[Editor's Note: In 2016 I had the opportunity to go back to Little Rock and speak to the Arkansas chapter of the American College of Surgery. I spoke at the med school and residency earlier that year, primarily on financial issues affecting early-career physicians. This second time they asked me to talk about mid-career and late-career issues. In preparation for that, I wrote this article for MDMag.com republished below.]
Last month I addressed the unique financial issues faced by mid-career physicians. This month I would like to address those in their late careers. While there are no hard boundaries to early-, mid-, and late-career, let’s consider a late-career doctor someone who anticipates retirement in the next three to eight years, so typically age 50 to 65. Here are nine considerations for late-career physicians:
#1 Determine Why You Are Working
By this stage in a career, savvy physicians who saved early and invested well are working only because they want to. They are already financially independent and could stop at any time. While there is still plenty of financial planning to do, it simply does not carry the same urgency as it does for a doctor who is working because he needs to. Thus, the biggest question for a late-career physician to address is “Can I Retire?”
Luckily, this is a remarkably easy question to answer, at least in general. Simply take a look at your budget or spending plan and see how much you are actually spending. If you don’t regularly look at your spending, this would be a very good time to do so. Make sure you include “one-time” purchases like automobiles, vacations, and home improvements. If you are already in your late-career with children out of the house, your regular spending is not likely to change dramatically in retirement.
Now, consider how much guaranteed (or nearly guaranteed) income you are receiving now (or will shortly begin receiving). This might include a pension, Social Security, or perhaps even income from businesses or rental properties. Subtract that from your income needs and multiply what is left by 25, since you can spend approximately 4% of your portfolio each year and expect it to last through a 30-year retirement with a high degree of confidence.
That calculation will tell you the size of the nest egg you will need to retire. For example, if you find you are spending $120,000 per year and your spouse expects a $20,000 per year pension and the two of you expect $40,000 per year from Social Security, that leaves $60,000 per year to be provided by your portfolio – $60,000 times 25 equals $1.5 Million. There are many nuances to this process, but that simple calculation will give you a pretty good idea about where you stand with regard to retirement.
If your nest egg already equals 25 times your spending, congratulations! You’re already probably financially independent (FI). If you’re close (say 15 to 20 times) and should easily arrive with a few more years of saving and investing, you know you are on track.
However, if you are only at two to 10 times, it is time to make some serious changes in your financial lifestyle. These probably include cutting your spending dramatically so you have more money to invest (and need less to maintain that lifestyle) but may also include changing your investments, hiring a new advisor, working more, or even working longer. While cutting lifestyle is always unappealing, the alternative is far worse. A moderate cut now could stave off a drastic cut early in retirement.
#2 Evaluate Life and Disability Insurance Needs
If you are FI, it is time to cancel your term life and disability insurance. If not, make sure your life insurance policy will last until you are. While term life insurance gets more expensive as you age, if you are in reasonably good health and only need a five or 10-year policy it is still usually affordable. Disability insurance is unique in that it typically only pays until age 65 to 67, or two years, whichever is more. So if you are into the late 50s or 60s, you may find that it doesn’t seem like a very good deal anymore, since every year you go without being disabled, the lower the potential benefits you may receive in the event of a long-term disability.
#3 Simplify Your Portfolio
This may also be a good time to simplify your portfolio. You can do this in two ways – by reducing the number of investment accounts and reducing the number of investments. There are four good reasons to simplify your portfolio.
- It usually reduces the cost, in both time and money, of managing it.
- Simpler portfolios often outperform more complex ones.
- As you age, you are likely to have diminishing capacity to manage your own investments. While this is much less likely in your 50s and 60s, and you can protect against that by bringing in a good advisor or a trusted, skilled family member, simplifying your portfolio can help dramatically.
- With most couples, the one managing the investments usually has the most interest and skill in doing so. If that person should die first, it can leave the remaining partner in a bad place. A simplified portfolio will be much easier for the remaining spouse and, potentially a new advisor, to manage.
My nine-year-old descending Pingora, Wind River Mountains
Old 401(k)s can be consolidated into a single traditional individual retirement account (IRA). While this is generally a bad idea earlier in your career as a tax-deferred IRA precludes the use of a backdoor Roth IRA and in some states, an IRA receives less asset protection than a 401(k), these become much less significant issues as you move into retirement. Many physician couples can enter retirement with nothing more than a Roth IRA and a traditional IRA for each of them, along with a joint Health Savings Account and a joint taxable (non-qualified) investing account.
The investments themselves can also be simplified. If you were an asset class junkie earlier in your career with 10 to 15 different asset classes in the portfolio, or worse, you directly own dozens of individual stocks, mutual funds, and investment properties, now is the time to simplify. Individual stocks, bonds, mutual funds, and even investment properties can be sold to simplify the portfolio.
However, when simplifying, you need to be conscious of both transaction costs and tax costs. If you have many “legacy” stocks and funds with low basis, you are likely to be better off holding them and spending just the income, using them for charitable bequests, and leaving them for heirs than to realize the capital gains at this point. Likewise, it may be very costly to sell an investment property, but you can simplify by hiring a management company to take over some of the tasks you used to do yourself.
#4 Finish Off Your Debt
Savvy physicians paid off their student loans in the first few years after residency and their mortgage in mid-career. They have often been debt-free for a decade prior to their late-career years. However, many physicians are still carrying debt at this stage. Paying off any remaining personal or investment debt prior to retirement can be a great idea as it improves your cash flow situation and reduces investing risk in retirement. Having a three-month vacancy in a rental property matters a lot less when you don’t have a big mortgage payment to make.
#5 Evaluate Your Social Security Decision
Most physicians will qualify for Social Security payments beginning between age 62 and 70 and may also qualify for a pension from a former employer. Deciding when and how to take payments can be surprisingly complex and may require careful study or even professional advice. You also want to make sure you sign up for Medicare as you turn 65.
Social Security is actuarially neutral. That means if you die at your life expectancy, it doesn’t really matter if you begin taking payments at age 62 or age 70. However, delaying payments to age 70 is such a great way to increase your guaranteed income that it is almost universally recommended for healthy, single retirees who can afford to do so, even if it means spending down your tax-protected portfolio in order to do so. In addition to an approximately 8% per year increase in your payments, you also receive substantial protection from inflation and most importantly, living a long life. In fact, this insurance component of Social Security is probably the best reason to delay taking payments. If you die early, you probably won’t spend through your portfolio so it doesn’t matter when you take Social Security. If you live a long life, the backstop your increased, inflation-indexed Social Security payments will provide may turn out to be extremely valuable.
If you are married, Social Security planning becomes far more complicated by virtue of the fact that your spouse can opt to take their own payment or half of your payment, which is often higher for a one-physician family. Survivor benefits also complicate the picture. In addition, other available strategies including the outlawed file-and-suspend make it so it is often better for the spouses to claim benefits at different times (typically with the higher-earning spouse claiming at age 70).
#6 Estate Planning
Everyone needs a will, and most physicians ought to have at least a revocable trust by mid-career. As you approach retirement, however, it is time to get serious about estate planning. You need to determine if you are likely to owe federal estate tax (for 2019, an estate of more than $11.4 million for singles and $22.8 million for couples) or state estate or inheritance taxes (often with much lower exemption amounts). If so, there are many useful strategies you can use to direct money to your heirs or favorite charities instead of the taxman.
You also want to avoid forcing your heirs to go through probate to get their inheritances by maximizing the use of beneficiary designations and trusts. In addition, you want to avoid making mistakes that will increase the income taxes your heirs must pay. For example, it is generally better for them to inherit your home rather than be listed as an owner prior to your death, as that eliminates the step-up in basis they would normally get at your death. Also, consider any liquidity needs you may have related to any illiquid businesses or properties you may own.
#7 Asset Protection
While asset protection may become less important to you as you stop practicing (and so can reasonably worry less about being sued above your malpractice limits, especially as the statute of limitations expires) this is also a period of life when you have the most to lose and the lowest ability to replace it by working more. It is important to make sure your home and other properties are titled properly, that you maintain adequate personal liability coverage, that you purchase a tail if you only carried claims-made malpractice insurance, and that you preferentially use retirement accounts over taxable accounts.
#8 Consider Roth Conversions
Roth conversions can be a great way to get tax-diversification for your portfolio and to minimize future required minimum distributions. However, it is generally ill-advised to do these during your peak earnings years. If you gradually retire with several years of part-time work, or if there is a period of time between retirement and age 70, these can be great years to do Roth conversions, at least up to the top of the nearest tax bracket. Pre-paying your taxes in a lower bracket in this manner can reduce your overall lifetime tax burden.
#9 Determining a Spending Strategy
Finally, as you approach retirement you should give some consideration to how you intend to spend down your assets. Different investors have different comfort levels with portfolio withdrawals as a primary source of income, but a good general strategy is to ensure you have enough income, preferably guaranteed income, to cover your needs and then let portfolio withdrawals cover your wants. While you can obviously adjust as you go (just as you did throughout your career), many retirees without pensions purchase a single premium immediate annuity (SPIA) with part of their portfolio in order to supplement the guaranteed income they get from Social Security. These can be purchased with or without an inflation-protection feature and with various benefits for a surviving spouse. A SPIA is essentially purchasing a pension from an insurance company. According to experts, the best time to purchase one is around age 70 where the mortality credits provide a significantly higher income stream than they would have earlier in life.
There have been many academic studies using past economic data to suggest various ways in which one can maximize their portfolio withdrawals without running out of money. However, a more practical approach used by many is to begin with withdrawing around 4% of the portfolio in the first year of retirement and then adjusting as you go. If portfolio returns early in retirement are good, more money can be spent, given away, or left for heirs. If early returns are bad, belts can be tightened to ensure retirees do not run out of money. This is much easier if most or all of your needs are covered by guaranteed sources of income such as Social Security, Pensions, SPIAs, and very safe investments such as a Treasury Inflation-Protected Security (TIPS) ladder.
Late-career is the time to determine if you have enough to retire, how to take Social Security, and how best to spend down your assets in retirement. It is also a good time to surrender unnecessary insurance policies, update your estate plan, do Roth conversions, and pay off your debts. Just like early in your career, smart financial planning reduces stress and maximizes available financial resources.
Did I get it right? Did I miss something important? Comment below!
health insurance prior to medicare needs strong consideration
I hear that a lot, but I have no idea why people think it is so complicated. If I stopped working today, I would have the same health insurance bought the same way I’m buying it now. I suppose If I were no longer self-employed it would no longer be deductible, but that would be the only difference. (Good reason to maintain at least a little self-employment income forever I suppose.) I buy it on the open market now. Now, I understand lots of other people get it from their employers, but it’s no tougher to buy than car insurance and only takes a few minutes to get an estimate on what you would be paying. Then you just need to make sure you have enough in your retirement nest egg to cover it like any other expense.
You must be truely blessed with perfect health. When I came out of fellowship, I decided to apply for individual health insurance to find out if self-employment was an option. Because of vaguely abnormal labs 5 years earlier done for disability insurance underwriting that were never explained but then normalized, I was denied by every insurance company I applied to. Not a higher rating, just flat out denial. No surgeries, never hospitalized, no meds, only doc visits were triggered by these labs, no chronic illness diagnosis, age 32…denied denied denied. Needless to say I took an employed position instead. If insurance companies would deny me based on nothing tangible, I only imagine that a history of diabetes, high blood pressure, asthma, etc would be a denial as well. For many many people buying individual health insurance on the regular market is just not an option.
Until Obamacare. You know the whole pre-existing thing changed then, right?
I think near retirees are very worried about healthcare costs. It is a big unknown. I buy my own insurance too. I own a small practice and I have compared rates between the ACA marketplace and my current small business policy. Rates jack up when you no longer have employees on the plan with you. The coverage deductibles and coinsurance also go up. I am going to work another year and see what happens with the republicans. If I keep procrastinating over this I will be Medicare eligible. It is not that I could not afford to pay ACA unsubsidizeded rates but I don’t want to.
I dont know what to do with my parents ACA, they dont have income and dont qualify for medicare. I am fearful Trump will cancel the program. All they could get before was catastrophic insurance with no preexisting condition covered. With ACA at least we can go to a doctor and have few things taken care of.
I agree with others, maybe a little off topic for people retiring near retirement age but I think healthcare costs actually are a big deal, and maybe more important for the FIRE crowd before medicare eligibility. You sort of brushed it off in the comments on “How To Punch Out of Medicine in 10 Years” post, but it can be such a large chunk of your budget. It currently looks like costs are increasing considerably each year, and as Dr. PK mentioned, there is no guarantee that pre-existing conditions etc.. will be covered down the road, policies for older folks may get more and more expensive…and out of pocket expenses may be higher
But what do you actually do about it other than worry it will continue to increase at a rate far higher than the overall inflation rate? There’s no way to calculate how much larger of a nest egg you’ll need to cover future unknowables.
I feel like I’m relegated to working until I’m off medicare age, whatever that will be 30-40 years from now. I’m going to assume Trump will get rid of the obamacare exchanges and hence pre-existing conditions will hurt a lot of people. But, this is what the people voted for and this is what they will get. It’s a democracy and we voted. At least in this country we have the opportunity to vote and the people have spoken.
I hope the new version of Obamacare, whatever it may look like, allows people with pre-existing conditions to still get coverage but without people being able to game the system by waiting until they’re sick to sign up. Not sure what the best way to do that might be, but if anyone can figure it out it’s Paul Ryan. Maybe a waiting period for pre-existing stuff- 6 months but not forever.
Maybe higher tax penalties for those who are not insured, also maybe cut down compensation of these health care CEOs, less than 10 million dollars a year seem reasonable. Some of them made over 90 million last year. Maybe use that extra money to pay doctors or subsidize health care.
Yea, I don’t have a problem with the mandate either to be honest with you and of course I’m going to support the pipe dream of transferring all CEO paychecks to doctor paychecks. 🙂
Quite an odd comment. You out of anyone, should know that pillaging the rich strategy is misguided at best.
Treat the issue not the symptom. Allow buying insurance over state lines, remove the ability for employers to deduct premiums, make insurance premiums personally deductible, and expand the HSA program. The preexisting conditions would slowly go away over time. If we need a stop gave solution in the meanwhile, we can talk about that after reform.
Getting off topic I guess, but although the CEO’s are hugely overpaid that’s a drop in the bucket when it comes to health care costs.
As far as the mandate goes, it will only work if the health care is affordable. If we get to the point where both the income tax penalty and the cost of insurance are unaffordable for middle class workers, I don’t see a solution.
The ACA did little to contain costs and we are starting to pay the price for that.
That’s exactly the main issue. It was designed to increase the percentage of people covered, not to control costs.
What already passed Congress (Obama veto’d) was repeal of individual mandate and elimination of federal subsidies to help people afford coverage. This triples down on the “free rider” problem, because most people won’t be able to afford coverage, so if they are healthy they will have to go without and hope for the best. If you expect Paul Ryan to fix this, don’t hold your breath; he pushed this legislation through to show it can be done.
in my state of nj the governor did not participate with the ACA
as such private bc/bs was about a grand a month each
medicare for all is the simplest and best solution
As someone who was recently put on the Medicare Legal Sanction list, I’m not sure I agree. A Medicare for all plan doesn’t work well without death panels, and we saw how well they went over.
the #1 reason for personal bankruptcy is medical costs
prior to the ACA many plans had a MAXIMUM LIFTETIME BENEFIT
imagine if that hit you
That’s another great feature of the ACA.
spoke to a Canadian couple
very happy with their healthcare except waits for elective surgery
we are the only civilized country without socialized medicine
medicare, Medicaid, va all govt run healthcare
I never met an unhappy medicare pt
you will LOVE it when you get there and the cost savings and access to 99% of practicioners
don’t knock it till you get it
Yes, but have you ever met an unhappy medicare provider?
NOPE! even my top cardiac thoracic surgeon in nyc PARTICIPATES
most do not have a choice but to participate
COSTS have to be managed or we will not have healthcare
If your tax rate in retirement is projected to be less than during final working years and you’re charitably inclined (and plan to continue to give in retirement) consider “front-loading” future years of charity by giving to a donor advised fund in final working years to achieve a greater tax benefit from the charitable deduction.
Good tip.
Hi WCI: I have been reading so much great stuff on your blogs – thanks SO much. I feel that I am getting a handle on the what and where, but I am still a little fuzzy on the How – and by that I mean the mechanics of moving $$ between locations….
My husband (61)and I (67) are trying to not only allocate (and re-locate) a substantial retirement nest-egg, but also trying to make sense of the mechanics of moving $$ between the various vehicles (SoloK, IRA, 401K).
Currently almost all of the retirement $ we need to move around is at Merrill Lynch – 2 inherited IRRAs, his personal IRA and a Taxable Account. He also has a retirement account at Fidelity (with matching contributions from his employer) which we plan on leaving untouched.
We also have 3 rentals and I am a Real Estate Professional – protecting that status and the tax benefits it bestows are a part of our long-term planning. I manage the rentals through an LLC-S and that gives me the opportunity to open up a SoloK. I believe that I should do that through Fidelity (low/no cost to open account) and then (a) roll-in to that account a very old IRA and old 401K from prior employers now, and then (b) contribute employee (payroll)/employer allocations for 2016. If I employ my husband – can we move $ from his ML IRA into the SoloK?
We also looked into opening up a Self-Directed IRA, but haven’t done that as yet.
So – how do we get the $$ out of ML – and where do we put it? Do we have to take each IRRA/IRA and move each one as “intact” buckets? Or can an IRA $ be deposited in % into different replacement accounts? I understand that in order to move from, say, ML to Fidelity, we have to liquidate all holdings and transfer only cash? (So any “good” funds or stocks inside the IRA have to get sold – boo, hoo – in order to move them out of ML?) Is that correct?
Looks like the/a Taxable Account is where to buy long-term held individual stocks (Facebook, Google etc) and use the IRA $ for Vanguard funds?
I am sure I sound like the “newbie” that I am. I just want to get away from paying 1% off the top each year to the manager of the ML account and to get invested into funds (Vanguard) with low ER (fees).
Would be most grateful for any suggestions/pointers. Thanks!
You’re doing fine. You’ll look back on all these questions a year from now and you’ll feel sort of dumb that there was ever a time you didn’t know the answer to them, but we’ve all been there. Your questions are a bit haphazard, but I’ll try to hit them all.
# 1 You can open up an individual (solo) 401(k) by virtue of having self-employment income. You don’t need an LLC and you don’t have to pay taxes as an S corp in order to do that. Fidelity is a good choice for you as they allow you to roll money into the account (unlike Vanguard) and they have a few low cost index funds (not quite as many as Vanguard, but enough.) More info here:
https://www.whitecoatinvestor.com/where-to-open-your-solo-401k/
# 2 If your husband is employed (or even if he is a partner like my wife is in my business) then he can also use the individual (solo) 401(k). As long as the plan allows it, he can roll over an IRA from anywhere into his individual 401(k).
# 3 You do not have to liquidate the investments inside an IRA before rolling the money over. They can be transferred “in-kind” if you really want to, and that can make sense even if you plan to sell them eventually if it is cheaper to sell them at the new place than at the old place. However, bear in mind that Fidelity’s individual 401(k) may not allow you to transfer assets in kind. It usually isn’t a big deal to liquidate IRA holdings since there are no tax consequences of doing so, although with a place like Merrill Lynch there are often substantial commissions to do so (thus the reason you want to get away in the first place.) They’ll also likely nail you with an out the door fee for closing the accounts.
# 4 You get the money out by initiating the proceedings at the new place. It is easier to pull the money into Fidelity than to push it from Merrill Lynch. It helps that Fidelity has all the incentive whereas ML has none since it is losing assets. You fill out a form and Fidelity does the rest.
# 5 A self-directed IRA can make sense for you guys given your interest in real estate investing. Bear in mind if you have a self-directed traditional IRA it will prevent you from doing Backdoor Roth IRAs, but you can have a self-directed Roth IRA and use it to invest in real estate. Do a lot of research on this topic as there are lots of ways to screw up investing in real estate in an IRA. Most people keep real estate in taxable accounts (often inside an LLC shell) for this reason. Self-directed IRAs also usually have higher fees than what you’d pay at Vanguard or Fidelity.
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
# 6 I’m not a big fan of buying individual stocks. That introduces “uncompensated risk” to your portfolio. I’d recommend against it. If you decide to hold them anyway, then there are benefits and downsides to holding them in an IRA or a taxable account and you’ll have to weigh them. In a taxable account, if you lose money it’s nice to be able to tax loss harvest. If they don’t pay dividends they can also be very tax-efficient. In an IRA, there is no tax cost to changing your mind, which is also nice.
https://www.whitecoatinvestor.com/uncompensated-risk/
Hope some of that rambling helps. If you still have questions after reviewing those links, let me know.
Dr. PK:
Can your parents get some 1099/W2 income (guess – its near certain% of your Federal Poverty Level – FPL; is it $16,020 for family of 2 in 2016?) Can they provide some duties towards your LLC/S-corp etc that they can get say the $16K+ income for the year ? Then they be eligible for ACA insurance (pre-existing covered!) + possible subsidy. They could be in for some pleasant surprise!
Importantly – even if they have started a job (1099 or W2), and show the status change of getting the job — be good enough to start the coverage ASAP. Whether or not they be able to fully work the full–year to get the 16K may not matter much (they may have to pay small penalty while filing taxes). The good thing is they got coverage and potential subsidy on top!
My understanding of ACA is: as clear as mud, somebody care to clarify !?
thanks SC for suggestions, I think my parents are indeed getting some sort of subsidy as they dont have income. My concern was loosing health care for them with Trump with preexisting conditions or being too expensive to buy it.
Totally off topic – just saw the side-ad on this page for HomeUnion (passive real estate investing). Does anyone have first hand experience with them?
You might get a better response asking this on the forum.
Michael H
What about inflation and tax rates? Impossible to predict in Trumpland.
International investing. Which countries and which companies? Canada, Mexico, S. Korea, ??
I see the string is getting a bit old, but two quick thoughts. Who knows what tax rates and rules will be after the next “reform,” but one can be confident high earners will be paying about the same in taxes. I don’t mean to be cynical, but really, the government has to tax where the money is, and it is very unlikely that the rule set will change so much that the tax system will not be progressive. As to specific choices for international investing (i.e., countries and companies) there is no need to make those choices. While you can, why bother when Vanguard has both global and international index funds that can be leveraged for passive investing? Pick an asset allocation percentage and get started.