Larry Keller and I did another article aimed at young dermatologists recently. Like the last one, it's not particularly specific to dermatologists at all. It's fairly basic for a regular reader of the blog, but hopefully will attract docs here to learn more advanced concepts. Check it out:
SEVEN RETIREMENT PLANNING STRATEGIES FOR DERMATOLOGISTS
By James M. Dahle, MD & Lawrence B. Keller, CLU, ChFC, CFP®
Retirement planning focuses on saving money today in order to provide a lifestyle for you and your family in the future, when you decide to slow down or stop practicing dermatology altogether. If you want to retire comfortably, you need to live below your means in order to invest, reduce your debts, and increase your net worth. This article will provide you with seven strategies to help you achieve that goal. Read more
I think assuming a return on stocks is dangerous. What one needs to do is constantly adjust to what the returns are. If you look at the stock market, i.e. S and P 500 from 1998 to today, it has the same value. I think one shoudl have observed this and saved more. Assuming the nominal 8.4% stock market return would have been a disaster.
I agree that making adjustments as you go is definitely important and also that making assumptions can be dangerous. Unfortunately, any kind of retirement planning requires you to make some assumptions. Hopefully you’re aware of the risks of assumptions and constantly reevaluating them.
I think you’re a little too negative on recent stock returns though. On Jan 5 1998 the S&P 500 was at 977. Today it is at 1391. That doesn’t include dividends. Even if you correct for inflation, the value of the S&P 500 has beaten inflation from 1998 to present, not counting dividends. Over the last 10 years the Vanguard S&P 500 Index Fund has made 6.79% per year. Not bad for a “lost decade.”
I think one also has to look at the Japenese Nikkei stock market to understand risk. About 20 years ago it was at 40,000 and today it is maybe a quarter of that. Now that doesn’t include the dividends so maybe the picture isn’t as grim.
I also looked at the S and P 500 index from vanguard and it looks like since 2000 it has returned about 2.25% with dividends, so it is easy to find 12 year periods of poor growth. I think this is where they get the term lost decade.
Unfortunately, bonds are not the best choice because of their low yields. All you need is for the fed funds rate to rise and you could be killed in bonds if not held to maturity.
The most important thing is to live below your means and make as much as possible. You can’t count on getting a real return after inflation. It is VERY TOUGH TO DO!
We really need to warn peope about the dangers of life insurance as an investment. Life insurance should only be used as life insurance.
I’m not sure “killed” is the right verb. I’d love for rates to rise (especially with a fixed mortgage and little other debt). My TIPS would have some capital losses, but the next ones I buy would have a higher yield. My G Fund would not be hurt at all by rising rates. Most bonds funds have relatively short durations and would have minimal impact from a 1-2% rise in rates. Remember also that the Fed really only controls short term rates and has less influence on longer term rates. So even if the Fed raises short term rates 3 or 4%, you might only see a 2% change in long-term rates. Remember if interest rates rise 2%, and the average duration of your bonds is 5 years (let’s say a current yield of 2%) then you lose 10% this year, but then you are earning 4% a year instead of 2%, so you can make that up relatively quickly. At any rate, a 10% loss is hardly getting killed.
Starting in 2000 is a very cherry picked time period. Why use 12 years instead of 10? Oh, that’s right, the dot.com bubble. 10 years is nearly 7% return, much different than 2%.
I think there’s plenty of warning about the dangers of life insurance as an investment on this site. In fact, there are two more posts about it coming up soon, including one in about 6 hours.