Managing Your Practice

Should I retire early?


Much has been written of the widespread concern among America’s physicians over upcoming changes in our health care system. Dire predictions of impending doom have prompted many to consider early retirement.

I do not share such concerns, for what that is worth; but if you do, and you are serious about retiring sooner than planned, now would be a great time to take a close look at your financial situation.

Many doctors have a false sense of security about their money; most of us save too little. We either miscalculate or underestimate how much we’ll need to last through retirement.

We tend to live longer than we think we will, and as such we run the risk of outliving our savings. And we don’t face facts about long-term care. Not nearly enough of us have long-term care insurance, or the means to self-fund an extended long-term care situation.

Many people lack a clear idea of where their retirement income will come from, and even when they do, they don’t know how to manage their savings correctly. Doctors in particular are notorious for not understanding investments. Many attempt to manage their practice’s retirement plans with inadequate knowledge of how the investments within their plans work.

So how will you know if you can safely retire before Obamacare gets up to speed? Of course, as with everything else, it depends. But to arrive at any sort of reliable ballpark figure, you’ll need to know three things: (1) how much you realistically expect to spend annually after retirement; (2) how much principal you will need to generate that annual income; and (3) how far your present savings are from that target figure.

An oft-quoted rule of thumb is that in retirement you should plan to spend about 70% of what you are spending now. In my opinion, that’s nonsense. While a few significant expenses, such as disability and malpractice insurance premiums, will be eliminated, other expenses, such as travel, recreation, and medical care (including long-term care insurance, which no one should be without), will increase. My wife and I are assuming we will spend about the same in retirement as we spend now, and I suggest you do too.

Once you know how much money you will spend per year, you can calculate how much money – in interest- and dividend-producing assets – will be needed to generate that amount.

Ideally, you will want to spend only the interest and dividends; by leaving the principal untouched you will never run short, even if you retire at an unusually young age, or longevity runs in your family (or both). Most financial advisers use the 5% rule: You can safely assume a minimum average of 5% annual return on your nest egg. So if you want to spend $100,000 per year, you will need $2 million in assets; for $200,000, you’ll need $4 million.

This is where you may discover – if your present savings are a long way from your target figure – that early retirement is not a realistic option. Better, though, to make that unpleasant discovery now, rather than face the frightening prospect of running out of money at an advanced age. Don’t be tempted to close a wide gap in a hurry with high-return/high-risk investments, which often backfire, leaving you further than ever from retirement.

Of course, it goes without saying that debt can destroy the best-laid retirement plans. If you carry significant debt, pay it off as soon as possible, and certainly before you retire.

Even if you have no plans to retire in the immediate future, it is never too soon to think about retirement. Young physicians often defer contributing to their retirement plans because they want to save for a new house, or college for their children. But there are tangible tax benefits that you get now, because your contributions usually reduce your taxable income, and your investment grows tax-free until you take it out.

For long-term planning, the most foolproof strategy – seldom employed, because it’s boring – is to sock away a fixed amount per month (after your retirement plan has been funded) in a mutual fund. For example, $1,000 per month for 25 years with the market earning 10% overall comes to almost $2 million, with the power of compounded interest working for you.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J.

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