You have heard it before: the story about the hard-working physician who "retired" only to be forced back into practice by unforeseen financial difficulty.
If you want to retire some day and stay retired, here are some steps you can take to make your retirement a pleasant trip.
1. Look both ways. Nothing is more important to you than your family, and you want to be there when they need you. But what happens when your adult child takes an unexpected trip through graduate school and the tuition comes due? And who will support your aging parents in the event that something happens and they need your financial support? If some “emergency” emerges, who will they call? That’s right… you. Look toward the future for both generations and you'll be more likely to keep your retirement on track.
2. Drive your debt to zero. If you are "debt free except for your mortgage,” you're setting yourself up for a difficult retirement. Remember, your retirement income may vary from year to year but your mortgage remains the same, and this can cause trouble. Refinancing a mortgage (or getting a new one if you move) is tough when you're basically unemployed. If you have enough money to pay off your mortgage before you retire, then pay it off. And if you don't, then find some way to become completely debt free before you quit your day job.
3. Calculate your financial gas mileage. Do you know how much money you spend each month to maintain your standard of living? Probably not. A surprising number of new retirees have never used a budget, nor measured what they spend. This is not just important, it's crucial. Figure out how much goes out each month by keeping a spending journal or using software like Mint.com to find your number. Remember to include what you spend on credit cards. Then add to this number all of the personal expenses that run through your practice (medical, dental, insurance, travel, mobile phone, etc.). Most people are surprised by what they spend, and it's better to be surprised while you're still employed.
4. Don’t let a broken promise wreck your retirement. Do you intend to depend on income from sources other than your own savings? Will Social Security really be there for you throughout your whole retirement? What about Medicare? If you're in line for a pension, how strong is the company who will be cutting your check? From time to time, big organizations break their biggest promises. When you do your planning, include scenarios showing what happens if these promises are broken, then be certain they don’t break your retirement.
5. Remember, you’re driving into a headwind. If you know how much income you’ll have and how much you’ll spend, it's tempting to think you’re good to go. But proceed with caution. If inflation runs at only 3%, your cost of living will double during the first 25 years of retirement. And the deferred taxes on IRAs, 401ks and annuities may consume as much as one-third of what you withdraw. Be certain to include these factors in any plans you make.
6. Ladies… Stop, look and listen. Statistics tell us that women outlive men but they fail to make it clear that a woman often cares for her husband as he ages, often consuming her financial, physical, and mental resources. Ladies, who will care for you when he’s gone? Maybe your children will but it may be an assisted living or long term care facility. Look into long term care insurance for yourself and remember to include the cost of the premiums in your budget for retirement.
7. Are you ready to go? A host of research studies indicate that the highest sustainable withdrawal rate a retiree can take from a well-diversified portfolio of stocks and bonds is 4% per year. That means a $1 million account might allow you to take out $40,000 per year with a minimal chance of running out of money before you run out of retirement. Use simple math to run a quick reality check on your retirement plan. Multiply the value of your investments by 4% (then subtract about 1/5th for taxes if most of your money is in an IRA or 401k). Is it enough to cover your annual cost of living in retirement? If it is then...
8. Hire a professional to point the way. And by "professional", we mean a real, live Certified Financial Planner™ who works with people like you to design and execute a plan for a sustainable retirement. Be certain that this person is squarely in your corner—no conflicts of interest, no hidden agendas. Rule out any "advisor" (an unregulated catch-all label) who has less than ten years of experience and be careful when taking advice from anyone who has the potential to sell you a product. You are looking for an honest, objective answer to the question, "Am I prepared to retire today?"
9. Watch out for investment potholes! Do you remember the last time you lost money in the stock market? Since you're still employed, it probably felt like a speed bump. But if you had been retired and depending on your portfolio to support your lifestyle, it could have felt like a rear-end collision. If you have less than five years until your retirement, consider investing today as if you were retired right now, and begin thinking about how you would take money from your portfolio to pay your bills. It might help you get used to the bumps you’ll experience for decades to come.
10. Slow down before you stop. When you have made up your mind to actually retire, consider your options before you come to a full stop. The most successful retirement strategies for physicians usually involve some form of continued practice. Maybe you’ll drop a day from your clinical schedule each year, or do locum tenens for a few years. Think of your retirement as the road that connects what you do now with what you will do for the rest of your life.
You have worked hard for all these years to be able to retire. A little bit of planning now can make it a long and pleasant journey for you and your family.