Plan for spending too

In many respects, we are a nation of planners. We delight in planning our vacation, our wedding, our dream house. And why not? All of these things involve spending money, America`s favorite pastime. But when it comes to our retirement, let`s face it: Most of us just wing it. After all, planning for retirement involves saving money, and, well, where`s the fun in that? Even among those who say they are aiming for a certain mix of assets - so much in stocks, so much in bonds, for example - fewer th

Hugh F. Doherty, DDS, CFP

In many respects, we are a nation of planners. We delight in planning our vacation, our wedding, our dream house. And why not? All of these things involve spending money, America`s favorite pastime. But when it comes to our retirement, let`s face it: Most of us just wing it. After all, planning for retirement involves saving money, and, well, where`s the fun in that? Even among those who say they are aiming for a certain mix of assets - so much in stocks, so much in bonds, for example - fewer than 25 percent are hitting their target.

You go to seminars on retirement and the experts lecturing on retirement planning tell you that you need to accumulate $2 million or more to have enough funds for a comfortable retirement. The message is not one that makes you feel comfortable. Upon hearing this, too many doctors are left with a total feeling of depression and utter frustration over these remarks. These feelings come about because of their perception that the $2 million number is not realistic for them.

Many doctors have expressed to me their concerns and state of consciousness about their inability to ever achieve that number. Some have come to me looking for another "way" or an alternate "game plan" to retire happily.

A suggested strategy

Here`s a possible solution to the dilemma. Let`s assume that it is realistic for you to develop a plan to save half of that "unachievable" amount of $2 million, and you save $1 million.

The traditional strategy suggested by experts is simple enough. You just live off the income generated by your bonds and stocks, preserving the principal. But that will not work with just $1 million, mainly because stocks aren`t throwing off the juicy dividends they used to. And if you are too heavy in bonds, you leave your portfolio exposed to the ravages of inflation.

What can you do once you retire? I suggest a strategy that is diametrically opposed to what most experts would do. You are going to spend those savings - but here`s the rub. You must make the accumulated savings last your lifetime. In other words, you develop another plan for spending.

Your new salary

Therefore, the suggested strategy is to come up with a method to pay yourself a steady "salary" from stock holdings, without exhausting your savings. For instance, you sell enough of your assets to cover three years of expenses, then let your portfolio regenerate.

Here`s how it works. You save $1 million, with 75 percent of it in equities. Sell off 15 percent of that portfolio and put the proceeds into a money market or some other secure, interest-bearing vehicle. I personally would recommend an account of short-term treasury bills. That will give you $50,000 a year, plus interest, plus, hopefully, Social Security to live on for the next three years. You keep selling off parts of your main portfolio to maintain this spending account at roughly three years` income. Meanwhile, don`t change your investment strategy. Continue to invest for growth so that the portfolio rebuilds as you go along.

The magic touch

The tricky part is figuring out when and how to replenish your living-expenses account so that you don`t let it get too low and, at the same time, aren`t forced to sell your stocks or funds into a falling market. It is essential that you neither try to replace each dollar immediately, nor try to pick the perfect moment to sell stocks. I suggest a quarterly review. If the market was up that quarter, you can sell off a bit, but if the market went down, you just sit tight. The three-year cushion should let you wait out a bear market, should one ever reappear. This strategy is likely to work very well.

Hugh F. Doherty, DDS, CFP, is a certified financial planner, national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. Dr. Doherty is also director of The Personal & Practice Financial "Boot Camp." For further information on the "Boot Camp," lectures, consultations, or study club workshops, call him at (800) 544-9653 or visit his Web site www.dr.hughdoherty.com.

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