Top 3 Strategies For Physicians Who Need To Accelerate Savings Before RetirementSubmitted by Harvest Asset Group - Fee-Only Financial Planner on August 5th, 2018
Are You A Physician Who’s Retiring Soon? Here Are 3 Strategies To Accelerate Your Savings Before You Retire.
If you’re a Physician within 5 years of retirement, this post is for you.
When a physician is nearing five years to retirement it is time, if not sooner, to seriously start making decisions on how to accelerate your savings and avoid costly mistakes in the long run.
As you prepare for retirement it’s important to consider what are the things you need to be paying attention to? And what can you do between now and retiring to optimize your circumstances?
Here are 3 strategies to help physicians accelerate savings before retirement.
Strategy 1: Maximize Tax Advantaged Savings Opportunities
As a pre-retiring physician you should work toward achieving some account type diversification in your working years or prior to the time at which you're going to be taking required minimum distributions from pre-tax assets. Ideally you will retire with assets in three types of accounts:
- Regular non- retirement family account
- Pre-tax retirement (traditional IRA and 401k/403b)
- Roth IRA
Because physicians tend to have a marginal tax rate up at the highest levels of the tax code based on compensation, it is typically wise to take full advantage of pre-tax savings opportunities.
When we go through the financial planning process with our physician clients, we often find missed opportunities that amount to costly mistakes.
For example, in Portland Maine, higher compensated physicians at the major employer not only have access to a 403(b) plan, which allows pre-tax savings of $18,500 to $24,500, but may also be eligible to contribute to another plan called a 457, which can allow for additional income deferral. The 457 is less commonly understood, so we find many physician clients learned about the opportunity and then ignored it. By fully funding both, a physician might save about $20,000 a year in current taxes!
But while funding pre-tax plans usually makes sense, you have to be careful and not overlook the long-term tax planning implications. It is possible to have too much of a good thing. Putting 100% of your savings efforts into pre-tax (especially if there are large profit sharing contributions added by your employer), can build an unhealthy concentration in assets under “pre-tax” status.
This can lead to complicated lifetime tax challenges later on, which is why we often recommend making efforts to build non retirement assets and consider building up a Roth IRA for the long run.
We have found that many clients don't understand the huge difference between the after tax value of different types of accounts. The after tax value of a $1.0 million Roth IRA is $1.0 million, while the same amount held in a pre-tax account might have a net tax value of about $600,000. Big difference!
Most don't anticipate or contemplate the notion that the government has a scheme up their sleeve to tax that money during their lifetime.
So when we are helping physicians accelerate savings prior to retirement, we focus on both the short and long- term tax considerations that come into play. This can put you at an advantage when it comes to trying to control your taxation on a year in year out basis.
Download the Retirement Guide for Physicians
Strategy 2: Review And Update Insurance Policies
Your insurance needs evolve and change as your life progresses, and as you begin to approach financial freedom, it is a good time for a risk management tune up.
As a young physician, you may have bought disability insurance coverage that goes beyond what is covered by your employer. That was a good decision at the time, but now they may be of less value to you relative to the premiums.
If you needed to make a claim back when you were age 40, the policy would help replace your income for another 25 years or so. If you get to be 55, 60 years old, you still pay the same premium, but the benefits only pay you until you hit about age 65. If you are close to achieving financial freedom, you may no longer need these expensive plans to address your current risk.
The same hold true for life insurance. If you pay a lot of money in life insurance premiums, although your life insurance needs have greatly diminished, you can consider a new insurance plan with lower premiums.
The savings from updating your life and disability plan can often free up cash flow needed to help accelerate savings or address changing insurance needs (like long-term care insurance).
Strategy 3: Review Your Debts And Service Plans
Being a shrewd user of debt, and being more deliberate about how you service debt can potentially reduce expenses now or later on. This is an area that must be aligned with your retirement goals.
Our planning process often takes a deep dive into the use and service of debt. Everything you earn each year goes to one of the following: debt service, taxes, risk management, savings, or lifestyle (everything else). We often discover big opportunities for clients to accelerate savings in the debt service area.
We see costly mistakes more often than we like. For example, upon refinancing a mortgage, a client might just start paying based on the term (15 or 30 years) defined by the bank. But if they had serviced their old mortgage for 10 years already they are just pushing the end date out further. Financial planning and alignment with your goals should determine how you service your mortgage, not the bank.
Following are some questions we might explore with you to determine if a new planning around debt can be beneficial:
- What are your long-term housing preferences? Are you likely to stay or move? What’s the status of current mortgage? If you keep your current mortgage and continue to pay at the same rate, at what age will the note be satisfied?
- Are you using high interest, non-tax advantaged debt to finance assets that depreciate over time (cars and boats)?
- What other debt service items impact your cash flow?
Debt accumulation and how it is serviced just seems to occur randomly for many families. Getting some professional perspective on alternative approaches often brings out recommendations that greatly accelerate savings prior to retirement.
If you have any questions on how to further accelerate your savings or about your retirement savings plan, feel free to give us a call or email us. We’re always happy to chat!