Blueprint for building a secure retirement

Aug. 1, 2000
Only four out of 100 dentists are financially prepared to retire. You must have a plan to follow for effective retirement savings.

Only four out of 100 dentists are financially prepared to retire. You must have a plan to follow for effective retirement savings.

Hugh F. Doherty, DDS, CFP

What is the primary financial planning need of dentists today? Answer: Funding for retirement.

The statistic that only four out of every 100 dentists are able to retire is shocking. After all, income surveys list dentists as a professional group in the upper percentile of all income-earners nationwide. How then can only four out of every 100 dentists afford to retire?

So what`s the biggest obstacle to saving enough for retirement? If you said "the high cost of living," "taxes," "inflation," or "the crazy financial markets," you are in good company - but you are wrong! As difficult as these obstacles are, the one thing that can keep you - or anyone - from saving enough for retirement is the challenge of mastering one`s own mind and emotions.

How is it that two doctors with similar financial resources can end up miles apart in net worth at retirement age? How can an affluent couple find themselves strapped, while another couple of modest means packs off happily for a trip to Europe? Answer: Your emotions can trip you up. If fear is one, you might not invest aggressively enough, even though you know better. What about being overly optimistic? You take on too much risk or overspend and come up short for retirement. How about those who are impatient? They take an immediate tax break, even though it will hurt them in the long run. The real killer is lack of discipline and the desire to spend rather than delay gratification. To act wisely, you must come face to face with these problems and, hopefully, recognize the solutions that are available to become financially secure.

Create a plan and stick to it

Achieving long-term financial security doesn`t happen overnight, and it certainly doesn`t happen without a plan. Financial success requires knowing where you are going and having a plan or blueprint to get there. One of the keys to creating your blueprint is understanding your current financial situation, as well as your financial goals and objectives. Identifying these two will help you make financial decisions correctly and with confidence.

Constructing a dream retirement will likely cost more than you ever imagined. But don`t worry; you can get there. All you need is a simple plan. In many respects, we are a nation of planners. We delight in planning our vacation, our wedding, and our dream house. And why not? All of these things involve spending money, which is America`s favorite pastime. But when it comes to your retirement, let`s face it: most doctors just wing it. After all, planning for retirement involves saving money, and, well, where`s the fun in that?

Over the years, working with doctors, I have discovered very few of them have a specific plan for the way they save and invest their money. Even among those who said they were aiming for a certain mix of investments - i.e., so much in stocks, so much in bonds, etc. - it was apparent to me that most would not be able to hit their target number for a successful retirement.

The key to a successful financial outcome is simplicity. My admonition and battle cry (at my workshops) is "Planning Makes the Difference." That`s right! The dirty little secret of the financial world is that the best planning strategies are also the simplest. In the spirit of simplicity, this article offers suggestions to enable you to accumulate funds to pay retirement`s price tag.

Retirement - a new phase of life

The old stereotype of a rocking-chair life is a stunning anachronism. In fact, retirement today bears so little resemblance to its old self that we probably should retire the word "retire." Years ago, retirement was short and not-so-sweet. The typical retiree lived about a decade in modest circumstances, engaged in sedentary activities, and was plagued by declining health. Old age meant frailty. While 65 is still the traditional retirement age, people are living much longer these days. Now, instead of a few years of retirement, we face the prospect of being healthy and living another 20 or more years. What we now call retirement is actually one-fourth of our lives ... or maybe more. That`s a lot of time - and it will take a lot of money to finance it.

Head somewhere and have fun

Vaguely defined goals can lead to halfhearted attempts to achieve them. It`s better to set goals you can grab onto ... goals that excite you. How about a million-dollar net worth by age 60? Instead of a comfortable retirement, why not a two-bedroom condo on a golf course on Hilton Head Island, plus an investment portfolio that will yield $8,000-$9,000 a month to support your lifestyle? Now those are real goals. You can put a price tag on each and use that price tag as an incentive to keep up your investment discipline.

Your retirement strategy as a self-employed person is not the same retirement scene that your parents faced. You and you alone are responsible for your retirement. You must do the planning, implementation, and periodic evaluation to see if you are on target. Your parents reached retirement armed with old-fashioned corporate pensions (the kind that pay a fixed monthly income for life), houses that appreciated like Internet stocks, and a Social Security system that seemed to get more generous with each new act of Congress. It is important to realize that those days are over.

The big questions

Peering into the future, then arranging your finances for a comfortable retirement that could last decades, is tricky, but that shouldn`t deter you from beginning. A financially secure retirement is the result of understanding five essential elements:

How large does my nest egg have to be?

(1) How much income will I need in retirement?

(2) Where will the money come from?

(3) How much time do I have to build my nest egg?

(4) How much risk am I prepared to take to achieve goals?

How large does my nest egg have to be?

This question goes to the heart of your entire plan, but few doctors ever ask it, let alone try to answer it. Like all else in retirement planning, answering the riddle is simpler than it seems. The way to start is by deciding how well you want to live once you leave your practice and determine the income needed to do so. For a worksheet to determine the nest egg needed for retirement, send your request by e-mail to [email protected] or call (800) 544-9653.

How much income will you need in retirement?

If retirement is some years down the road, figure that your income will grow and inflation will devour a good deal of its purchasing power. For long-term planning purposes, a conservative estimate is that inflation will average about 4 percent annually between now and the time you retire. The monthly income you will need is between $8,000-$12,000 (pretax). You will need to adjust that preliminary nest egg to account for the reality that inflation will not stop and the cost of living will rise; therefore, you will need to draw more from your nest egg each year to maintain your lifestyle. How much you need to increase the target by depends on how long you will live during retirement and what happens with inflation.

Where the money will come from?

Most of the retirement income for doctors will come from pension plans, personal savings and investments, IRAs, and personal practice office-building rental. Two big mistakes doctors make when planning for retirement is to include home equity and the sale of their practice as income. Don`t count on these assets for retirement. First, your primary residence is illiquid and is not an investment, but a place to live. Second, practices are harder than ever to sell today. It is a buyer`s market. If you can swing a sale, all well and good ... but you need to look at it as the icing on the cake.

Start as early as you can

You can devise a plan for achieving your goals, regardless of your current style of saving and investing. Your task is not to devise the most ingenious investment plan ever conceived. Rather, your task is to start early, create a plan that suits you, and stick with it. It is imperative that you are aware of the number-one enemy to financial planning - procrastination. It tends to keep things the way they are. With inflation and taxes working against you, failing to take action can be a disaster to your retirement.

Consider these numbers: Let`s say we have a 35-year-old dentist who wishes to retire at age 55. If this dentist saves $30,000 per year for 20 years and achieves an 8 percent per year investment return, he or she would accumulate $1,690,000. What happens if the dentist postpones saving until age 40 or for five years because he/she wants to pay off debt quickly? The amount accumulated at the end of 15 years would drop by more than half to $845,000.

In other words, by waiting just five years, the doctor loses approximately $800,000. And if the doctor waits 10 years until age 45 to start saving, the amount accumulated at the end of 10 years would drop by more than half to $415,000. Waiting 10 years would cost the doctor over $1,300,000 of lost savings at age 55.

The bad news of this example illustrates the serious problem caused by the procrastination monster. The good news is the demonstration of the magic of compound growth at work. Compounding is a kind of financial snowball that grows ever larger and faster as it rolls toward your retirement date. The longer the power of compounding has to work in your favor with an early start, the less you will need to save monthly to reach your retirement goals.

Your portfolio

If starting as early as possible gets top priority in creating your retirement-savings plan, investing regularly runs a close second. No matter when you start, if you can manage to keep it up, you will find yourself well on your way toward your goal.

Consider your personal retirement savings a fixed expense. Shoot for 15 or 20 percent of your net income, if you can swing it. You may need to start small and build toward that goal. But the closer you are to retirement (and the longer you have procrastinated about saving for it), the higher the percentage of income you must save.

Put your savings on autopilot

Think of it as paying yourself first. This may be the single most productive action you can take toward ensuring you will have enough money for retirement. You can bootstrap your way to a bigger retirement nest egg by establishing a monthly automatic savings plan that sets aside a fixed amount on a regular basis. Don`t underestimate the power of this simple strategy. It takes discipline to keep it going year after year, and that`s where many doctors come up short.

The best way is to sign up for automatic plans called electronic transfers. The investment firm plucks the amount you specify directly out of your checking account on the day you choose, automatically. The best part is you don`t see the money; therefore, the temptation to spend is gone.

Take shelter

Tax-sheltered plans, such as individual retirement accounts and qualified retirement plans, are perpetual-motion money machines with a single goal - encouraging you to sock away retirement money ($30,000 annually) that will grow unfettered by taxes. The power of tax-free growth inside these tax shelters makes these simple tools a potent financial force over the long term. Most doctors should have a qualified plan and should put as much as is allowed ($30,000) in these tax-sheltered plans each year.

How much risk are you prepared to take?

Most people would say that risk is the chance you take that you`ll lose all or part of the money that you put into an investment. Risk is really the chance you take that you`ll either lose money or earn less from your investments than the rate of inflation or the interest available from insured savings certificates. To put it another way, risk is the chance that you will earn less than 4 or 5 percent on your money. If you can`t reasonably expect to do better than that with the risk you are taking, then there`s no sense in taking the risk.

So, what investments offer the best hope of achieving the returns you need? A core portfolio of stocks, bonds, and mutual funds is ideal for a long-term goal like retirement. In general, the more time you have before retirement, the more risk you can take. With 20 years to go, an aggressive-growth mutual fund would be appropriate in a portfolio dominated by growth stocks (or funds that specialize in them).

With 10 years left, there is still plenty of time to take some risk with stocks and stock funds. Market peaks present opportunities to move money out of risky, aggressive stocks and into dividend-paying growth stocks with reinvestment plans. You can give your mutual fund portfolio a less risky profile by moving into growth-and-income funds, bonds, bond funds, and short-term intermediate bonds. Consider keeping about 10 to 20 percent of your portfolio in cash, meaning money-market funds and T-Bills.

As you get closer to retirement, you may be tempted to increase your risk in hope of achieving the higher return you need to accumulate the necessary funds. Don`t do it. That`s exactly the time when you should be reducing risk to conserve the capital you have. Be more conservative, but it`s also important to remain diversified. Hang on to some growth stocks or growth-stock funds, especially those that pay good dividends. If interest rates look high, load up on bonds.

Building wealth this way takes you along a path that`s short on thrills, but it`s short on spills too. And the nice, green scenery along the way will keep you interested in the trip.

Diversify

There are at least three good reasons to diversify your investments. First, it`s common sense not to put all your eggs in one basket. Second, no investment performs well all the time; as a rule, when one asset is down, another one is up. And, third, some experts believe that you can actually increase your return with a sensible strategy of diversification.

For investors seeking long-term growth, moderate risk, and ease of access to their money, we recommend a portfolio consisting of 60-80 percent stocks (including stock mutual funds), 20-40 percent bonds (including corporate and municipal securities and variations such as mortgage-backed securities), and 10-25 percent cash (including money-market funds, CDs, and T-Bills).

Alert investors also should diversify within investment categories. This is called asset allocation. To understand this strategy, a great book to read is Asset Allocation by Gibson. For example, a well-designed portfolio includes big-company stocks, small-company stocks, corporate bonds, intermediate government bonds, international stocks and bonds, technology stocks, and real estate.

To keep your plan on track, recalculate your retirement-income goal and available assets whenever a major change occurs. It`s a good idea to recalculate every couple of years, even if the changes are minor.

Unless you have at least a net worth of one-and-a-half million dollars - exclusive of your home and practice - you will not be able to maintain your current standard of living simply by preserving your principal. Remember, it isn`t so bad to be old or poor, but it`s a tragedy to be old and poor.

Retirement Planning Mistakes

- Procrastination - Don`t start a retirement plan early on

- Fail to realize that, as a self-employed person, you and you alone are responsible for your retirement

- Use the wrong retirement plan

- Don`t use a qualified plan through the practice

- Set your retirement plan on automatic pilot, with no focus or plan on a direct course to future financial security

- Pay down debt first before you fund your retirement plan

- Fund children`s college before funding retirement

- Use unnecessary risk with your retirement portfolio

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