Hugh F. Doherty, DDS, CFP
What makes for a great retirement? My definition of a doctor who has achieved financial security is someone whose net worth consists of $1,000,000 or more in liquid assets, cash, stock, mutual funds, bonds and other securities that can be sold immediately.
I do not count the equity in the home because you cannot sell real estate quickly, and, in the end, you do not receive the price you
expected. Most of my client-doctors who are well off became rich by working hard in their practices and using smart discipline to save and invest what they earned.
You must think about your future before spending big. A cautious attitude about money and a determination to preserve wealth over long periods of time has a huge influence on spending habits. Many of my successful clients say it forced them to ask themselves key questions before spending money on large purchases. "Will I still be happy if I spend a little less?" "What costs less, but has high quality, comfort and durability? Hesitating before spending and asking critical questions like these can lead you to realize that some purchases are not even necessary.
Keeping up with yourself, not with your friends or neighbors, makes for a more secure retirement. My clients have comfortable homes, decent cars and take nice vacations, but they are not extravagant. They focus on raising their net worth each and every year and view this as the supreme method in achieving future financial security. Usually, they live in good, but not the most elite, neighborhoods, and their homes rarely are the largest ones on the block. Instead of driving expensive sports cars, they tend to buy preowned models. They do not view cars as status symbols. Luxury to my wealthy clients is knowing that their futures are secure.
They invest regularly and have a formal savings program, which is a must if you want to retire wealthy. A common goal is to save 10 percent of their gross earnings each year. This is in addition to the money contributed to a qualified retirement plan. They have a willingness to seek and listen to professional advice. They do not care whether the questions they ask seem dumb. They know that if they understand what they are doing, and why they are doing it, they have a much better chance of achieving a future that is financially secure.
So you are in your 50s with little or no retirement savings. You are not alone. Many doctors are playing financial "catch-up." These simple suggestions will help you make up for lost time:
1.) Spend less. You probably already have lots of "stuff" (e.g., furniture, clothes). Start buying less, and invest the difference. Buy used cars instead of new cars.
2.) Spend carefully. Look for bargains and opportunities to save. Once frugality becomes a habit, it is easy to maintain.
3.) Set a written goal. Calculate how much money you will need for retirement. Call (800) 544-9653 for our planning sheet on how to determine how much you need to save each month to reach a financial goal.
4.) Set aside 10 percent of your gross pay. Sound impossible? Start with 3 or 4 percent and increase by 1 percent each year. As you start to accumulate money, you will become motivated to save more each month.
5.) Maximize your contribution to a tax-deferred retirement plan. Look into a defined benefit plan. These plans are designed to help people who start to save late in life for retirement.
6.) Consider relocating to a less expensive area. If you can reduce living costs (e.g., property taxes), you may be able to increase your savings.
7.) Plan on staying in practice a few more years, or ease into retirement by working part time.
8.) Invest more aggressively. This means having stocks or growth funds in your portfolio, both before and after retiring.
Beware alternative minimum tax
The new tax law virtually guarantees that more doctors will pay the alternative minimum tax (AMT) - a stiff levy initially intended to hit only the wealthiest taxpayers. Congress failed to pass a proposal that would have adjusted key AMT provisions for inflation. Without that fix, by 2007, the AMT will grab an estimated 9 million taxpayers (most doctors), up from 700,000 today.
And the new law`s incentives to go for capital gains will push even more taxpayers into the AMT. Consider: If you realize a big capital gain, you are likely also to incur a large state income tax bill. That, in turn, will create an outsized deduction on your federal return - and big write-offs can trigger the AMT. My advice: See a tax advisor before you sell any highly appreciated asset.
How much to break even?
Taxes and inflation are the enemies of investors. Federal taxes alone can take up to 39.6 percent of every dollar earned. At 3.1 percent annual inflation (the average from 1925 to 1995), prices double every 23 years. Today`s $22,000 car would cost $44,000 by the year 2020. So what is an investor to do? Find your break-even point - the rate of return needed to maintain purchasing power after taxes and inflation.
The break-even rate formula is:
Assumed Inflation Rate
---------------------------
1 minus marginal tax bracket
(as a decimal)
So if you are in the 38 percent bracket, your investments would need to earn 4.8 percent to avoid losing ground, assuming 3 percent inflation. Here is the formula:
.03 .03
----------- = ------ = 4.8%
1 minus .38 .62
Not all investments have to break even. Emergency savings, for example, earn relatively low rates - the trade-off is that these assets (e.g., money market funds) are available when you need them.
The average return in your portfolio should match or exceed your break-even rate - an added return of 2 percent to 4 percent is a realistic goal.
Ask your advisor about the best ways to earn returns that outpace inflation and taxes.
Florida 1998 Winter Workshops - Do your practice a favor - close it for a few days. Come and learn about retirement, personal and practice financial control.
Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, call (800) 544-9653.
