Make Money for Retirement: An Easier Way

Physician's Money Digest, July 2006, Volume 13, Issue 7

Phillip T. Powell, associate clinical professor of businesseconomics and public policy at the Kelley School of Businessat Indiana University, has his finger on the pulse of Americanmedicine today. He likens a physician's salary to a balloon:when you press it too hard, it pops. Too much downside pressureleads to a loss of doctors and a downturn in the qualityof medicine. It also means doctors aren't making as muchmoney. Powell states that specialists in anesthesia, radiology,obstetrics, and surgery saw their annual earnings fall between10% and 20% in the late 1990s. He further quotes a recentsurvey that found 30% of doctors aged 50 and older plan toretire early (ie, in 3 years or less). Researchers at the IndianaUniversity School of Business and School of Medicine estimatethat another 10% drop in physician salaries would swell thenumber of retired MDs by another 15%.

The desire for a higher salary can lead to many physiciansleaving their jobs in search of greener pastures. In addition towanting more money, doctors also seek better benefits, includingmore vacation time and increased compensation forextended work hours. In many physician practices, expensessuch as malpractice premiums, staff salaries, and equipmentcosts barely justify the profits made. Doctors understandablytry to find optional avenues to help themselves financially.Some work more hours, while others get a second job (eg, oneMD I know sold Amway). Yet, probably the easiest way toretrieve finances lost to lower salaries and early retirement isto pay careful attention to medical corporate retirement plans.It could be said that money saved here is equivalent to moneyearned. The truth is that it's better because it is accruing tax-free,depending on how your management fee is paid. If thefee is taken out of your account, your tax-advantaged dollarsare used. In that case, they can't accumulate tax-free becausethey are in your manager's pocket. The other option is for youto write a check using taxable dollars for the same purpose.This is better for you because it means you allow more tax-freedollars to build up over time.

Management Fee Payments

Dr. Jane Deer has a pension worth $1.5 million. Her managementfee is $6000 per year taken out of her pretax pensionaccount quarterly by her managers. This is money that couldbe accumulating tax-free if she paid their charge with post-taxrather than pretax dollars. Over 10 years at 8% interest, the$6000 per year grows to $100,000. Subtract the $60,000 sheinvested over those 10 years from the $100,000, and the resultis $40,000 more tax-free for Dr. Deer. She didn't have to earnthis money, she just had to be aware of how her managementfees were paid and act in her own best interests.

Is your pension advisor recommending certain funds to youbecause they are participating in revenue sharing? This meansthat a managed fund is paying your advisor to recommend it.It's not necessarily the best fund for you, but the one that willmake your pension advisor more money. This kind of informationis hard to discover because the SEC's disclosure rules areminimal. The best way to find out is to ask your pension advisor outright. If the answer is anythingbut an unqualified no, your consultantdoes not have your best interests atheart, and you should seek out a changeas soon as possible. One place to start, which is a free servicethat matches you with a financial advisorin your area, based on the specifictype of advisor you're looking for.

Favored Fund Families

Dr. Jim Buck realized that some pensionadvisors recommend favored fundfamilies from whom they received perksin return. When Dr. Buck asked his advisorabout this, it seemed he couldnever get a straight answer. This stimulatedhim to check his pension performance.Each managed fund was laggingits index by 2% to 3% each year. Hewas paying almost another 2% in fees.His overall performance, therefore, was4% to 5% less than the indexes. Dr.Buck was aghast, as was his group. Theychanged advisors, switched to indexfund options, and insisted that any recommendationother than index fundsbe justified in writing with a statementthat the advisor was not participating inrevenue sharing. Dr. Buck and his groupare making more tax-free money thanbefore. They did this by becomingaware of revenue sharing and using thatknowledge in their own best interest.

Is your pension performing at thesame level as the fees you're paying?Charges for corporation pension fundsare typically high. If managed mutualfunds are used in the pension plans,their average fee is about 1.4% per yearin addition to management charges.This does not take into accountturnover of the fund, which incurs coststo you, or 12b-1 fees that the fundcharges you for marketing or front-orback-end loads. All of these costs,which diminish your return, mean youare less likely to beat the appropriateindex. Your pension advisor will be ableto help you straighten out and understandthese costs, and show you howyou can ease the burden of paying them.

Dr. John Doe has a pension worthnearly $1 million. He pays a managementfee of 1.6% per year for his pensionadministrators to choose mutualfunds. Over 10 years, the performanceof his pension funds, not including fees,is 10%. When his expenses are subtracted,he made 8.4% per year—10%return minus 1.6% for management. Ifhe used index funds instead, which consistentlycharge lower fees, his totalexpenses would be considerably less,let's assume 0.5%. This means the doctormakes 9.5% per year, assuming thesame return of 10%. This is 1.1% morein his pocket than his first option (ie,9.5% to 8.4%). On a $1 millionaccount, this means $110,000 moretax-free in his pocket at the end of 10years. Dr. Doe didn't have to earn thismoney, he just had to be aware thatmost indexes do better than managedmutual funds over time and cost less.Then, he uses this information to hisadvantage and earns a significantlyhigher return. A little knowledge can goa long way to financial gain for anyphysician. Just do your homework, andreap the benefits.

Shirley M. Mueller, MD, dissects barriers to

effective monetary decisions so they

become manageable. Her unique training

and experience as a practicing physician

board certified in neurology and psychiatry,

combined with her 7-year investment advisor career, contribute

to her expertise. She welcomes questions and comments