How Physicians Can Maximize Retirement Income And Manage RiskSubmitted by Harvest Asset Group - Fee-Only Financial Planner on August 5th, 2018
Are You A Retired Physician? Here Are 5 Risks Physicians Can Manage In Retirement.
If you’re a retired physician this post is for you.
Physicians face new challenges around maximizing their income once they’re retired but when you think about it, more importantly, the challenge is managing the risks associated with retirement.
So what are those risks that you face and what can you do to make sure your retirement portfolio lasts a lifetime?
The following are some of the areas we focus on with our physician clients.
1: Longevity Risk
No one wants to outlive our money, so longevity risk is in many ways one of the biggest we face. If you live to be 108, are you still going to have any money? Fortunately, there are tools in the tool chest that very specifically help address this particular risk.
For example, electing Social Security late helps address longevity risk because you can be 108 and still receive payment. And you will be paid more because you waited until 70 to get it. So as 108-year-old, you're going to have more money than if you made some other choices.
Several important questions to consider:
- When do you take Social Security?
- When does your spouse take Social Security?
- What are the rules?
- What are the benefits or pros and cons of taking your Social Security early versus waiting?
Let’s say you’re 58 and will be retiring fairly soon, it's nice to have an understanding of what you intend to do with Social Security and why. For some physicians, we may recommend taking it early, and for others we might recommend waiting until age 70. Taking your Social Security early versus waiting all depends on your personal circumstances, health status, and other things.
Also, a lot of it is coordination of spousal benefits. So the way Social Security works for a couple is, husband has a benefit, wife has a benefit, one of you dies, the surviving spouse gets the higher of the two. Given that, if the male waited until 70 to take his benefit and receives $42,000 a year versus $32,000 a year if he took it early, and then he passes, the wife will receive $10,000 a year more for her life.
This is the kind of thinking that goes into the decision process. Figuring out what to do with your Social Security is definitely an important decision and working with a financial advisor can help you.
So for example, with our clients we look at the financial picture and actually develop a table to help illustrate.
The table looks at when you're both alive.
- This is the income that is going to be coming in.
- These are the expenses that are going to exist.
- This is how much you're going to need to pull from your accumulated assets annually to sustain lifestyle.
Then the table illustrates how things change if the husband predeceased his wife or, conversely, the wife dies first. We look at how much is expected to be needed from your investment assets each year under each scenario. And if that bottom line of how much would have to be withdrawn from assets to sustain the lifestyle of the surviving spouse is too high, then we recommend remedies.
2: Withdrawal Rate Risk
This is the risk of spending down your nest egg too fast.
What this means is you're drawing money out of your assets that's not sustainable over your lifetime. The planning process helps manage this risk because it helps determine whether your planned spending is likely to be within reason, and helps plan for contingencies.
Working with an advisor year over year to adjust and make sure that spending level is likely supported with the resources at hand can help address this risk.
Download the Retirement Guide for Physicians
3: Health Care Risk & Long-term Risk
Health care is going to become a more important costly expense as you age. Care costs are rising at about two times the rate of general inflation. So the health care risk is definitely something that can disrupt your financially secure future.
Tools and tactics to address these risks include:
- Consideration of long-term care insurance
- Employing an investment strategy which can outpace inflation over time
4: Investment Risk
Investment risk is not optimizing the benefits you get from investing your money. Being unwilling to participate in risk markets can hurt you by causing you to lose purchasing power over time. And if you take too much risk with your money, it may not be there when you need it.
But it goes beyond that. If you don’t execute a disciplined investment strategy grounded on proven principals such as diversification, low cost investing, and periodic rebalancing, you will not likely earn a rate of return that is on par with the risk you are exposed to. In other words, your investment plan will not be very efficient.
Investment risk is really optimizing, i.e. making sure you have the right strategy implemented the right way so that the money you have working is doing the job appropriately.
5: Inflation Risks
We lived in a period of time where inflation has been fairly benign. Everybody’s recent memory is, "Oh, inflations no big deal, probably never will be." Well, during a 30-year retirement, it very well could be again.
The biggest tool in the tool chest to address inflation risk is investing and participating in markets. Doing so tends to produce a return that does better than inflation. So it's just the opposite of Social Security. Like Social Security can help address longevity, good investing helps protect against inflation risk. You have to put all the right levers in place customized to your specific needs.
Everybody's circumstances are different in terms of how much fixed income they're going to have upon reaching retirement age, and how much income will come from accumulated resources.
Here are a few strategies to follow when mitigating risks on accounts you might withdrawal from.
- Work with an advisor to develop a strategy that strikes the right balance for you between income from fixed and reliable sources (like Social Security) and investments.
- Understand how much money needs to come from your nest egg on a year by year basis. It will likely change considerably each year as you transition. Money that is going to be distributed for income soon needs to be in safe havens to protect against short term market volatility.
- Consider the tax consequences before you draw money from your various accounts. Developing long and short term tax planning strategies with a professional advisor can be highly beneficial.
These risks apply to everyone, but not equally. How to best apply the tools available to address your specific needs is where working with a financial planner can add tremendous value.
If you have any questions on how to further maximize your retirement income and manage risk or about your retirement savings plan, feel free to give us a call or email us. We’re always happy to chat!