Have you ever felt behind or wondered if you’re on track for a stress-free retirement? As a doctor, you may feel the weight of retirement planning. (You may feel this way even more if you are entering your career later than your peers.) Though the average retirement age is 63, the average physician retirement age is 68.
If your career is delayed, it could mean you have less time to build savings for retirement. Unfathomable might be a word that comes to mind when you factor in inflation and see the amount of time it will take to build an adequate retirement fund.
Whether you have extra years to save or not – if the impact one decision has on another is ignored, your big-picture plan could quickly go off track if one is unprepared for surprises. Though you have spent many years in training, there are strategies you can put in place to reach your goal of a happy retirement.
When this topic comes up in the doctors’ lounge or in an online conversation, one might think preparing for retirement is just about your 401k, IRA, or social security. In fact, the thoughtful approach to retirement planning is more than just thinking about retirement accounts. There are significant factors that should be considered when creating a plan for a successful retirement. Watch the video below for a breakdown of these factors.
As surprising as it sounds, there are only six decisions that we make when it comes to money. It’s important to understand those because the decisions you make in one area of your finances affect all the other areas of your financial situation - they are all interconnected. When preparing for retirement, your plan will likely touch on all six money decisions at some point, but four decisions are most notable in the key factors we will address.
Let’s dive into the 5 key variables you should consider when preparing for retirement.
SPEND
As you know, you won’t have income from your full-time job once you retire. It’s prudent to calculate what your monthly expenses will be to maintain your standard of living. Understanding how much it costs to live the way you like to live will help you decide how much you need to save for daily, monthly, and even yearly spending.
Remember, your spending calculation will need to be maintained for potentially decades in retirement. Therefore, there are a few factors that are more significant in the long-term retirement plan equation than understanding how much your standard of living costs. In other words, if you were to retire at age 63 and die at 93, you would need to fund 30 years of expenses.
A common myth is that your expenses will decrease during your retirement. Though your liabilities might decrease (i.e. your mortgage payments), your lifestyle expenses can increase due to the newfound freedom in your daily schedule. You will have more time for the experiences you have dreamed of, but travel, entertainment, and food still cost money. We see many clients choose to downsize to save money but then struggle to actually decrease expenses when they choose an apartment, condo, or smaller house that costs the same due to the location or quality of the home.
EARN
The second variable is what income sources you might have in retirement. Social Security is often one of the most common income sources people consider, but you may also have access to a pension, for example, if you've worked at a hospital or a large employer. Other sources of income could be from stock investments, ownership in a business, or real estate investing.
There may also be annuity incomes that you'll receive or inheritance that may enter your financial picture during or before your retirement years. It’s best to calculate your earnings conservatively, to ensure you don’t overestimate how much you have in your nest egg.
EARN/SAVE
The third factor beyond expenses and income is longevity. A significant part of the retirement equation is how long you're going to live. Does your family have a long life expectancy? If so, this would give you a probability or at least a possibility of living into your late 90s, or even 100.
Or does your family history lead you to presume that you may die in your early 80s? This is a big factor in retirement planning and one that should be taken into consideration.
Obviously, no one knows exactly when they will die, but there are many ways to overcome the risk of outliving your assets. One option is investing in annuities. This is a common income stream used by retirees. They were designed to be a reliable means of steady cash flow for a retiree to alleviate fears of longevity risk of outliving one’s assets. There are many types of annuities and they can be acquired through insurance companies, independent bankers, banks, and other financial groups.
SAVE
The fourth factor to consider is your assets or what you own. What do you have in retirement accounts like your 401(k) or IRA accounts?
How much are you adding to these accounts on a regular basis? Your monthly deposit to your retirement accounts can give you an idea of what they may accumulate by the time you're ready to rely on these assets to fill the income gap. Although 401(k) plans are an excellent tool to save, they may not yield enough savings to fund your full retirement. One reason is that the IRS limits the amount you can contribute each year.
Once you have an estimate of how much savings you can accumulate through your 401(k) or IRA, you can determine if you will need more assets to fund your lifestyle.
On the other hand, if you are a business owner, you may not have a 401(k) because you are the employer. A common misconception is that proceeds from selling your medical or dental practice will be sufficient to fund your lifestyle during retirement. The profits from the sale may provide some savings, but you might need to supplement your income with other retirement accounts.
PROTECT
Finally, we’d be remiss to leave out the importance of accounting for surprises. One of the most notable surprises that can derail a retirement plan is a significant deterioration in health. Long-term health care costs like assisted living or nursing homes can bring high costs to you and your family. Americans often underestimate the cost of long-term care, below the average lifetime expenditure of $142,777, which could increase over time.
You might think you can save money by avoiding a retirement community or nursing home. Even staying at home but requiring professional assistance can rapidly deplete the assets that you accrue through a lifetime of work.
Life insurance can help protect your retirement by funding end-of-life care. You could have a combination life insurance policy, sometimes called a hybrid policy, that includes a long-term care benefit to pay for long-term care services. If this is something you need down the line, you can take advantage of it, otherwise, there is a death benefit for your beneficiary.
There are many factors to consider when preparing for retirement. The decisions you make today do indeed impact your future retirement. Selling your practice or putting a portion of your paycheck in your 401(k) are products of the decisions you make decades in advance to open/acquire a practice or set up your 401(k) account. If you choose to buy the fancy car or the million-dollar home, will it allow you to save enough to maintain your standard of living during your retirement?
Whether you are in training or practice, the time to start planning for your future is now! A financial planner can help give you peace of mind by calculating how much you will need for retirement. They can offer you multiple scenarios and then guide you through choosing the best strategy for the successful retirement you have been picturing. If you have questions about retirement, please contact one of our financial planners to discuss your specific situation.
Are you planning to retire soon? Make sure you're on track to achieve your retirement goals. Download our Budgeting Guide for Mid-Career Physicians and Dentists to help you reach your retirement goals
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Shane Tenny is the managing partner of Spaugh Dameron Tenny. Along with hosting the Prosperous Doc® podcast, Shane has a true passion for behavioral finance, helping clients and audiences understand how to develop successful strategies based on their unique temperaments. An accomplished and highly engaging speaker, Shane is regularly interviewed for television and podcasts, is actively involved in the Financial Planning Association®, and contributes to industry advisory boards.
