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Retirement Planning

by Patrick C. Alguire, MD, FACP
Director, Education and Career Development

It is hard to imagine planning for your retirement just as you are entering into practice, but in reality, this is the best time to begin. By starting now, you avoid the disaster confronted by so many physicians of not having enough set aside for a comfortable retirement.

There are three important considerations when planning your retirement:

• Begin funding your retirement plan as soon as possible
• Fund it consistently
• Make your retirement fund one of your most conservative investments

Knowing how much to set aside is part of the planning process. If your plan only provides a retirement income that is 0% to 50% of your pre-retirement income, you're in big trouble. If it is 55% to 70%, you will probably have to adopt a simpler life style at retirement, but if your retirement fund is 80% or more of your pre-retirement income, you will be in excellent financial shape. Most experts recommend planning a fund that can provide a retirement income that is at least 70% of your pre-retirement income to ensure a comfortable old age.

A retirement income usually is derived from three sources:

• The retirement plan: 70% to 75% of retirement income
• Other investments: 10% to 15% of retirement income
• Social Security: 5% to 10% of retirement income

The obvious lesson here is don't count on social security to provide for your financial needs in your old age. Although it is unlikely that social security will go bankrupt as the "baby boomers" begin to retire, it is almost a given that the payouts will be less, the minimum age to receive benefits will increase, and there will be increased taxation on the benefits. The other important lesson is recognizing that the retirement fund is your main path to a financially secure retirement.

For a young physician just entering practice, often encumbered with substantial debts, the question is, "Why should I start funding my retirement plan now." The answer is simple, the sooner you begin funding the plan, the more money it will accumulate. For example, if you begin funding a retirement plan at the age of 30 at the rate of $20,000 per year at a modest 8% interest, you can expect the plan to accumulate over $2.25 million dollars by the time you are 60 years old. This would allow you to withdraw approximately $200,000 per year over the next 30 years. Even when taking inflation into account, this represents a secure financial future. On the other hand, if you wait until the age of 50 to fund your retirement plan, under the same conditions you will accumulate less than $300,000 in the fund and your annual income from the fund can be expected to be no more than $25,000. In short, your retirement financial well-being is related to how early and how consistently you fund your plan.

A commonly asked question is how the retirement fund should be invested. Keep in mind that pension plans are long term investments. Do not "play the market" in order to capture the highest yield. The last thing you want is to lose money on high-risk ventures. A good rule is, once you have purchased your stocks and bonds for your pension plan hang on to them and be patient with the normal stock market and interest rate cycles. Remember, you are simply trying to achieve an average return of 9% to 12% on your investment and this does not require taking large risks.

Most investors will have a combination of stocks and bonds in their retirement portfolio. As a general rule bonds are associated with a lower risk than stocks but also yield a lower average return. For example, based upon forty years of data (1949-1989), a pension plan that contained no stocks and 100% bonds had an average return of 5% and lost about 9% in its worst single year. A portfolio of 50% stocks and 50% bonds produced an average return of 9.3% and lost about 11% in its worst single year. A portfolio of 100% stocks and no bonds had an average yield of 13% and lost about 26% in its worst year. There is a rule of thumb that recommends subtracting your present age from 100 to determine the percentage of your retirement portfolio that should be invested in stocks. So, if you are 30 years old, this rule directs that 70% of your investment should be in stocks and 30% in bonds. As you approach retirement, the rule proposes that you invest more of your money into lower yield but lower risk investments (bonds).

Finally, treat your retirement plan as your most important investment. Don't borrow from it, don't buy life insurance as part of the plan, don't use the money to buy collectables or other highly speculative investments, and don't make loans to others with your plan's assets.

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