Name: Thomas Werther, MD
Residence: North Carolina
Years in practice: 4
Type of practice: Dermatology
Annual income: $194,000
Savings: $96,000 in miscellaneous mutual funds
Financial concern: Dr. Werther is interested in establishing some type oflong-term, tax-deferred savings/retirement plan in his practice. The problem is,he has reservations about setting up a plan because of the negative investmentenvironment. He realizes, however, that by postponing the establishmentof a retirement plan, his retirement savings will be dramatically affected.Before he lets the current investment environment deter him, Dr. Wertherwants to know how much his annual future retirement income will be impactedif he waits another 2 years before establishing a retirement plan.
The Finance Professor's Solution
In order to figure out the answer to Dr. Werther's question, I had to makethe following 4 assumptions about his defined-contribution plan:
• Dr. Werther establishes a defined-contribution plan that allows him todefer $30,000 annually, since this is the amount he is generally comfortablesaving on an annual basis;
• He makes monthly contributions of $2500 to the plan through age 60;
• His long-term annualized rate of return on a tax-deferred basis (net offees and expenses) will be 9% during preretirement; and
• The inflation rate is 3.5% annually.
If Dr. Werther implements a retirement plan today, by the time he retires atage 60, he will have a projected $2.9-million nest egg. Should he decide to waitanother 2 years before implementing a plan, he will have a projected accumulationof only $2.4 million. Therefore, by foregoing contributions of$60,000 during the next 2 years (keep in mind that all contributions are madeon a pretax basis), he will have more than $500,000 less in his retirement planat age 60. Additionally, if Dr. Werther lives 25 years in retirement (ie, until age85), he will have nearly $38,000 less available each year (adjusted annually forinflation) during retirement. In short, if Dr. Werther waits another 2 yearsbefore setting up a retirement plan, it'll cost him almost $1.5 million cumulativelyduring his 25 years in retirement.
For more information, call Mr. Kosky at 800-953-5508or visit www.assetplanning.net.
Thomas R. Kosky and his partner, Harris L. Kerker, are principals of theAsset Planning Group in Miami, Fla, specializing in investment, retirement,and estate planning. Mr. Kosky teaches corporate finance in theSaturday Executive and Health Care Executive MBA Programs at theUniversity of Miami.