The impact of today's sluggish economy has been widespread. Virtually every avenue of the financial world has been affected, including the way physicians need to plan for and build a retirement nest egg. The days of buy-and-hold investing are over, experts say. Now more than ever physicians need to be more proactive in their management of retirement assets.
The impact of today’s sluggish economy has been widespread. Virtually every avenue of the financial world has been affected, including the way physicians need to plan for and build a retirement nest egg.
“Physicians have to be more proactive in managing their retirement assets,” says Mark Tepper, CFP, managing partner and founder of Strategic Wealth Partners Ltd., based in Seven Hills, Ohio. “The days of buy and hold, I believe, are over and done with. I know Warren Buffet has done extremely well with a buy and hold strategy, but his duration is forever,” he says. “However, most of our clients have a duration. They’re going to retire in five years, or 10 years, or they’re already retired and they need a paycheck next month.” Therefore, Tepper says, physicians today need to be much more proactive in their management of retirement assets.
Stick to a Process
One key strategy in successfully building a retirement nest egg is to formulate, and stick to, a risk-management process, Tepper says. This could be as simple as buying positions in a portfolio, then adding trailing stop orders to the portfolio. For example, say you want to invest in an energy-sector exchange traded fund or an individual stock in the energy sector. When you purchase the security, you also put in an order to sell the security at a trailing 5% stop. So, you’ll hold that position as long as the stock keeps going up. But once it stops rising and drops 5% from its peak, you have a risk-management process in place that will automatically sell that shares and lock in your gain.
“You don’t have to watch your portfolio daily to do something like that,” Tepper says. “That’s just a simple risk management procedure that you can add to your strategy that can help to make sure that you’re locking in profits as opposed to buying high and selling low.”
Creating a Plan
It’s important to have a sense of what your retirement looks like before you begin planning for it. The planning, of course, should start as soon as possible, but that’s not always in the cards. The challenge then is making up for lost time, says Julia Connell, CFP, senior wealth advisor at Hoxton Financial Inc., based in Shepherdstown, W. Va., which can sometimes be a dilemma because the tendency with age is to become more conservative with investments. However, if you feel you’re behind in accumulating your retirement nest egg, some adjustments in strategy are necessary.
“It’s important to put together an investment strategy that would allow you to have capital appreciation to grow the nest egg, but at the same time not take on more risk than you can afford,” Connell says. “That might mean compromising on some retirement goals, like the age of retirement.” On the other hand, she says, physicians who begin saving early in their careers will have more flexibility in making decisions about retirement.
Starting to save for retirement as early as possible is key, says Tepper. Based on the time-value of money, postponing the start of retirement planning by even one year will significantly impact a physician’s future portfolio.
“A lot of physicians incorrectly view that as, well, it’s just the first year of savings,” Tepper says. “But when you hit age 65, what you’re really truly missing is that last year of compounding. Let’s say we’re talking about one million dollars at a 7 percent return. By postponing savings for that one year, that could cost you $70,000. That’s a lot of money.”
No Rule of Thumb
Neither Tepper nor Connell pay much attention to the rule of thumb stating that retirees only need 80% of their income because their expenses will be lower.
“I haven’t met a client yet who is willing to reduce their spending in retirement,” Connell says. “That piece of income that was spent on college saving for your children during your working years is replaced with things like travel and leisure when you become an empty nester. I find that people spend what they bring home.”
Tepper echoes those thoughts. “A lot of people think they’re going to be mortgage free in retirement, then suddenly they can’t resist the urge to buy that vacation home,” he says. “That’s why it’s important to identify what retirement looks like to you, what’s important to you, and then plan accordingly for that desired end result.”