See the Difference a Few Years Can Make

Physician's Money Digest, April 2006, Volume 13, Issue 4

Waiting only a few years to retire can have a great economic impact on both accumulation at retirement and income generated annually through life expectancy. Let's illustrate the benefits and power of tax-deferred savings and accumulation in a 401(k) retirement program.

Consider the case of Dr. Winifred Van Houten, who recently turned 40. She owns a solo practice, generated an income of $175,000 in 2005, and expects to earn no less this year. In 2006, she will begin contributing $44,000 (combined employee and employer contribution) annually into a 401(k). Let us make the assumption that she retires at age 60, closes the plan, and rolls the monies into an IRA. Let us further assume that Dr. Van Houten makes monthly contributions to her plan and wishes to withdraw an annual income beginning at age 61 through age 85 (at which point she expires, and her IRA has been exhausted). She earns a 7% annual rate of return (net of all fees and expenses) on her monies, and the inflation rate is 3% compounded annually.

Given these assumptions, what would be the impact of waiting 1, 3, or 5 years before beginning to fund this retirement plan? Table 1 shows the impact of delayed contributions on annual retirement income.

In other words, if Dr. Van Houten begins to fund her retirement immediately, she is projected to accumulate nearly $2.59 million at age 60, or $815,000 more than she would have if she waited 5 more years before beginning to invest in a retirement plan. She could begin withdrawing approximately $157,500 annually at retirement (adjusted annually for inflation) from ages 61 through 85, after which time her IRA would be exhausted. If she also withdrew $157,000 annually under the other scenarios, in which she begins contributing later, she would exhaust her IRA prior to age 85, as illustrated in Table 2.

As you can see, if Dr. Van Houten were to delay funding her plan by 1, 3, or 5 years, her IRA would be exhausted at age 83, 78, or 75, respectively. So, why would anyone, provided they had the cash flow to fund such a plan, procrastinate contributing to a plan where they obtain an annual tax deduction equivalent to roughly 35% of the annual contribution; protection from creditors; and tax-deferred accumulation? I can't think of an answer.

Thomas R. Kosky and his partner, Harris L.

Kerker, are principals of the Asset Planning,

Group, Inc, in Miami, Fla. The company

specializes in investment, retirement, and

estate planning. Mr. Kosky also teaches corporate

finance in the Saturday Executive and Health Care

Executive MBA Programs at the University of Miami in Coral

Gables, Fla. Mr. Kosky and Mr. Kerker welcome questions or

comments at 800-953-5508 or e-mail Mr. Kosky directly at