Are You Retiring Without a Net?

Physician's Money Digest, June 2007, Volume 14, Issue 6

For millions of baby boomers,retirement is justaround the corner, yet they have not taken full advantageof retirement plans such as 401(k)s and profit-sharingplans. And those who are, aren't saving nearly asmuch as they need.

"In my experience, I have found that the vast majority[of baby boomers] have a safety net," explainsCharles Massimo, of CJM Fiscal Management. "It's justnot big enough. They have underestimated how longthey might be living in retirement and the cost associatedwith a lengthy retirement."

Massimo explains that many people have no ideahow much savings they will need in the first 2 or 3 yearsof retirement let alone a retirement that might last 20 to30 years. It's important to really understand how muchyou can safely withdraw from your investments beforedepleting principal.

How Did We Get to This Point?

Why are so many baby boomers faced with theprospect of retiring without a safety net? According toRon Rogé, chairman and CEO of R.W. Rogé & Company,it's because their parents were poor role modelswhen it came to saving. As they say, the apple does notfall far from the tree.

"Boomers' parents had the old-fashioned pensionplan," Rogé explains. "They worked for a company for35 years, received a gold watch at retirement and amonthly pension check [$3000-$5000 per month],Social Security [which has a cost-of-living adjustmentprovision], and purchased a home for $5000 to$15,000. They paid off the mortgage during those 30years, never refinanced, and now have a big home thatis valued at $400,000 to $800,000 at retirement, withouta mortgage."

That scenario rarely happens today. Instead, refinancingoccurs regularly, pension checks are a thing ofthe past, and too many people are so busy living fortoday that they often lose sight of providing for asecure tomorrow.

Rogé explains that a safety net is an asset that is notcurrently required for you to live comfortably in retirement.Once you know you are 100% funded for retirementwith a defined basket of assets, Rogé recommendsthat all other assets should be designated as the safety net.

"We currently recommend that our clients be 120%to 125% funded for retirement to prepare for the unknowns,"Rogé said. "Today's unknowns are createdby longevity. We will all be living longer, and this hascreated a whole new field of financial geriatrics. We cannotimagine today what the social and personal implicationsare when the average life expectancy increases toage 115. You need to be financially prepared for thoseunknowns by overfunding your retirement."

So, what do physician-investors need to do—andnot do—if they're concerned that their safety net isn'twhat it should be? Hank Parrott, president of Estate &Financial Strategies, Inc, recommends the followingapproaches for late retirement planning success, whilealso offering the following pitfalls to beware.

Strategies for Success:

1) Self-reflection. Parrott suggests physicians startby assessing where they are, financially speaking, rightnow by asking themselves a series of questions."What is your current income?" Parrott asks,rhetorically. "What are your current expenses? Whatassets do you currently have and what, if any, debt?This information is imperative for mapping out yourfinancial future. You won't know where to go if youdon't know where you are."

2) Taking stock. Do you anticipate any majorincreases or decreases in either income or expenses?Then forecast, looking ahead to where you intend tobe based on your current path or plan. What, approximately,can you count on in the next 10 years?

3) Developing a financial game plan. Afterassessing what you want and what you can expect,develop a strategy that fuses these two projections, andstick to it.

4) Staying the course. Parrott stresses this. "With10 or fewer years until retirement, time is of theessence. And looking for greener grass is a sure-firehazard." Stay disciplined, not distracted.

Pitfalls to Avoid:

1) Failing to make a plan. Any plan, Parrottpoints out, is better than no plan at all.

2) Taking unnecessary risks. This is what Parrottcalls "chasing the golden carrot." It can hurt morethan it can help.

3) Ignoring the unforeseen. It is important toanticipate high medical insurance and long-term careexpenses, even if you are in good health and can'timagine needing them.

4) Thinking that a will is all you need. A healthcare power of attorney and a living will can help avoidmajor problems down the road.

5) Lastly, don't go it alone. "Those who have 10or fewer years before retirement and have not madeany notable strides in securing their and their family'sfinancial future should seek the advice of a credentialedinvestment expert," Parrott says. "Optimally,choose a financial advisor with multiple designationswho specializes in retirement-based investing."

Your Most Valuable Asset

For physician-investors who are more than 10years away from retirement, and who have sometime to build that retirement nest egg, Rogé has somevaluable advice.

"Physicians need to focus on building a business,not a practice," Rogé says. "When you have a practice,you have a job and patients, you work in the business.When you own a business, you work on yourbusiness, not in your business, and you have clients."

Rogé explains that because physicians failed tobuild a business of their medical practice, the HMOsstepped in and built the business they failed to build.The HMOs commoditized the medical professionbecause the physicians did not want to take any riskswith their very good income and build their own business.As a result, Rogé says, physician income has notincreased at the rate it used to decades ago, yet physicianswant to live the lifestyle of their predecessors.

Okay, so how can physicians turn their practiceinto a business? "Hire the expertise you need toperform all the tasks of the business and run it efficientlyso clients, not patients, will want to comeback," Rogé suggests.

Lastly, after spending so many years in school,physician-investors might want to think of retirementplanning from a classroom perspective.According to Robert Standish, JD, CFP®, vice presidentof financial planning for BPU InvestmentManagement, Inc, effective retirement planning isthe ultimate pass/fail grade.

"It is the ultimate exam for which you have spentyour entire adult life preparing," Standish pointsout. "You either pass and achieve those things in lifethat are most important to you, or you fail, and goback to work. And who wants to engage in a processin the twilight of a career only to be told that youfailed?"