Unravel the Intricacies of Your Retirement Dreams

Christine Menapace

Physician's Money Digest, June30 2004, Volume 11, Issue 12

Will you be prepared for retirement? It's a scary question and one we don't often like to contemplate while we're still young, healthy, and earning income.

According to the latest Retirement Confidence Survey, released in April, four of 10 Americans say they are not currently saving for retirement and many of those with savings cite low levels of investments. Despite this, Americans have a high level of confidence about retirement. "In the 14 years that we have done the Retirement Confidence Survey, the aggregate level of worker confidence in having enough money to retire comfortably seems to remain unrelated to whatever economic conditions exist," states David Salisbury, president and CEO of the Employee Benefit Research Institute (EBRI; 202-659-0670; www.ebri.org). "Almost half of the workers who have not saved for retirement are at least somewhat confident about having enough money in retirement, with expectations that their retirement money will inevitably come from somewhere. America seems to be a nation of optimists when it comes to retirement, but for some people the retirement dream may turn into a nightmare."

Unprepared for Retirement

Wayne Zell, a partner in the law firm Mintz Levin in Reston, Va, says most people are not properly prepared for retirement. "That's the problem, they're waiting for magic to happen," Zell comments. One culprit, he says, is faith in Social Security, which he feels has less than a 50% chance of survival, citing grim studies done in the 1990s.

Indeed, according to a 2002 EBRI study, retirees who say they have a lower standard of living in retirement struggle with several issues, including lower Social Security and pension benefits than anticipated, unexpected medical expenses, Medicare covering less than expected, inability to find employment to supplement income, investments not doing as well as expected, and higher general expenses than expected.

In retirement, health care costs alone can be astronomical. Today the average 65-year-old male lives to age 80.8, and the average female to age 84. According to a 2003 EBRI study, a man who retired at age 65 and died at age 80 would need $47,000 with employment-based insurance and $116,000 without it. The estimates do not even include potential long-term nursing home care, which now often costs more than $50,000 per year.

Necessary Savings

How can you best prepare for retirement? Financial advisors agree that you should first determine how much you need to save. Surprisingly, only one third of Americans who have actually made this calculation say they don't know or can't remember the result, according to EBRI. "A lot of people have no idea what it takes to retire—you need to make them aware of that number," says Amir Viskin, CFP®, of Strategic Financial Partners in Waltham, Mass. "The earlier you do that exercise, the better."

You can start your calculations by filling out a Ballpark Estimate Retirement Planning Worksheet available from the American Savings Education Council at ChooseToSave.org. By simplifying some issues, such as projected Social Security benefits and earnings assumptions on savings, the worksheet offers a rough first estimate. It assumes you'll need 70% of your current income, you'll live to age 87, and you'll realize a constant real rate of return of 3% after inflation.

According to EBRI, more than four of 10 of those who do a calculation report change their retirement planning as a result. "I don't think people are setting aside enough money to save," Zell says. One reason for this, Zell states, was the incredible growth of stocks in the 1990s, which gave a false sense of earnings potential.

The sooner you start saving for retirement, the better. But for physicians, this can be difficult. "One issue with physicians, as compared to other professionals, is that they're starting their careers relatively late, and with very large education loans," Viskin comments. Thus, the challenge becomes balancing debt with investments. "It's very important to see a financial advisor, develop a budget, and start saving money," he says. "If you catch the physician early, you have the opportunity to educate them. They earn a good income and become targets for lots of offerings, and if they're not careful, they can end up owning financial products with no rhyme or reason."

Retirement Plan Contributions

Obviously, the single most important facet of planning is contributing to a qualified retirement plan, such as a 401(k) or profit sharing plan. For physicians with their own practices, this means setting up your own plan. Fortunately, both Zell and Viskin agree that most physicians do have plans at their practices. "Most of my physician-clients have done very well," Zell says. He comments that the majority of physicians put aside 15% to 20% of their income.

Physicians should also contribute to IRAs. However, in the case of Roth IRAs, restrictions may limit a physician's participation. Viskin says to decide on an IRA based on your risk tolerance and time horizon. "The key is to mix asset classes," Viskin says. Also look for IRAs that are well managed and consistent while being careful with expense ratios. "Beyond that, the differences are not that significant over time," he comments.

There are more options to consider. "For physicians, what I've done is set up nonqualified deferred-compensation plans," Zell says. In this case, the corporation sets aside some money into a trust, which may be funded with insurance using current dollars. Viskin also mentions life insurance as a good vehicle for investing. "Insurance happens to be a very viable tax shelter," Zell comments.

If you think the sale of your practice will provide a large retirement nest egg, think again. "That's a huge issue today," Zell states. "A lot of physicians have an overinflated value of their practice, while others have no idea." Zell says there's currently a large disconnect between what physicians think their practice is worth and what young physicians are willing to pay. "The whole practice of medicine has changed. There are new economic paradigms. It's a lot harder than it used to be," Zell says. "This directly affects the value of a practice." Viskin echoes, "It's certainly something doctors need to be aware of and plan for."

Postretirement Expenses

Viskin points out that it's important to understand the difference between saving money for retirement funds and actually using it. "[Physicians need to] change their concept of what their investments need to do," he says. "That transition is not easy. There's no way of avoiding it, it is scary." Essentially, it means changing the portfolio structure—and seeking professional guidance.

Professional guidance is also crucial to another important consideration—the tax implications of using retirement funds. "A lot of physicians don't have an understanding of how retirement plans are taxed," Viskin says. For instance, where you draw money from and the way you draw it can have a large effect on estate planning.

According to EBRI analysis of the Survey of Consumer Finance (SCF), among IRA participants, 53.5% had their assets mostly invested in stocks in 2001, while 401(k)-type plan participants had 52.7% mostly invested in stocks. Interestingly, this represents a substantial increase since 1992, when investments in stocks were 32% and 21.1%, respectively.

EBRI analysis of the SCF showed 78.7% of family heads had a defined-contribution plan in 2001. However, only 38.4% participated in a defined-benefit plan—down from 59.3% in 1992. Overall, the percentage of family heads that participated in any type of employment-based retirement plan increased slightly from 48.3% in 1992 to 48.7% in 2001.