This is part 2 of this post. In part 1 I introduced the topic and gave the first three suggestions for those who have undersaved and are nearing retirement with not nearly enough money to support their desired lifestyle. In this post, I continue with solutions # 4-13.
Solution # 4 Move!
This one seems dramatic, of course, but can be very beneficial, despite the cost of moving, especially if you're moving to a community you'll stay in after retirement anyway. You can move to a community with a lower cost of living. You can move to an income tax-free state that allows you to save what you were previously paying in taxes. You might also be able to move to another area of the country with higher reimbursement. Most physicians have realized that cost of living has very little correlation with physician pay. Selling a half-paid-for $2 Million dollar home in California and buying the same home in Texas for $300,000 cash gives you $700,000 to add to the retirement portfolio and eliminates that massive monthly payment. Insurance and tax costs may also decrease significantly.
Moving also allows you to change your lifestyle and social group with much less pain. You don't have to explain to the guys why you're no longer in the country club or why you're selling the boat. It's obvious- you're moving. Then, at the new location, you can buy a smaller home in a less expensive neighborhood and avoid making friends with the Jones.
Solution # 5 Work Longer
This solution may sound just as unattractive as moving, but it is so beneficial that it is the main solution that most undersavers utilize. It is helpful for six reasons. First, you earn more lifetime income. Second, you don't need your nest egg to provide for as many years. Third, you can delay taking Social Security, allowing for greater payments later. Fourth, you can delay purchasing a SPIA, getting a higher rate when you do so. Fifth, and perhaps most importantly, delaying retirement gives your nest egg more time to compound and perhaps even recover from a recent bear market. Lastly, if you're working longer, you can be more aggressive with your investments, hopefully producing a higher return.
Solution # 6 Work Part-Time
This is really just a toned down version of working longer. Physicians of many specialties and similar professionals can often decrease how much they work. They may be able to support their lifestyle on just 5-10 days of work a month, especially given the reduced tax burden. While they might not be able to do that and still make big retirement contributions, they do get the other five benefits of working longer while still having time to enjoy retirement activities and travel. Sometimes, it can be tough anyway for a doctor to stop doctoring and going part-time is a good compromise.
Solution # 7 Get a Real Investing Plan
If you do not already have a finely-tuned investing plan, I would suggest you do so, either on your own or with the help of a competent, fairly-priced advisor. Many doctors are investment collectors and have no investing plan. Others have terrible returns due to market-timing or stock-picking schemes. They may be invested in high-expense mutual funds. They may also not be taking an adequate amount of risk. There is nothing quite like understanding your shortfall risk to encourage you to take an appropriate amount of market risk.
Solution # 8 Fire Your Advisor
Obviously, if you have an incompetent or overly expensive advisor you should fire him. However, even firing a competent, low-cost advisor does save you some investing expenses that can be redirected toward portfolio growth. Those expenses get larger every year if you're paying via an Assets Under Management (AUM) fee. Now, I'm hesitant to recommend this approach to someone who is behind on their savings. If they were really the competent do-it-yourself type, they probably wouldn't be in this situation. Nevertheless, there is no reason you cannot learn to do your own financial planning and investing in your 50s just as easily as in your 30s. But remember, it does not help you to avoid advisory fees you were paying a competent advisor unless you actually perform the tasks your advisor was previously doing. Selling low in one bear market late in your career is a financial catastrophe from which there may be no recovery. If the advisor can prevent you from doing that, he is well worth the fees you are paying.
Solution # 9 Eliminate Economic Outpatient Care
Standard financial advice is a lot like that safety speech the flight attendants give before the plane takes off. If the oxygen mask drops, put yours on first, then help your kid. In the same way, you need to take care of your retirement first before worrying about your kids. That might mean they have to take out more loans for college. It might also mean cutting them off if your income is supporting them post-college. You can't afford to help them with a downpayment on their home, cover their medical bills, or pay off their credit cards.
Solution # 10 Give Less to Charity
Physicians are well-known for their charitable inclinations. But just like helping your kids out, you've got to take care of yourself first. Besides, in retirement you can switch from supporting charities with money to supporting them with your time.
Threading the “Pearly Gates” just before dawn on Mt. Hood.
Solution # 11 Get Lucky
The safe withdrawal rate is generally considered to be in the 4% rate. However, if you look at what is usually okay, it's possible to get away with withdrawing 5-6% a year. A $1 Million portfolio may only be the equivalent of a $40,000 per year of income, but if you hit a reasonably good period of returns early in retirement, you may be able to get away with $60,000 per year. This good period of returns is far more likely if you had relatively poor market returns the last few years of your working career. For example, someone who retired in early 2009 would have a much smaller amount of money than someone who retired in early 2008. However, the guy who retired in 2009 who would have enjoyed a much better average return his first 3 years of retirement than the guy who retired in 2008.
Solution # 12 Rob your Heirs
Many people wish to “leave a legacy” to their heirs. However, that money can be used to support your retirement lifestyle instead. There are two ways you can do this. First, if you have cash value life insurance, you can exchange it to a SPIA instead of leaving it for the death benefit. You can also simply do a partial surrender (amount equal to premiums paid comes out first tax-free) and then borrow most of the rest tax-free (but not interest-free.) Even if you don't have life insurance, you can use a large chunk of your nest egg to purchase a SPIA. That money won't be available to heirs, but it will maximize your guaranteed retirement income, probably allowing you to spend more than 4% of it a year.
Solution # 13 Roll the Dice
This isn't the same as get lucky, in fact, it's an awful lot like getting unlucky, but the truth is that most people aren't going to enjoy a 30 year retirement. The life expectancy for the average 65 year old male is 19 years. That means half of those guys are going to have a life expectancy less than that. Only a small percentage of them will actually live the 30 years the safe withdrawal studies are based on.
Each of these 13 solutions, if implemented, are likely to reduce the size of the retirement cliff. Those who find they have undersaved for retirement should not necessarily feel guilty, as they are actually quite normal. Most Americans have trivial retirement savings and live mostly off of social security. However, if they wish to avoid a huge retirement cliff, they need to become a bit abnormal, implement several of these solutions, and boost that nest egg prior to retirement.
What do you think? Are you or anyone you know in this situation? What have you/they chosen to do about it? Comment below!
I see solution 5 and then 6 being the most common. I’m not sure why doctors don’t want to put in a little time to learn about money, most would rather just not think about it and keep doing the same thing they have been.
If you plan on retiring with a 6 figure income why not spent a handful of hours reading and learning about it? We just spent 10+ years in college, graduate, post grad, residency etc. learning how to work and make a 6 figure income. To me, this is the best return on my time I can get!
I think the reason doctor’s don’t put in “a little time”, is because they don’t know that it really does just take a little time. If you couple that with some arrogance in not wanting to admit we don’t know everything, and a habit of delegating, then I’m not so surprised.
I think hearing “small cap” this and “blend fund” that, can be a off-putting because it’s jargon that’s not in our lexicon. That’s no different than if you start saying “no N/V, no CP, no SOB, no DOE…has RUQ pain.”
Maybe it’s just me, but I always thought that inventing meant stock picking. I figured I’d never learn how to do that (thought it would take years of school), so might as well get a financial guy to do that stuff. If you say “passive investing” to most people, you get a funny look…at least I do. I don’t think that most people, including doctors, know that it’s possible to invest for retirement in a way that doesn’t consume all your time…that you don’t need to pick any stocks, or read the wall street journal every morning.
Those who are very interested will go out and learn for themselves. The rest need to know that it’s at least possible and not too hard. If we had at least one class in med school that covered this material, most doctors would be in much better shape…it would demystify investing.
I agree with what you said. I feel lucky to have gone to a school that had a couple classes on the business side of healthcare. Nothing about investing or many specific, but at least we realized that there was a whole other side to healthcare besides treating patients.
I think that talking about it helps more docs to realize that there are a lot of us in the same boat and there are resources like this blog to help us learn. I don’t mind having someone else do the work and getting paid for it, but I always have to understand what is going on. Especially if someone is investing all my retirement. I guess that’s the surprising thing to me. We don’t want to buy a car without knowing all about it and getting the best price, but handing over a few hundred thousand to someone to “invest” without knowing what’s going on with it is mystifying.
Keep up the good work WCI!
I think the crux of the problem for many physicians is figuring out where to start. Sure, for many of us it’s easy as we all have out favorite finance books. But for someone who doesn’t know where to begin, the number of books and articles, many of whom give you conflicting advice, can be very overwhelming.
I lost 90% of a small 403b balance in the dot.com bust and it’s aftermath. That was a wake up call for me to figure this out. I went to Amazon and looked up finance books. I got lucky that Bill Schultheis’s “The Coffee House Investor” caught my eye and that was the first book I read. Had I read something by Jim Cramer or some other stock-picking guru, I’d probably be in a very different place with my retirement investments right now.
I work with residents and have become their go-to-person for financial questions. I refer them to this site (though that’s not as helpful because it is a series of unrelated posts really). I think the WCI book is a great resource now, and I recommend it, along with Bogle’s Common Sense book as a starting point.
As an aside, it would be great to have an “I don’t know anything about finance or investing… Where do I start” button prominently displayed on this site. It would then link to various posts that are logically sequenced to provide a primer on investing for for physicians. Or, it could just link to the WCI book on Amazon.
;-D
I’ve tried to do that with this page: https://www.whitecoatinvestor.com/new-to-the-blog-start-here/
In what way would you change that to be more helpful to a total rookie?
I don’t think that page was there when I started reading the blog. I’ll point my people in that direction first. Up until now I would just send them the posts that I thought could help them, but this lets them get a foothold and then explore from there.
You’ve been with me a long time! It’s been there at least a year or two and is the second most popular page on the site.
I usually use the mobile version and I can’t find it there. Looking at the desktop version, it still took me a bit to find it. Your focus is really drawn to the blog posts. I would put a prominent button on top of the left column that is much more in your face when glancing at the page and says “First timers, click here.” We’re so busy and distracted these days that sometimes we need a little help to see things that are right in front of us.
Second that! Book is excellent. Website a bit daunting and many of the comments/blogs are way ahead of where we were at the beginning.
Question: sounds like you are recommending withdrawing only the income on portfolio. We gave my kids plenty already, and they are not expecting inheritance. If our portfolio is 1.75mil currently, and we are planning to retire btwn 65-67 (10 more years ahead of us), and probably live not more than 20 yrs after that, but to be on the safe side, lets say 25, and want to have 150K in portfolio for kids to inherit, how much could we be withdrawing?
Thank you!
https://www.whitecoatinvestor.com/the-4-rule-safe-withdrawal-rates/
This post should help answer that question. There’s a lot to it. You may also wish to play with the FIRE calculator. http://www.firecalc.com/
I’m one of the two authors of the book Jim referenced in his first post on this topic, a few days ago. Obviously, I’m a financial guy, and I understand this site is more for folks who wish to run their own money, but Jim has been very kind in offering feedback, and I’d like to try to be helpful in turn.
The question you are asking does not have an answer you can calculate. The reason is we don’t know:
1) The average rate of return
2) The sequence of returns (even given a 10% annual return, unlikely in my judgment, a sequence of ten years @ 20%, followed by ten years @ 0%, is great, while a sequence of ten years @ 0% followed by ten years @20% is a disaster)
3) The inflation rate
4) How long you will live (in reference to your example, you are way too pessimistic, in all probability. Two spouses retire at 65, and there is about a 50% chance one is alive at 90. And that is on average. More highly-educated folks live longer, on average.)
If you withdraw all income, your principal is declining by inflation each year, as is the next year’s income.
The best tool to understand this problem is Monte Carlo analysis. The problem with the tool is that most practitioners use historical returns (10% average return on stocks) rather than prospective returns using Shiller’s CAPE methodology (currently suggests <5% returns for next ten years), which is much more robust and predictive.
Hope this helps. IMHO, the seat-of-the-pants generalizations about safe return will not be reliable, starting from the current valuation level.
The school system needs to educate students about personal finance
It’s really 5th grade material
Simple simple simple
Just read bogle, malkiel, swedroe, Bernstein and you will know all there is to know
Some of my colleagues who are approaching retirement are resorting to option #13. I found it hard to believe, but more than few have told me they live, and I quote, “paycheck to paycheck.” I thought it hyperbole (knowing they’re making at least $250-300K), but alas I was mistaken. They were quite serious, if they stopped working or missed a paycheck, they’d be in financial straits…no emergency fund, no investments…at best they’ve been contributing to the 5% match. I was told that I too would be in the same situations, “just wait until you are married and have kids.” Apparently they are still supporting their adult aged children even past college/med school/law school, they call it having their kids “on the payroll.”
So either they tell me that it’d be nice to save retirement if they could (but they can’t), or they’d just rather not have to think about it (a sort of resignation). Either response is depressing. I suppose some are hoping to get by on their pension (years worked x 1.1% x high 3 salaries), which could be about 40% if you’ve worked your whole career there. But that’s a step cliff for someone living paycheck to paycheck.
I get a much better response from medical students and residents when the topic comes up; most are quite interested, so I point them in the direction of this website and a few good books. At least they’ll have a chance of avoiding these common financial pitfalls.