As doctors enter their 50s and 60s, many start dreaming about retirement; unfortunately, properly planning for retirement requires as much time and effort as planning a career.<\/p>\n
Truthfully, the non-financial aspects of retirement are perhaps the most important. Unless your retirement is a \u201cforced retirement\u201d due to disability or job loss, you want to make sure you\u2019re retiring to<\/strong> something rather than just retiring from<\/strong> something.<\/p>\n Physicians tend to be type A personalities and don\u2019t rest on their laurels well. Physician identities are also often closely tied to their careers, which further complicates the complete cessation of work. Today, however, I will discuss some financial items you probably ought to check off before retiring.<\/p>\n There is always a mathematical argument out there that carrying low or even moderate interest rate debt while investing your money<\/a> can lead to greater wealth in the long run. However, these arguments usually ignore both the risk of this \u201cinvesting on margin\u201d and the income requirements necessary to service the debt.<\/p>\n While there may be \u201cgood debt\u201d for someone in their 20s and 30s, there is no good debt by the time you are getting close to retirement. Every bit of debt you pay off reduces your overall financial risk and the income your assets need to produce to maintain any given retirement lifestyle.<\/p>\n I advocate most doctors pay off their student loans within 2-5 years<\/a> of completion of training by living like a resident<\/a> until the loans are gone. Some might consider that extreme, but there is no doubt that it is a terrible idea to carry student loan debt\u2014whether it is your own or that of your children\u2014into retirement.<\/p>\n There is no reason to ever carry a balance on a credit card and very little reason to have any significant debt for automobiles or \u201ctoys\u201d<\/a> (such as boats, airplanes, RVs, timeshares, etc.). Certainly, if you have any of this \u201cbad debt,\u201d it should be long gone before you seriously consider retiring.<\/p>\n While mortgages are often considered \u201cgood debt,\u201d having a paid-off home\u2014especially in retirement\u2014frees up a big chunk of income, provides an important inflation hedge, and allows you a palpable feeling of financial security.<\/p>\n Plan to have yours paid off by retirement, whether that means taking out a shorter mortgage, making extra payments, or downsizing before retirement.<\/p>\n Using leverage in real estate generally boosts returns. However, in retirement, you want those investments to provide as much income as possible, and the best way to do that is to pay off the mortgage.<\/p>\n More information here:<\/strong><\/p>\n The Risk of Retirement<\/a><\/p>\n Some Sobering (and Scary) Statistics on People\u2019s Retirement Preparedness<\/a><\/p>\n One great measure of truly being financially independent is that if you die, your loved ones don\u2019t have to change their financial plans. Term life insurance<\/a> should be kept in place until you reach that point. If you (and your loved one) are not comfortable canceling your life insurance, you may not be financially ready to retire.<\/p>\n If you\u2019re financially independent, you shouldn\u2019t need it.<\/p>\n If your employer has been covering your health insurance premiums, will you have enough financial resources to do it on your own<\/a>, at least until you qualify for Medicare at 65? Remember that Medicare does not cover everything.<\/p>\n While this is less of a big deal for a self-employed doctor who has been paying their own premiums for years, it prevents many people from retiring as early as they would like.<\/p>\n More information here:<\/strong><\/p>\n The Silliness of the Safe Withdrawal Rate Movement<\/a><\/p>\n 4 Methods of Reducing Sequence of Returns Risk<\/a><\/p>\n\t\t Although it may seem obvious, I have been surprised at how many people come out of retirement because they can't match their retirement income to their spending needs.<\/p>\n A lifetime of budgeting may be the best preparation for this, but we all know how few of us really budget seriously.<\/p>\n Start with what you are spending now, subtract out everything you won\u2019t have to spend due to not working (such as commuting costs, payroll taxes, and CME expenses), add in expenses you will have when you are not working (perhaps extra traveling or healthcare costs), and add a little extra as a fudge factor.<\/p>\n If you qualify for Social Security or a pension, you can count that<\/a>. If you have (or will) purchase an immediate annuity<\/a>, you can count that, too. You may also wish to add in the net operating income of your rental properties (usually about 55% of your gross rents), but keep in mind that large expenses, such as a new roof or windows, will eat into that income significantly.<\/p>\n As a general rule, you can withdraw something like 4%<\/a>, indexed to inflation each year, of a reasonable portfolio and expect it to have a very good chance of lasting 30 years. That means if you need your portfolio to provide $100,000 in income each year, you need a portfolio of $2.5 million.<\/p>\n Delaying Social Security<\/a> until age 70 provides an important inflation hedge and longevity insurance. But that obviously reduces your income if you retire well before 70, like many doctors wish (or are forced) to do.<\/p>\n Also, keep in mind there are real advantages to having each member of a couple claim Social Security at a different age.<\/p>\n Live on your expected retirement income for six months before retirement. Is it reasonable, or do you feel pinched all the time? Better to find out while you still have a job.<\/p>\n In the first few years of retirement (the \u201cgo-go years\u201d as opposed to the \u201cslow-go years\u201d and the \u201cno-go years\u201d), you will probably want to spend your money on experiences, many of which can be easily foreseen and budgeted despite their expense. You want to avoid spending your now-limited income on expensive, unforeseen large-ticket items.<\/p>\n You don\u2019t want to have to purchase one, much less two, new cars in the first few years of retirement. If you don\u2019t drive much, you may find that a car purchased just before retirement is still in your driveway when your kid finally takes your keys away.<\/p>\n If your retirement plan includes living on a sailboat in the Caribbean or a luxury motor home, purchase it (with cash) before you retire.<\/p>\n Don\u2019t go into retirement living in a home in which you know you\u2019ll have to replace the windows, the roof, the carpet, or even the washing machine any time soon. Do that while you still have a working income.<\/p>\n If not, do you have money put away that you plan to use to help them with wedding or schooling costs?<\/p>\n More information here:<\/strong><\/p>\n How to Spend in Retirement<\/a><\/p>\n 7 Principles of Withdrawing Money in Retirement<\/a><\/p>\n Estate planning<\/a> is always important but even more so the closer you get to your own life expectancy.<\/p>\n You probably should have a will and a revocable trust<\/a> before getting to retirement, but at this point, you can make a much more educated decision about any serious estate planning you may need to do.<\/p>\n It is also a lot easier at age 60 than it was at age 40 to decide where the money you don\u2019t spend in retirement should go upon your death.<\/p>\n By retirement, you should have a good idea if you\u2019re going to have an estate tax problem. Remember, your state exemption limit may be much lower than the 2024 federal exemption of $13.61 million ($27.22 million for couples) [visit our annual numbers page<\/a> to get the most up-to-date figures]<\/em>.<\/p>\n Just like a pilot runs through a pre-flight checklist, be sure you run through a pre-retirement financial checklist like this one\u2014either on your own or with a good financial planner before embarking on this new adventure.<\/p>\n#1 Debt Reduction<\/h2>\n
Are Student Loans Paid Off?<\/h3>\n
Is Consumer Debt Paid Off?<\/h3>\n
Is the Mortgage on Your Home Paid Off?<\/h3>\n
Are Investment Property Mortgages Paid Off?<\/h3>\n
#2 Term Life Insurance<\/h2>\n
#3 Disability Insurance<\/h2>\n
#4 Do You Have a Plan for Health Insurance?<\/h2>\n
#5 What Is Your Income Plan?<\/h2>\n
Do You Have a Realistic Assessment of How Much You Will Spend in Retirement?<\/h3>\n
Add Up Your Non-Portfolio Sources of Income<\/h3>\n
Understand What the 4% Rule Means<\/h3>\n
Do You Have a Plan for Social Security?<\/h3>\n
#6 Go for a Retirement Test Drive<\/h2>\n
#7 Don't Forget to Plan for Big-Ticket Items in Retirement<\/h2>\n
Are Your Cars Relatively New?<\/h3>\n
Do You Need Toys for Your Retirement?<\/h3>\n
Does Your Home Have Deferred Maintenance?<\/h3>\n
Are the Kids Already Married and Through School?<\/h3>\n
#8 Estate Plan<\/h2>\n
Are Your Will and Trust Updated?<\/h3>\n
Do You Need to Start Giving Money Away Early to Avoid Estate Taxes?<\/h3>\n
The Bottom Line<\/h2>\n