[Editor's Note: This post is one of my regular columns in ACEP NOW titled “Behind in the Savings Game?” It is not written for the diligent physician who found WCI as an MS4. Instead, it's written for the physician in their 50s or 60s who has realized he is dramatically behind regular WCI readers in saving for retirement. It demonstrates some of the steps that can be taken to still allow for a comfortable retirement. In retrospect, I wish I had added one more recommendation–eliminate help for the kids–i.e. they get to pay for their own school and you cut off both “economic outpatient care” and any expected inheritance. At any rate, I hope you find it useful.]
Question: I am a 61-year-old emergency physician. I am healthy and still enjoying my practice and make about $300,000 per year. However, for various reasons, I only have $300,000 saved for retirement. I would like to retire eventually but feel like I am way behind my peers. What can I do to still have a comfortable retirement?
Answer: The first thing to realize is that you are not alone. Due to inadequate financial education, poor discipline, a late start, a divorce, and/or bad investment advice, many physicians arrive at retirement age with far less than they need to continue their current standard of living in retirement. While starting early obviously makes everything much easier, it is never too late to improve your financial position. Here are eight steps to help you make the most of your situation.
8 Steps to Retire Comfortably With a Late Start
1. Cut Back a Little Now Rather Than a Lot Later
Unfortunately, there is no way, short of winning the lottery, for a physician spending most of his $300,000 salary to reproduce that entire salary with his investments in less than 10 years, particularly starting with such a small nest egg. The 4 percent rule indicates that to replace a $300,000 salary, you need $7.5 million. Social Security reduces that need somewhat, but there is no realistic way to get from here to there.
Most physicians won’t need to replace anywhere near their entire income to maintain their standard of living since they will not need to contribute to retirement accounts, fund college savings accounts, pay for work-related and child-related expenses, and pay premiums for disability and life insurance. Hopefully, their mortgage will also retire with them.
However, if you have been spending nearly your entire income, you are in for a drastic reduction in income upon retiring. Your Social Security may provide $30,000–$50,000 per year, but that $300,000 portfolio will only contribute another $12,000 per year. While there are many people in America who retire quite comfortably on that size income, it will be a dramatic change from spending most of a $300,000 salary. The sooner you cut back on your current spending, the less dramatic the change at retirement will be.
2. Work as Long as Possible
The best solution to an inadequate nest egg is simply to keep working. This has numerous benefits.
- You have more time for your nest egg to compound.
- You also have more earnings to contribute to your retirement funds.
- Your Social Security benefits grow with more contributions.
- The longer you work, the shorter retirement will be, so the smaller the nest egg you will need in retirement. Even if you are only working part-time, you will still reap many of these benefits.
3. Delay Social Security
One of the best investments out there is to wait until you are age 70 to claim your Social Security benefit. If you are married, it may make sense to use the “file and suspend” technique for your spouse while waiting until 70 to take your benefit. Your Social Security benefit may be 85 percent larger at age 70 than it was at age 62.
4. Convert Non-Income-Producing Assets to Income-Producing Assets
Many physicians have inadequate nest eggs late in life because they have spent too much money on consumption items like expensive cars, boats, airplanes, and second homes. These assets can often be converted to income-producing assets.
This is most commonly done by selling them and using the proceeds to purchase stocks, bonds, mutual funds, or investment real estate. However, many times the doctor can keep the asset and simply rent it out. Even if your vacation home is not the best investment, obtaining an extra $10,000 a year in income from it will help offset its costs. If you have a year-old BMW, consider selling it, purchasing a five-year-old Honda Civic, and adding the $50,000 saved to your portfolio.
5. Get Rid of Debt
A surprising percentage of the salary of a physician with low net worth goes toward servicing debt. This may be a mortgage on a primary home, a second mortgage, a mortgage on a second home, car payments, consumer debt, or even student loan payments. By paying off these debts, you may be surprised how little income you need to maintain your standard of living.
6. Downsize the House
Once the kids are out of the house, you may no longer need the 4,000-square-foot mansion. Downsizing may help you get out of debt and free up funds to add to the portfolio, but it will also reduce your ongoing expenses. Smaller houses have smaller bills.
7. Maximize Tax-Deferred Accounts
Let Uncle Sam boost the size of your nest egg. If your nest egg is small, relative to your current income, be sure to maximize your use of tax-deferred accounts as you will almost surely pull that money out of the accounts at a lower tax rate than you saved when you put the money in.
8. Take Advantage of Catch-Up Contributions
Older investors are actually allowed to save more in tax-protected accounts than younger investors. These catch-up contributions are $1,000 for IRAs and Roth IRAs and $6,000 for 401(k)s and 403(b)s starting at age 50. Health savings accounts (stealth IRAs) allow you to contribute an extra $1,000 per year starting at age 55. In addition, 457(b)s may allow you to double your contributions for the last three years prior to retirement age.
It is never too late to improve your financial position through education and discipline. If you find yourself approaching retirement with an inadequate nest egg, following these steps will still allow you to reach reasonable financial goals.
What do you think? What other advice do you have for physicians who have a late start on saving for retirement? Comment below!