Downsize Your Personal Finances and Save

Physician's Money Digest, May 2005, Volume 12, Issue 8

Downsizing. The word has oftenbeen attached to negative images.When a company downsizes, itusually means that at least a few peoplewill lose their jobs. When people or familiesdownsize, it usually means moving to smallerliving conditions and/or operating on areduced income. While either scenario canbe traumatic, they don't have to be.

Kiplinger's

According to a recent Merritt, Hawkins& Associates survey, nearly 30% of physiciansaged 50 to 65 plan to retire, reducetheir workloads, or seek nonmedical jobs inthe next 3 years. As reported in a recentarticle in , downsizing, in theform of learning to live on either one or areduced income, doesn't have to meanstruggling. With the proper discipline, it canactually be a positive experience.

Know Your Story

How to Survive Without a

Salary

With doctors, living on a reducedincome could happen at any time. Whenthis becomes a reality, the big mistakemany people make is assuming that anyand all financial issues will somehow workthemselves out. The problem is compoundedby not having a solid grip onyour budget, or worse, having no budgetat all. According to the article, CharlesLong, author of (Warwick House Publishing; 2003),recommends that families take a hard,close look at their finances and begin makingadjustments as early as possible—evenif the change in earnings status is severalyears down the road.

Start by identifying all your assets, suchas the equity in your home, cash-value lifeinsurance, and any retirement funds. Evenif you have no intention of tapping intothese assets, it's reassuring to know thatthey're there. Also, consider refinancingyour home as a way to lower your monthlypayments, or take out a home equity line ofcredit for emergency use. Both are easier todo before income levels decline.

Next, separate out fixed expenses fromthose that can be adjusted. Your car paymentis what it is, but it's important toreduce your variable spending whereverpossible. For example, the article suggeststhat if you go out to dinner 3 times a week,consider going only once. Or, if you don'twant that severe of a change, simply find aless expensive restaurant to visit.

Strategize Your Downsize

The article also suggests using yourretirement accounts strategically. Forexample, if you are aged 55 or olderwhen leaving a job, you can tap into a401(k) free of penalty. However, if youroll the money into an IRA, you'll face a10% penalty if you make any withdrawalsbefore age 59 1/2.

If you set up a distribution schedulebased on your life expectancy, you can takeearly withdrawals of IRA money withoutpenalty. According to the article, you mustmake equal withdrawals each year for 5years or until you reach age 59 1/2, whicheveris longer. Having that flexibility mightprovide you with the additional cash flowyou'll need to downsize.

Kiplinger's

How can you tell if you're able todownsize? At the Web site(www.kiplinger.com/magazine/links) youcan find a "Can one of you afford toquit?"worksheet. It can help you recognizethe savings attached to operatingwith a reduced family income. For example,if you stop driving to work, your carinsurance premium might drop.

If, after completing the worksheet,you find that downsizing is not a feasibleoption at the present time, don't despair.Doing this exercise will show you exactlywhere your money is going and providea good starting point for reducingexpenses so you'll be ready to downsizewhen the time comes.