The growing number of physicians approaching retirement age face a plethora of misinformation pertaining to retirement planning. Some people suggest hard “no’s” on specific retirement strategies, while others urge a resounding “yes.” As such, it is essential for physicians to gather retirement advice from a knowledgeable, reliable source, like a certified financial planner (CFP).
According to Pulse Financial Planning’s CFP Matt Elliott, CFP, CSLP, one common myth put forth to physicians is that municipal bonds are a safe, reliable option, since they are tax-free. However, only a specific demographic truly benefits from this strategy—those earning $578,125 (filing as single) or those earning $693,750 (filing jointly). It is unlikely that physicians will remain in this demographic throughout their entire career and also in their post-retirement years. As such, Elliott strongly urges physicians not to invest in municipal bonds. Furthermore, he adds that debt securities issued by government entities are technically not risk-free, as municipalities are not immune to defaulting on their debt.
Another common misconception is that retiring physicians should always abide by the 4% rule, which suggests that only 4% of retirement savings should be withdrawn during the initial retirement year, and the same amount (adjusted for inflation) in subsequent years. Physicians who adopt the 4% rule should, in theory, be able to make their retirement savings endure for 30 years, with half in stocks and half in bonds. According to Anthony Watson, CFA, CFP, of Thrive Retirement Specialists, however, the 4% rule is excessively rigid and simplistic, leading physicians to live out their retirement years with a less-than-desired quality of life in an effort to save money.
Physicians are also best served to remember that employee retirement plans are simply not enough. FIT Advisors’ Anjali Jariwala, CPA, CFP, notes that a popular misconception among physicians is that saving the maximum employee deferral into a 401(k) will suffice for retirement. She notes that medical school and additional training delay the start of physicians’ retirement savings, which in turn significantly decreases the amount of time in which investments can grow. Jariwala suggests that physicians open a taxable investment account in addition to retirement accounts like 401(k)s and backdoor Roth IRAs.
Physicians often think that they won’t be spending as much money in their retirement years, especially if they no longer owe money on their home and have no children to support. However, G.M. (Buz) Livingston III, CFP, of Livingston Financial Planning notes that such physicians are frequently mistaken. While home and child support spending may decrease, healthcare costs start to significantly increase in retirement. Everything from annual visits to managing acute illness to financing long-term care expenses plays a huge role in the growing healthcare costs for retirees. That said, according to Altfest Personal Wealth Management’s Lewis J. Altfest, PhD, CFP, CFA, CPA, PFS, physician retirees who are fully confident that they will not run out of money should keep the same level of risk in their portfolio that they maintained pre-retirement. Higher-risk, higher-reward investments are more likely to accumulate a significant amount to pass on to heirs.
This does not mean saving 25 times one’s annual income, which is another common myth. According to Watson, this strategy is flawed, in that it presumes to be sure of the amount of money physician retirees will need to take care of themselves; in fact, this amount fluctuates depending on the retiree’s geographic location and lifestyle. Furthermore, Watson notes that not all savings are equal, with the true value of a physician’s savings being dependent on their location and taxability. He suggests that physicians invest in low-cost, tax-efficient ways, with a tax strategy geared toward minimizing lifetime taxes.
Another common mistake made by physicians is the decision not to have an expert review their student loans, especially given that loans affect savings. Jariwala notes that in light of the COVID-19 pandemic, there have been significant changes made to the student loan payment process, and navigating these changes as they pertain to a retirement plan can be challenging. Relief provisions implemented in recent years offer payment-management opportunities that could highly benefit retiring physicians.
Financial planning for retirement is complex, and it’s best for physicians to regularly consult experts who can guide them through the process.
