Three important financial tactics when approaching or in retirement
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The number one financial goal for most physicians, including orthopedists, is getting to a comfortable retirement on their own timeline and with the lifestyle they want.
This is borne out by independent physician studies and David’s experience of working with more than 1,500 physicians in his career. In continuation of our March article on three long-term strategies to implement in decades to meet one’s personal retirement goals, this installment explores targeted steps to ensure financial stability when one is within 10 years of retiring or in retirement already. Specifically, we will discuss developing a budget, reviewing asset allocation and designing a withdrawal strategy.
Develop a budget
It may seem like overly simplistic advice, but budgeting can either push a retirement plan to success or drive it to failure. While many physicians may believe a budget is merely an awareness of what one is spending, its actual purpose is to ensure one lives within his or her means and every dollar earned is deployed with strategic purpose. To accomplish this, one must have a written and managed budget, not a simple mental tally of expenditures.
Deciding how much to save today will depend significantly on how much one expects to spend during retirement. There is no way to determine that without attempting to project future expenses. This task can be accomplished by creating budgets based on various post-retirement factors, including location, size of home, hobbies, frequency of vacations and other post-retirement lifestyle expectations. These budget exercises provide a broader view of how effective a retirement savings plan can be based on various lifestyle decisions. It may be helpful to model multiple scenarios, including an aggressive and conservative budget.
A common mistake made by many well-meaning physicians during this exercise is assuming substantial investment returns to justify expensive lifestyle choices. Expecting massive returns on minimal savings is dangerous to a retirement plan. Investors, including physicians, should consult with an advisor to determine a reasonable expected return based on historical performance, portfolio components and other factors.
Review asset allocation
Asset allocation encompasses the types of investments within a portfolio, its various underlying industries, risk and level of market correlation. One of the most important strategies for proper asset allocation is diversification.
Managing diversification: Diversification is the process of varying the allocation of value in a portfolio among various sectors, investment types and risks to reduce each investment’s correlation with the others, thus ensuring some buffer against significant swings wiping out an entire portfolio. Proper diversification offers one of the most effective ways of mitigating losses.
Putting returns in its place: Risk tolerance is an investor’s ability to mentally and financially withstand volatility in investment performance. An investor with a high-risk tolerance may be young, with decades of expected income and relatively unbothered by large swings in investment values. A more conservative investor may have fewer working years to replenish investment losses, who becomes stressed at the idea of volatile investment swings.
As physicians age, they need to reallocate their assets into increasingly conservative investments to limit their exposure to loss as their investment time horizon shortens. In addition, careful consideration must be made to limit downside risk, potentially through fixed income and alternative investments.
The idea of reallocating to more conservative assets can be troubling to those focused on maximizing returns because conservative investments tend to have limited upside potential. To understand why this move is often more beneficial than seeking higher returns in later life, one needs only to be familiar with sequence of returns risk.
Sequence of returns risk is the danger that the timing of liquidation and withdrawal from a retirement account will coincide with a downturn in the market. If it does, it effectively reduces the overall potential performance of the entire portfolio because a high number of shares will need to be liquidated earn the expected income, thus leaving fewer shares in the portfolio to grow.
Sequence of returns risk may not be important during the accumulation phase, but during the withdrawal phase it is one of the most critical factors in the overall success of a retirement plan, making it a higher priority than chasing returns. See the authors’ September 2023 article for more on sequence of returns risk, including an illuminating case study.
Design a withdrawal strategy
The design of a withdrawal strategy is equally important to financial health in retirement.
Select a withdrawal rate: A fundamental pitfall in static retirement plans is setting a withdrawal rate that is fixed during a retirement period. Consider that, for many physicians, the retirement stage of life is likely to last 20 years or more. In that time, investment yields may vary widely and both tax rates and personal spending habits could also change. Because of these changing variables, flexibility must be built into retirement planning, both in initial models (high, middle, low) and when reviewing the plan each year (or more frequently). By having flexible planning models and periodically adjusting these based on real-time results, one can expect to follow a model that can endure throughout retirement, regardless of how many years or decades that retirement may last.
Make room for taxes: No one knows what tax rates will be upon or during retirement. This does not mean physicians should ignore tax planning, but that they should account for the potential costs of taxes and design a strategy to minimize them.
To do this, one must understand how taxes will impact withdrawals and liquidations. It is essential to have a plan that considers which withdrawals will trigger ordinary income taxes, which will incur capital gains and which will realize no tax.
Conclusion
Most physicians consider a comfortable retirement as a reward for decades of hard work. Do not let the absence of pre-retirement or in-retirement wealth planning hinder this goal.
While understanding the three tactics above is a good start, there is no substitute for working with an experienced advisor who can make analyses and recommendations specific to your situation.
- References:
- Bhatia S, et al. Retirement planning involves three long-term keys to success. https://www.healio.com/news/hematology-oncology/20240229/retirement-planning-involves-three-longterm-keys-to-success. Published March 1, 2024. Accessed March 26, 2024.
- Bhatia S, et al. Sequence of returns risk: What it is and how to minimize it. https://www.healio.com/news/orthopedics/20230919/sequence-of-returns-risk-what-it-is-and-how-to-minimize-it. Published Sept. 21, 2023. Accessed March 26, 2024.
- Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
- For more information:
- Sanjeev Bhatia, MD, is an orthopaedic sports medicine surgeon practicing at Northwestern Medicine in Warrenville, IL. He can be reached at sanjeevbhatia1@gmail.com or @DrBhatiaOrtho.
- David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group, where Andrew Taylor is a partner and wealth advisor. They can be reached at 877-656-4362 or mandell@ojmgroup.com.
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