Relying on Interest May Be Disastrous

Physician's Money Digest, June30 2003, Volume 10, Issue 12

Will you be able to support yourselfthrough the interest earned onretirement assets? Most physician-investorsthink so, but they're often surprised whenthe numbers are actually crunched. This isespecially true when their estate planinvolves "just leaving what's left" to theirfamily after they've passed away. Let'sassume you're a physician who has saved$1 million and is considering retirement.Will that $1 million—which generates$70,000 of annual pretax income—beenough? Let's analyze your options.


If you only need $70,000 per year inretirement, this "living off interest" planmay work for you. However, if a significantdownturn in the market occurs, you couldbe in trouble. If this happens, the depreciationof your principal will force you toeither: scale back your lifestyle or startusing the principal to fund retirement.While the stock market has been very

strong lately, the retiring baby boomerswill certainly put some stress on the stockmarket in the next 10 to 15 years. Consideringthat average life expectanciesafter retirement are 18 and 21 years formen and women, respectively, it becomesclear that "golden years" will likely lastover 20 years, well into the period whereeconomists see the baby boomer withdrawalsoccurring. Unless you're in yourmid-60s now, a significant market downturnis a real risk for your nest egg—a riskthat your stock-invested savings will not beable to support you in your golden years.

You will probably either pass away withwealth in your estate or outlive your savings.Let's assume you beat the odds andwere able to live on interest alone for yourentire retirement. How much is the remainingprincipal worth to your heirs?

Depending on the value of your otherassets, the estate tax due on the additional$1-million asset that was funding yourretirement could be approximately 50%,or $500,000. In this case, you would leaveyour heirs $500,000. Your heirs will certainlyenjoy the gift. However, most investorsare unhappy leaving more than half oftheir earnings to the IRS—especially whenthey have already paid income taxes on it.

Even worse, if the stocks were sitting ina tax-deferred retirement vehicle, the IRSwould tax the $1 million twice—once forestate taxes and once for income taxes.This might leave your heirs about $100,000out of the $1 million. The rest goes toUncle Sam. If this doesn't sound appealing,consider annuities and insurance vehicles.


Using the example above, let's assumeyou and your spouse are both age 55 andhave accumulated $1 million in retirementsavings. You'd like to quit working at age60. You could take $700,000 of the $1 millionand purchase a $70,000 per year annuitythat begins paying you in 5 years andgrows according to the consumer priceindex, which measures inflation. This willprotect you from outliving your savings.

With the remaining $300,000, you couldpurchase a $3-million life insurance policy.If you place the insurance policy in an irrevocablelife insurance trust, all $3 millionwill pass to your beneficiaries withoutgoing to the IRS. In this way, both you andyour spouse have secure retirement income,your heirs will have plenty left tothem, and the IRS is out of the equation.

It is possible for the living-on-intereststrategy to cover your costs of living andleave more to your heirs than the annuity-and-insurance strategy. For this to occur,the following would need to happen:

  • Your stock investments return 20%per year (the average over 72 years is 12%);
  • Inflation remains below 3%; and
  • These trends continue until you die.

These circumstances may not seemimpossible, but the market has neverreturned those kinds of numbers consistently,and inflation has never remainedthat low for that long.

Christopher R. Jarvis and

David B. Mandell are authors

of The Doctor's Wealth Protection

Guide and Wealth Protection:

Build and Preserve Your Financial

Fortress (just released in November

2002, you can read reviews, sample

chapters, and purchase the book at a 20%

to 30% discount at They also started the financial

firm, Jarvis & Mandell, LLC, and work with

clients nationwide. They welcome questions

and comments at 888-317-9895.