[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
Masquerading as retirees.
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!
Just to add on, would a cash balance/ defined benefit plan not also be a good idea for someone close to retirement to really increase their tax advantaged space quickly? If they are over 55 I would imagine getting up to 200k in additional space would mean that you can effectively save as much as you can make for a few years. Depending on if they earn enough income to make it worth while, of course.
Yes, contributions are largest when you’re older.
Exactly. However, someone who is not comfortable in contributing $250k a year into a combo plan (401k + Cash Balance) will not get as much benefit as someone who can. If one is making $300k and is spending $200k of that, they would still owe $50k in taxes, so that does not leave a lot to make a good size contribution. Even if someone is maxing out their 401k and Cash Balance plans, they can still only get $2.5M into the CB plan and a fraction of that into the 401k plan over the 10 years. So even in the best case scenario they will only have about $3M saved. This is better than nothing, but definitely not possible for anyone who is not a practice owner and who is not able to live on a fraction of their income to make this happen.
Good point Kon. Not many people would be able to take advantage of that. But then again, if you’re willing to cut living expenses enough to fund that, then 3 million dollars is probably enough to get you through retirement!
Sure if you are not an employee unless you can convince your employer to start it.
All defined benefit plans are better if older since fewer years of the costs and higher deductions. Just don’t get fooled into 412i or 412e plans. Typically you would then be just paying more for the same defined benefit.
I’m curious about the defined benefit plan also. I’m in my 30s and hear that it’s not worth it now, due to expense and all the employees I have on my team, but will be great the last 5 years of work or so.
If you have employees, chances are, unless you have only a handful, a CB plan will not be a good idea until you are at least 40-45. Actually, not too many practice owners (unless they are really making good money right before retirement) can max out their CB plan. Doing so gradually might work better if you don’t anticipate having a significant income 5-10 years to retirement. And it is more like 7-10 years, not 5, as that won’t be enough to max out the plan. For some, you might want to start a plan at 40 or 45, and contribute a smaller amount right up to retirement. A plan can be designed with your individual horizon in mind, so your contributions will depend on when you want to retire.
As far as employee expenses and other costs, this is not a big issue. A Cash Balance plan together with a 401k plan will produce the best numbers vs. just the 401k plan. It is not uncommon to have 95% of the contributions go to the owners vs. 85% or so for a typical small practice 401k plan. Also, there are plenty of low cost providers, so a plan can be installed very cost-effectively for a small practice.
I think your #4 deserves more emphasis for a lot of folks who have been living high income lifestyles. People accumulate an extraordinary amount of stuff that often continues to bleed money in terms of insurance, storage, fees, and so forth. The vacation condos, expensive second and third vehicles, boats, RVs, and so forth. Downsize and convert that stuff into actual investments. You’ll be surprised how little you’ll miss most of it.
I have a partner who got rid of all of his motors except their two cars. Boat, motorcycles, ATVs etc. He would very much agree with you.
something is wrong in Denmark with a physician so underfunded with his retirement account that he really will never be able to retire at the same lifestyle
I always go back to the fact that as a society we are financially ILLITERATE
It needs to be part of our secondary education
If you delay SS from 66 t0 70 it increases 8% yearly; it will not be 85% greater which is almost double
If you collect at 70 instead of at 62, you will collect 76% more at 70 than at 62.
( 132%/75% )
At what point do you decide to not fund your children’s college? I am 46, with 375K in tax deferred accounts(maximum contributions) and may need 65000 per year in retirement. Should I work on opening and aggressively funding taxable accounts or continue funding 529 contributions for my 16,12 and 11 yr olds? Is there a percentage you can advise me to work with? Like, put 70% of monthly funds available to my new taxable accounts and 30% to 529? I have no debt, only because I sold my home 3 years ago and moved twice with job changes and I continue to rent.Current salary 250-300K, depending on how much moonlighting I do.
At some point, you need to sit down and put the numbers on paper. A typical private university might cost anywhere from $200k to $250k. There is no way you can do this times 3 unless you sacrifice your retirement significantly.
The best you can do is provide for some of your children’s higher education expenses (a fixed amount for each child, to be fair, say $20k each), and only for those majors that make sense in terms of ROI. If they don’t have enough money for college, maybe they’ll work for a few years and go to a state school or get Federal aid. You can’t get a loan for retirement, so the downside for not having enough will be much worse than anything your children will experience.
Thanks.
Consider at which age you plan to retire – how many years you will still be able to save for it. Figure out what the “nest egg” you need to have at retirement age, safe withdrawal rate, and your life expectancy. Then contribute diligently to get to that amount. Max out your tax advantaged space (if you moonlight and get paid as 1099, make sure you have an individual 401k, maybe a defined benefit plan also – depending on how much of your income is not on a w2). If what you need to save for your retirement through tax advantaged space and taxable investing is less than available funds, invest the remainder of available funds into 529’s.
One of the 529 advantages is that growth is not taxable. At current age of your children you do not have many years of that left. Your 16 year old will need their college money in 2 years. You will not get much of this benefit from 529, given the age of your children (maybe some for 11 and 12 year olds; but not nearly as much as having funded 529s 11-12 years ago would have been). You will just be able to get some state tax break, if your state offers it. Consider also how soon they will need the money if you do decide to fund the 529s – you cannot be very aggressive with the 16 year old’s, as you only have 2-5 year investing horizon.
As another poster said, kids can take out college loans, but you can’t take out loans for retirement. I doubt they will qualify for any federal aid (other than loans or work study) – your income is way too high for even 3 kids to get any federal grant money.
Depending on how your retirement savings are doing at time of your kids’ college graduation – consider helping them out with their loans, instead of excessively funding 529’s at expense of your retirement. It is possible that their loans would not incur interest while they are in school – I think some of my medschool classmates parents’ had kids take out loans for school, then helped them repay them after graduation. During that time your investments can continue to grow. I had some federal and some private loans in medschool, and federal in college – I believe all of them were interest deferred till about 6 months after graduation, hopefully student loans are still this way.
Good luck!
Thank you for such invaluable advice! You have put everything in perspective so well. I think I will opt for discontinuing funding for the 16 yr old(who is actually a rising senior) who has about 30,000, and help him with loan repayments after graduation in order to maximally contribute to my retirement. I started funding college pretty late and tried to play catch up but I now realize that I missed out on the real potential benefit already.I think I am somewhat behind my goal for retirement . I will likely taper down my contribution to the younger children as well once they get to about 25,000.Good majors with good ROI, instate, public. I plan to open an individual 401K this year, I already have my backdoor IRAs. Once I free up that additional cash (along with some additional savings beyond my emergency fund I will open that taxable account. Thanks so much!
retirement funding comes before college funding, always
This is painful…I wonder aloud if this is partially a generational thing as working well into the 70’s is still something people want to do. If this person works to 75 and saves the majority of the 300,000 they will still have a good sized portforlio (although not near the 7.5 mil)