As the saying goes: people don’t plan to fail; they fail to plan. The main reason is that as a whole, physicians start saving too late and are unable to make up the shortfall during their peak earning years. Procrastination and poor planning can result in the need to continue working in some manner during retirement or reduce the income desired during the retirement years.
Successful retirement planning requires three key elements:
Setting clear goals.
Maximizing tax benefits.
Exercising discipline.
When setting a clear retirement goal, give thought to the age that you would like to achieve financial independence. Consider financial independence to be the point when you do not have to earn an income to support yourself. There is no better feeling than continuing to work on a full-time or part-time basis because you want to — not because you have to.
Once you determine the desired age goal, quantify the amount of income needed to maintain a comfortable standard of living. Many retirement planners suggest an annual income of approximately 70–75% of your current standard of living.
A more specific and personalized method of determination is to review your expenses over the last 12 months by going through your checkbook or bank statements. While doing this, consider which expenses you won’t have or that will be less during retirement. Also think about categories of expenses that may increase, such as travel and other leisure activities.
Next, take an inventory of your investment assets, including your retirement plans. What types of rates of return have you been earning and what can you expect in the future? Is your rate of inflation assumption realistic? From an income tax-planning standpoint, recognize that there are three distinct phases of an investment:
The deposit or purchase phase: Do you invest with after-tax or pre-tax dollars?
The accumulation or growth phase: Is the growth taxable, tax-free, or tax-deferred?
The liquidation phase: Will you receive the income on a taxable or tax-free basis?
Based on current tax law, the government allows, at best, a tax benefit to be available in two of the three periods. Proper planning ensures that you will receive the tax benefits to which you are entitled. Exercising discipline makes the difference between financial independence security and failure.
All the retirement and tax planning strategies in the world will prove ineffective if you don’t actually implement a retirement planning strategy.
You not only need to gather information and determine objectives, but also you need to make informal decisions and act on them. Don’t put it off, as the sooner you begin, the greater the chance of enjoying a financially successful retirement. Planning for retirement can be an enjoyable experience. Use the following checklist for a successful retirement as a starting point.
Checklist for a Successful Retirement
Have your financial planner prepare a retirement income projection to ensure there are adequate assets to support your retirement standard of living.
Anticipate and prepare for non-financial changes. After being with patients and colleagues for so long, many physicians miss the social aspect of medicine. One way around this is to work on a limited basis with shorter hours and no call. If you’re interested in this kind of arrangement, explore the possibilities.
While working a full schedule, have a business valuation conducted on your practice. This should provide a starting point for discussions about selling your share of the practice. Selling a practice may take upwards of two years.
Determine liability coverage options and other asset-protection strategies to be used during retirement.
Map out a strategy to coordinate the tax treatment of income generated from the rollover of qualified retirement plan assets.
Decide who will assist you in managing your rollover portfolio during your retirement years.
The earlier you begin, the greater the chance you will enjoy a financially successful retirement. Remember, it’s important to plan, but critical to act! Sometimes the goal of financial independence can seem deceptively easy to attain.
Adapted from The Prescription for Financial Health: An Authoritative Guide for Physicians, 2nd Edition by Joel M. Blau, CFP, and Ronald J. Paprocki, JD, CFP, CHBC
For more information listen to Ronald J. Paprocki’s SoundPractice podcast interview on this topic. www.soundpracticepodcast.com/e/the-basics-for-financial-health-for-the-new-or-young-physician-ronald-j-paprocki-jd-cfp%c2%ae/