have $2 million in assets, you should only plan on spending $100,000 a year after taxes. That should anticipate reasonable taxes, inflation, and rates of return. And even in rough times, like the past few years, this formula works at 4 percent."

Slow and steady wins

Creating a conservative portfolio and paying off debt top the list of recommended planning strategies. "Retirement planning is mostly about controlling spending and making good investment decisions," says Blum. "The magic of compound interest works in your favor, so start a savings program early on."

When it comes to investing, think safety first. "The absolutely foolproof thing you can do that no one does, because it's boring, is to take your monthly savings and invest it in a mutual fund," says Singer. "Put $500 a month into a money market account and you're virtually guaranteed a good return. Five hundred dollars per month for 25 years with the market earning 10 percent overall comes to $663,000. And a well-compensated doctor should have more than $500 to put in each month."

It's also important to make sure your investment assets will be liquid when you need them. "The typical physician, one week before retirement, has zero total investment income," says Singer. "If you stopped working tomorrow, how much money would come in from your investment income? The answer is almost always zero. That's because your assets --  a house, pension plan, brokerage accounts, IRAs --  don't produce income."

The fix is simple: "Set up a cash-flow stream where money comes in on a monthly basis," says Singer. "For example, if you need $6,000 per month, set up $18,000 in a money market, and that will provide income for the first three months. Then look at all your investments and decide what to sell to replenish that money market account at $18,000. It's a planned liquidation of certain assets that acts as income."

Preparing the practice

Not all retirement hurdles are financial. Continuing down our retirement readiness checklist, we come to the legal (and sometimes emotional) issues that come into play when you leave your practice.

How will I leave my practice?

Many physicians make two assumptions about leaving their practice: that they will be bought out, and that they don't need to write up a buy-sell agreement until retirement is just around the corner. Wrong on both counts.

"Sometimes there's hostility when a doctor retires," says Singer. "It doesn't go as smoothly as some anticipate, with seniors gracefully exiting and juniors taking over. Many practices are no longer worth much more than a percentage of receivables. If you want to be bought out, plan it out as many years ahead as possible."

Norma Plante, senior administrative director at Scripps Clinic in La Jolla, Calif., agrees. "I worked in a small orthopedic practice that had a partnership agreement spelling out the terms of the buy-out, but it didn't go smoothly," she says. "The initial agreement was set up in the days before managed care, when physician incomes were much higher. The buy-out was actually a financial burden for the doctors left behind because they had to pay out more than they could really afford. The buy-sell was never updated because changes required a simple majority and the doctors at or near retirement did not want to change it. The senior doctor who wanted to retire is still working."

Reduce your stress

How to avoid pre-retirement stress and misunderstandings? Planning. "Transition planning should be in place from day one of your partnership," says Gunther. "As in most small businesses, the coming together is easy, the leaving is not. There's plenty of enthusiasm for building, but not for paying out people's share."

Blum concurs. "As you form the partnerships you should work these things out. Be creative in structuring compensation for your practice. Do you want cash up-front, payments over a period of years, or a percentage of future collections? Do you want a cut on any new clients that come in because of existing clients? If you're a sole practitioner, could you take your practice to a competitor and work out a merger?"

Battles between doctors can impact the very asset they're struggling over --  the practice itself. Staff take sides when doctors argue, and morale and performance are affected. "Some staff leave with a doctor if they've been together a long time and the staff feel like the doctor was cheated," says Susan Rockwood, administrator at Stillwater Medical Group PA, in Stillwater, Minn. And problems for staff lead to problems for patients.

"One of the main concerns is providing continuity for the patients," says Rockwood. "You have to notify patients well in advance of the retirement and suggest how they might go about establishing a new relationship with another doctor. It helps to have a letter go out from the retiring doctor thanking the patient and making the connection to another doctor."

"The best thing doctors can do," says Plante, "is to automatically revisit their retirement agreement every few years, so decisions don't become personal."
What will I do when I'm retired?

Last but not least, it's crucial to think positively about life after retirement. While no one looks forward to the stereotypical vision of lounging in rocking chairs and building ships in bottles, doctors can be especially depressed by what they perceive as a life of inactivity or lost identity.

"Even those with a lot of outside interests find their work makes up their identity," says Rockwood. "This can be especially true in a small town where they've been the doctor for 30 years and everyone has a professional relationship with them. They are 'the doctor,' and that's hard to walk away from."

However, Gunther sees more and more doctors who are not totally defined by their work. "Older doctors were mostly working in individual practices, while younger doctors are either in large partnerships or in HMOs or other large organizations. For them, being a doctor is not such a purely individual reflection of themselves."

Retirement need not be the unpleasant reality waiting at the end of the road. With thorough planning and the right mental preparation, the retirement years really can be golden.

Lori Rogers-Stokes can be reached via

This article originally appeared in the September 2003 issue of Physicians Practice.