4 Ways Physicians Can Minimize Expenses Before RetirementSubmitted by Harvest Asset Group - Fee-Only Financial Planner on August 5th, 2018
Are You A Physician Considering Retirement? Here Are 4 Tips To Minimizing Your Expenses Before You Retire.
If you’re a physician thinking about retirement, this post is for you.
Oftentimes, physicians will have unnecessary expenses that put a drag on efforts to ensure a comfortable retirement later.
Many of our clients are shocked when they learn of the opportunities they’re missing out on to save money when we’re going through the planning process of their family cost structure.
For our clients, we break down expenses that are currently being wasted and then recommend changes to reduce costs that better align with their emerging circumstances and priorities.
Decreasing your unnecessary expenses is an important step to help you stretch your retirement dollars. As financial advisors we encourage physicians to minimize expenses before retirement. This way you’re able to free up cash and save way more in the long run.
We’ve highlighted some strategies to help you get started.
Here are 4 tips you can use to pocket more savings before retiring
Tip 1: Have A Tax Managed Approach To Investing
Having tax or a tax managed approach to your investing is oftentimes a big opportunity.
For example, many people implement a non-tax managed strategy. And that's fine in an IRA or a Roth IRA, but in a regular account, all those things are taxed on a year in year out basis. If someone like a physician has a very high income, and they also have a $300,000 regular account that's pumping out interest and dividends and capital gains, they might be hit again with taxes that takes away from their efficiency. So the notion of having a tax managed approach can be a big opportunity.
Now you may be wondering if this is an ideal mix of what you should be doing pre-tax and post-tax with your income. The short answer, not really. It will depend on the circumstances but usually it has to do with availability of your cash flow, and your financial needs in retirement.
There's limits on how much can go into any pre-tax retirement plan, and that's not necessarily the same number as you should be saving for retirement.
Let’s say for example, if we are financial planning for a physician that says, " I need to be saving $40,000 a year for retirement in order to retire at age 65 between now and then." Your pre-tax opportunities might only be $24,000, depending on where you work and the benefits that have been made available to you.
Once the pre-tax is funded, then you definitely want to look at your regular accounts or, perhaps if you have a spouse they can do a Roth IRA contribution or a traditional IRA contribution.
Working with a financial advisor can provide you with clarity about what you should be doing and why by helping you determine the allocations for the following:
- How much should be going to your company plan?
- How much should be going to a Roth IRA?
- How much should be going into a regular account that's going to be tax-managed?
Download the Retirement Guide for Physicians
Tip 2: Access Your Insurance Needs
You probably already understand that if you ask an insurance professional for advice to help address financial concerns or opportunities, the solutions offered will be insurance products.
One of the advantages of working with a fee-only fiduciary is that we don’t sell anything. So when we offer advice on insurance, we do it based on a look at needs and also a look at balancing priorities. We know what's available and what it costs, but we also are fairly savvy about how to meet those needs, and we don't get caught up in the world of how to maximize our commissions in doing so.
Typically, when clients are getting closer to retirement, their insurance needs have changed since when they purchased the insurances they have in place. That’s because the risks they are exposed to have evolved. For example, if a client is only going to work 3 more years, the value of their disability insurance (which is typically designed to replace income to age 65) is reduced, and it is less necessary than in early working years. So it's not untypical for us to modify the insurance plan and have them source the insurance from places that offer better value.
Tip 3: Evaluate Your Long-term Care Insurance
This actually isn’t likely to save you expenses today, but could mean the difference between financial security, and potential hardship later on. And in the financial planning world, avoided costs later can be every bit as valuable as extra savings today.
- Families with accumulated wealth
There are families that have enough accumulated wealth that they're in a position to self-insure for the risk of high long term care costs. If you have that much wealth, you are also are in a position to fund a premium if you so choose. And coincidentally, often people who do have the means ultimately decide to spend on the premiums for long-term care insurance rather than absorb the potential costs of those kinds of expenses and putting a ding in their wealth.
- Families who either have pre-existing conditions or the economics of paying a premium
The second is families who either have pre-existing conditions, or the economics of paying a premium given their other priorities make a long-term care premium of $6,000 to $7,000 a year. Because of the high cost, long-term care insurance isn’t a realistic option.
- Families somewhere in between Then there's those of us, and many people fall into this category, who fall somewhere in between. While you may not like the idea of paying the premium, insurance can unquestionably help protect the financial well-being of your spouse or other dependents if you were to require expensive personal care.
For most people that can afford a premium, including those who could potentially decide to self-insure, we recommend that they take a close look at it, and decide. The insurance business of long-term care has gotten much more expensive, much more difficult to obtain, and waiting will just cost you more or put the coverage out of reach.
We highly advise evaluating your long-term care insurance needs, particularly for a married couple. The chances of one spouse needing skilled care are pretty high, and the costs can be devastating. Medicaid offers no relief until family assets are depleted, so the healthy so the spouse is likely the one who will experience the hardship. The motivation is primarily to protect your spouse against financial ruin in case something like this happens.
It’s a natural inclination to put this on the back burner and decide, "Oh, yeah, we'll look at that next year. We'll look at it the following year." But unfortunately, every year you wait, the price goes up and the ability to get underwritten goes up.
So our recommendation tends to be to encourage you to make this the year to look at it, consider it seriously, and decide whether long-term care insurance is for you. It often requires some coaching.
Tip 4: Review Less Costly Education Options
One of the mistakes that we see people making when they come to us with regards to their expenses is funding their children’s college education. Education expenses are a major one that can put your retirement in jeopardy.
Unfortunately, most parents have made some kind of a verbal commitment to their kids about what they are going do for them before they come in. And one of the things that the financial planning process does when it's done right is it organizes goals by priority and time.
Typically the way that people tend to approach education is it's the first hurdle they have to get over before turning attention to retirement needs.
For example, we often hear “I’ve got three kids, and I have to educate them all through college because my parents sent me to college, and then we'll worry about retirement.”
And so the point we make with them is this: there's loans for education, and there's choices you can make on the education front. Retirement, not so much.
So before you commit large sums of money to private schools, universities etc., where your child didn't receive any kind of aid package you want to make sure you’re not putting other more important and non-flexible goals in jeopardy.
So if we tell someone, "Look, your kids are already in high school, if you want to put the three of them through private school and blow in that process, $700,000, then this is how your retirement outlook kind of comes together." That's sometimes a hard moment for families, but it's the reality. However, when presented with that kind of information, there's also solutions.
There are things you can do to minimize your education expenses.
- Consider the likely net price of the schools you apply to. It can be vastly different based on the school, your student, and your personal financial circumstances. All colleges are now required to have a net cost calculator on their website. Use it, and don’t go into the process blind or indifferent to the cost factor!
- Understand the factors that drive your costs. For example, if your family has low income and assets accumulated, your costs might be lower at a well-endowed private school than a state college with lower gross tuition. Conversely, if your family is high income, a school with lower tuition might be considerably less expensive for you.
- Consider some more creative strategies, like student establishing residence in a state with very low in state tuition, or starting out at community college and transferring to four year college after two years.
Surprisingly, many people haven't considered those things because they just think, "Oh, you know, that's what you do, you send your kid to the school they want to go to and you deal with it."
And some people are really well-prepared. They've thought that way from the time the child was born and they've saved money or the grandparents gave them money. But a typical family, middle market family that's raising kids, didn't have $700 a month to plug into a 529 plan since the time their child was born in order to fully fund Harvard.
Regardless, if your retirement is in five years or years away, being realistic and weighing through all the options to cut your expenses now is in your best interest if you want to get the most out of your retirement.
If you have any questions on how to further minimize your expenses or about your retirement savings plan, feel free to give us a call or email us. We’re always happy to chat!