By Dr. Jim Dahle, WCI FounderAs 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.
Truthfully, the non-financial aspects of retirement are perhaps the most important. Unless your retirement is a “forced retirement” due to disability or job loss, you want to make sure you’re retiring to something rather than just retiring from something.
Physicians tend to be type A personalities and don’t 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.
#1 Debt Reduction
There is always a mathematical argument out there that carrying low or even moderate interest rate debt while investing your money can lead to greater wealth in the long run. However, these arguments usually ignore both the risk of this “investing on margin” and the income requirements necessary to service the debt.
While there may be “good debt” 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.
Are Student Loans Paid Off?
I advocate most doctors pay off their student loans within 2-5 years of completion of training by living like a resident 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—whether it is your own or that of your children—into retirement.
Is Consumer Debt Paid Off?
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 “toys” (such as boats, airplanes, RVs, timeshares, etc.). Certainly, if you have any of this “bad debt,” it should be long gone before you seriously consider retiring.
Is the Mortgage on Your Home Paid Off?
While mortgages are often considered “good debt,” having a paid-off home—especially in retirement—frees up a big chunk of income, provides an important inflation hedge, and allows you a palpable feeling of financial security.
Plan to have yours paid off by retirement, whether that means taking out a shorter mortgage, making extra payments, or downsizing before retirement.
Are Investment Property Mortgages Paid Off?
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.
More information here:
Some Sobering (and Scary) Statistics on People’s Retirement Preparedness
#2 Term Life Insurance
One great measure of truly being financially independent is that if you die, your loved ones don’t have to change their financial plans. Term life insurance 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.
#3 Disability Insurance
If you’re financially independent, you shouldn’t need it.
#4 Do You Have a Plan for Health Insurance?
If your employer has been covering your health insurance premiums, will you have enough financial resources to do it on your own, at least until you qualify for Medicare at 65? Remember that Medicare does not cover everything.
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.
More information here:
The Silliness of the Safe Withdrawal Rate Movement
4 Methods of Reducing Sequence of Returns Risk
#5 What Is Your Income Plan?
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.
A lifetime of budgeting may be the best preparation for this, but we all know how few of us really budget seriously.
Do You Have a Realistic Assessment of How Much You Will Spend in Retirement?
Start with what you are spending now, subtract out everything you won’t 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.
Add Up Your Non-Portfolio Sources of Income
If you qualify for Social Security or a pension, you can count that. If you have (or will) purchase an immediate annuity, 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.
Understand What the 4% Rule Means
As a general rule, you can withdraw something like 4%, 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.
Do You Have a Plan for Social Security?
Delaying Social Security 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.
Also, keep in mind there are real advantages to having each member of a couple claim Social Security at a different age.
#6 Go for a Retirement Test Drive
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.
#7 Don't Forget to Plan for Big-Ticket Items in Retirement
In the first few years of retirement (the “go-go years” as opposed to the “slow-go years” and the “no-go years”), 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.
Are Your Cars Relatively New?
You don’t want to have to purchase one, much less two, new cars in the first few years of retirement. If you don’t 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.
Do You Need Toys for Your Retirement?
If your retirement plan includes living on a sailboat in the Caribbean or a luxury motor home, purchase it (with cash) before you retire.
Does Your Home Have Deferred Maintenance?
Don’t go into retirement living in a home in which you know you’ll 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.
Are the Kids Already Married and Through School?
If not, do you have money put away that you plan to use to help them with wedding or schooling costs?
More information here:
7 Principles of Withdrawing Money in Retirement
#8 Estate Plan
Estate planning is always important but even more so the closer you get to your own life expectancy.
Are Your Will and Trust Updated?
You probably should have a will and a revocable trust 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.
It is also a lot easier at age 60 than it was at age 40 to decide where the money you don’t spend in retirement should go upon your death.
Do You Need to Start Giving Money Away Early to Avoid Estate Taxes?
By retirement, you should have a good idea if you’re 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).
The Bottom Line
Just like a pilot runs through a pre-flight checklist, be sure you run through a pre-retirement financial checklist like this one—either on your own or with a good financial planner before embarking on this new adventure.
Looking for some personalized answers when it comes to tracking your retirement? Check out Boldin, a WCI partner that helps you build your retirement plan and keeps you on track for the future you deserve. It’s much more than a retirement calculator; it’ll help you get to the retirement of your dreams.
What do you think I missed, got wrong, or even got right? What else should someone on the eve of retirement have taken care of before pulling the “ejection lever?”
[This updated post was originally published in 2014.]
Point 15 on deferred maintenance is excellent and something not very many people think of.
For big ticket items maybe. I disagree with delaying retirement in order to finance a washing machine.
As I contemplate retiring late next year, husband and I have discussed deferred maintenance and new (at least to us) cars. I haven’t had the bandwidth to pursue several expensive maintenance projects due to work schedule. My solution is to earmark funds for anticipated expensive purchases.
Very thorough. Interesting point about cars. Will have to consider that more thoughtfully next time my husband bugs me about my 9 year old van.
MyMoneyBlog just posted a bit about this:
https://www.mymoneyblog.com/rule-of-thumb-how-much-car-can-i-afford.html
Thanks. We can afford to pay cash for a new car at this point, but I just don’t see the value for me personally. I do not care about being in a new car. The stains, crumbs, mud, dings, and dents look just the same in my 2006 Odyssey as in a new car. And, my car has never required anything but routine maintenance. But, as we near retirement the car may reach an age where resetting to a newer car is worth it for reliability and continued low maintenance (or just to get my husband to leave me alone about it).
Excellent overview Jim. On the topic of automobiles, assuming a typical retirement age, one should consider our reduced vision, hearing, reaction times, flexibility and risk of injury, when deciding what to drive. A reasonable argument can be made that driving a newer automobile, with the attendant crash protection, backup camera and safety features, is a worthwhile investment that may pay significant dividends. Of course affordability comes into the picture, but many/most of these capabilities can be acquired in a two-year-old, low-mileage vehicle, for a reasonable expenditure. If this is not financially manageable in early retirement, there may be bigger fish to fry, before leaving a profession.
I think it’s the wrong question to ask though. Rather than asking how much you can afford, you should ask yourself how much you need. I’ve seen Dave Ramsey throw out a rule of thumb that your cars shouldn’t cost more than half your annual salary. Well, that’s a pretty darn nice car for me. Maybe not a new Lamborghini but certainly a used one. Meanwhile, I’m driving a Durango I paid $4K for 4 years ago that gets me everywhere I need to go and hauls everything I need to haul.
When many of the readers reading this post retire, most cars will be self-driving. This will be a boon to retirees and will extend their mobility for a few years. So that’s the auto upgrade they need and one I’m looking forward to. 😉
We were also supposed to have flying cars by now, so we’ll see. 🙂
I think in the next 30 years there will for sure be driverless cars. Try driving around Phoenix without seeing them. But don’t worry WCI, your flying cars are coming too. 😉
https://www.digitaltrends.com/cars/all-the-flying-cars-and-taxis-currently-in-development/
Good post…I will need this information in about 20 years if all goes well. But still good information to know what I am working towards and how to plan for the future (it’s nice to get a look at the finish line before the race starts)
Incidentally, do you have any idea what the statistics are on readers to your blog? 50-60 year olds should be reading this stuff, but I have a feeling your followers tend to be a younger demographic on average.
Jim
Once again, another one out of the park
My take is that I have 4 challenges with the checklist.
1. My mortgage is not ANYWHERE paid off!!
2. I need to update our wills as we are now 60 and a lot has changed
3. My one rental property in Rexburg, ID is also not paid off but is only 50% mine and co-owned by two of my boys father in law
4. Need to make a decision on my one year old Whole Insurance policy. Costing $5400/year. Already convinced that I need to cancell my wife’s WLI policy costing $2400/year and Doug agrees.
Bob
Can you explain your rationale for purchasing a whole life policy at age 59? (one year old policy) The only possible explanation I can come up with for this is either assett protection if you live in a protected state or tax/estate planning purposes. Maybe you or Jim can correct me about why someone would do this but it otherwise seems like a horrible idea.
Thanks,
Value of Roth accounts should be analyzed.
This is really good information. People need to talk about retirement more.
I read a book about 5 years before my physician husband retired (at 62) and it recommended having dinner with 7 couples you knew that were already retired or planning to retire soon. We learned more from those 7 couples than we dreamed possible.
I’m happy to say as I read through your blog, we had done everything you recommended.
I didn’t see anything about travel in there. We have found travel (even during the pandemic) has become one of our larger expenses. Even if you don’t travel the world, as a retiree, traveling to see your kids, friends, or just for fun happens more frequently. I would recommend budgeting extra money for travel.
Great tip!
Via email:
Under section 5, 4% rule you should clarify that this is income BEFORE taxes and that income AFTER Taxes will vary among individuals depending on the relative amounts of qualified vs non qualified savings as each has a different tax rate.
It might also be helpful to explain the IRMMA rules for Medicare which can significantly increase costs for those doctors in higher income levels.
Two excellent points.
Tax planning. For many physicians, their largest retirement accounts will be pre-tax, by a landslide.
Are there going to be low(er) income years, maybe where you are working part-time or per diem, where it makes sense to do Roth conversions?
In addition, as you get closer to retirement, you’ll have a more accurate understanding of the current tax laws and how that will impact your specific situation.
I agree one should PLAN for expenses like autos and home maintenance in retirement. But that is not an argument for doing the work or replacing cars while working. Money spent replacing something that is still serviceable is just wasted. If it is good now but will need replacing later, then factor that into a retirement budget. Don’t feel some need to spend the money now.
Speaking of wasting money – paying off a low rate mortgage is a terrible idea. Someone who took out a mortgage recently has historically low rates. If interest rates go back up to 5% on the 10 year T bond, anyone with a 2% mortgage has an asset that pays them 3% per year, guaranteed. More if rates go higher. Who in the world would want to pay that off?? They would be throwing money away.
They could set aside enough to pay off the mortgage, invest it in CDs or a Treasury ladder, make the payments as they come due and turn a profit on the rest.
I would. Amazing how despite how throwing all that money away I seem to be doing just fine. There’s more to life than maximally leveraging it.
I did what you recommend for a year or two, then dropped it. Documentation here:
https://www.whitecoatinvestor.com/a-scheme-to-pay-off-my-mortgage-early/
https://www.whitecoatinvestor.com/were-debt-free/
I look at it differently. With a mortgage rate below the interest rate on bonds you have a valuable asset. If you DON’T pay it off and instead put the money in Treasurys, CDs, or munis, you have a low risk bond that pays you a return equal to the difference in after tax returns between the investment and the loan.
If you DO pay it off, then you throw that asset away. That is a bad idea.
Even if someone cannot control themselves and would waste the net return on that asset, they are better off with the bond than without it.
Deciding to pay it off is exactly like tearing up a bond.
You view a debt as an asset rather than a liability. Interesting. Would you like to borrow some money from me so you can have more of this fantastic asset?
Seriously though, your assumption is that interest rates go up so eventually you’re paying less on the debt than you’re making after tax on the guaranteed investment. Anyone who has done that in the last decade plus has been surprised to see rates not only not go up, but many times go down. There is no guarantee that interest rates will go up while you have that debt.
If after tax interest rates on an investment are below the after tax cost of the mortgage, then pay it off. If you are collecting more interest than you are paying on the mortgage, then hold on until the mortgage is paid off on schedule.
That is the best strategy whether working or retired.
Yes, I am saying that it can be profitable to borrow at a low rate and invest at a higher rate. This can be risky if the rate on the loan is variable and the investment return is volatile. For a fixed rate mortgage and low risk fixed rate investments it can be a safe and simple winner. It works for babies and those decades into retirement. Working or not. People who find themselves in this position should not throw away that asset.
Comsider- years ago someone took out a mortgage which they later refinanced to a low rate. At some point in the past, they also bought a long term CD at an interest rate much higher than current. Now they are turning a profit, as long as they hold on. They could cash in their 5% CD and pay off their 2% mortgage. But why should they give that up?
If retired they are still making a profit. They should keep doing so for as long as they can.
Yes, but the point is you really can’t (for the most part) get a mortgage at a rate lower than what fixed, guaranteed investments are paying at the same time. You can get a 2-3% mortgage, and you can get a 1-2% bond or CD. It doesn’t pencil out. The only way it pencils out is if you get the mortgage and then rates go up and then you get the investment. Taking out a loan just for that purpose is a gamble because rates may not go up.
I mean, obviously the math works if you owe at 2% and are earning at 5%, but look around you…there are no 5% CDs right now.
Every pre-retiree(within 5yrs or so) should understand Sequence of Risk and Marginal Utility of Wealth
Do you have any suggestions for books about retirement planning for those of us about to jump off the treadmill?!
Thanks,
Mark
I’ll try to think of some specific to that topic.
Any mitigations to take into account for those of us who retire with a pension? My pension covers about 90% of my expenses.
It should lower the amount you need from your nest egg by 90% then.
Long-term (nursing) care insurance should be given a lot of thought. In-home care, assisted living and nursing home costs are much (MUCH) higher than many people think, and can quickly deplete even large nest eggs.
Does anyone have recommendations on best long term care companies and how to decide what to plan for when you are fortunately healthy in your 50s but want to cover yourself for your later years?
Ideally, WCIers will be wealthy enough to self-insure this risk.
https://www.whitecoatinvestor.com/long-term-care-insurance/
There has been a trend the last few years for states to require it (or charge you a massive tax penalty if you don’t buy it). Already law in WA and 2 or 3 others considering it.
I’m going to push back on this comment.
First, if you don’t know what it costs ($50-120K) that’s an ignorance/education problem.
Second, not sure what number you’re thinking about when you say “large nest eggs” but $100K a year isn’t going to “quickly deplete” a $5m+ portfolio. There is a nest egg size at which this cost is self-insurable. It’s clearly more than $1 million and certainly less than $10 million.
I’m going to push back on this comment.
First, if you don’t know what it costs ($50-120K) that’s an ignorance/education problem.
Second, not sure what number you’re thinking about when you say “large nest eggs” but $100K a year isn’t going to “quickly deplete” a $5m+ portfolio. There is a nest egg size at which this cost is self-insurable. It’s clearly more than $1 million and certainly less than $10 million.
So I guess the question is did you just get lucky/unlucky or should this actually be a recommended “investing” strategy?
I was just lucky/unlucky.
But if your health is declining, your job is physical, you have pre-existing conditions with a high risk of recurrence and disability (my scenario), one may want to pause before canceling disability insurance. It may make sense for only that subgroup to continue.
Maybe a $1.2k premium for a $12k/mo income stream makes sense for those at higher risk of disability, even post FI.
I think it makes sense more often to hold on to life insurance. Risk is going up each year but the benefit stays the same. With disabiity risk does go up, but the benefit (payments to age 65 usually) goes down each year.
Also include how you’ll spend your free time. There’s many on this site who will have no issues with the money part but consider carefully what you will do
Feel a certain obligation to post in respect to Jonathan Clements, who urges us to speak with authority regarding matters within our own experience. I find it interesting in this blog no mention of Medicare elections to be made. My focus was risk management and elected a plan G supplement, which I had through my last few years of working. It has been great. Not so sure about Medicare advantage plans, and trust details of those don’t need to be worked here. Seems to me WCI folks would be in a unique position to speak to this issue. Would you elect a Medicare advantage plan for your health coverage?
It’s really complicated, but I think Medicare Advantage plans do make sense for many/most.
Good point that it would have been very worthwhile to include in this blog post.
Probably the biggest issue I am curious about is if you regard prior authorization of your Doc’s proposed treatment by the insurer of your advantage plan acceptable.
I’m not sure I ever saw a “prior auth” that I liked.
I think one of the greatest advantages of being employed at a state university for some years is that you can get the state health insurance for life from them.
Although at the age of 65 they’ll force you to take Medicare, their own state plan becomes secondary, and they’ll reimburse you for Medicare premium ( was it part B?)
I would think that in this case you’re better off with a regular Medicare.
Good list. I have some questions about points 1 and 7. If you managed to refi to a pretty low rate (say 2 or 3%) and retirement is on your horizon doesn’t it make more sense to put more money away vs. pay down the mortgage. I realize this is an age old debate but for this particular scenario it seems like putting more money away is the better move.
For point 7 about the cars… Assuming you’re going to live another 30 years you’re going to need to buy a few more cars so does it really matter if you buy the car now vs. a few years from now?
In general I think you are right, if the income generated by investing the money is significant to you.
For me, I had a couple more considerations. Neglecting a few mortgage payments is a sure way towards foreclosure and I wanted to eliminate this possibility entirely. Even on auto-pay, money has to be shifted around for availability. A prolonged disability has a way of getting in the way of finances.
Since retirement was close, that means I was older. We had this mortgage for many years and the amount owed was a small percentage of net worth.
Sleeping better at night is worth a few percentage points.