Retirement Planning for Physicians: Where to Begin

You hear it discussed whenever doctors get together. All too often, the conversations include such comments as, “I still have kids in college,” “I need to continue working to qualify for health insurance,” or “I made some lousy choices in my retirement plan.” With the changes in healthcare financing and regulation over the past decade, it’s not surprising that physicians are more often looking at their practice as a vehicle for achieving financial independence rather than primarily as a lifelong calling. Financial independence is having the means to choose your time to retire in the style you want. To get there, you must develop a plan and have the discipline to follow it.

It would be great if we all began to plan for retirement as soon as we joined a practice. Somehow the more immediate needs of raising a family and starting a career get higher priority. Not knowing how to plan is also an obstacle. So where do you start? Some suggest that you need enough assets to allow withdrawal of 4 percent every year. That sounds simple, but what about inflation and the return on your investments? Others suggest creating a retirement portfolio containing a percentage of bonds equal to your age. But what happens if the return on bonds is low (as it is now) and the income doesn’t cover your needs? There are also calculators available, many free and online. But how realistic are the assumptions on which they base their calculations? All of these methods are best used to raise - rather than answer - the question: “How much do I have to save and how should I go about saving it?”

To plan where you want to be, it helps to know where you are. The best planning processes begin with a thorough accounting of your current financial position - a detailed financial statement, including cash, investments, debt, and life insurance. The next step is to make assumptions on future income, spending and investment return - reasonable guesses based on what you know today - and begin to develop a model depicting the future value of your savings. The model becomes the cornerstone of your financial planning; suggesting saving and spending parameters that will help you achieve your goals. This model becomes a living document that can accommodate changes in your life and provide some objectivity when selecting from various strategies.

For example, it can help in determining the amount of investment risk that is necessary to achieve your goals. Given that investment risk and return are related, the question becomes how much investment risk should you take to generate the expected return you need to grow your assets to the necessary level. Or, it can illustrate the effect of pushing retirement back a few years, or buying a second home, or spending a little less each year. As with a patient’s treatment plan, the financial plan and its progress need to be reviewed on a regular basis as lifecycle situations change and as goals and objectives are modified.

But what about such things as inflation or return on investment? How will they affect your plan? Sophisticated planning tools will take these into account. For example, investment returns vary from year to year, often deviating significantly from their historic averages. Planning tools that use Monte Carlo simulations actually calculate a “probability of success” based on hundreds or even thousands of calculations using different returns, rather than relying on an average annual return. This variability more closely represents actual historic performance, and takes into consideration the potentially disastrous effect of scenarios in which returns are unusually low as well as the timing of those returns. Models that assume a constant rate of return year after year do not allow for this. Take advantage of this powerful tool by creating different scenarios to cover possible career moves or investment choices.

Retirement planning should also include the possibility that retirement may be forced prematurely, either by disability or death. Either will have a devastating effect on the family, and the need for insurance protection against these possibilities is important, particularly early in your career.

It is clearly very difficult to predict what inflation, your net worth or your income will be 10 years, 20 years, or even 30 years from now. But by carefully making assumptions and regularly reviewing them, a financial model using sophisticated techniques can be a useful benchmark by which to judge your progress toward financial independence.

Here are some key points to remember:

• Although it is best to start planning and saving early, it is never too late to begin.

• The planning process should start with a comprehensive analysis of your current financial picture.

• Models predicting future growth of savings should take into consideration inflation and the variability of investment returns.

• The model can be used to assess the effects of alternate career plans or different levels of investment risk, or even suggest when you may be investing too aggressively.

• Don’t forget to plan for unexpected loss of income through death or disability.

• Review your plan regularly and make adjustments as your circumstances dictate.