Physician Retirement Plan: Issues You Must Address Before Retirement
What must you address in a Physician Retirement Plan? Let’s look at the big rocks of a physician retirement plan:
Taken from the parable that if you have sand, pebbles and big rocks to fit into a mason jar, you’d better put the rocks in first (and thus the Big Rocks are your first priority). The Big Rocks of retirement must be addressed first.
After the big rocks, everything else is detail.
So what are the issues you must address before retirement in your Physician Retirement Plan?
Physician Retirement Plan Big Rocks Depend on Risk and Fundedness
The Big Rocks change depending on the level of risk you are comfortable with and your fundedness.
To be clear, I write for those who oversave for retirement. The plan for physician retirement usually involves oversaving!
If you have undersaved for retirement, you still have your human capital, and social security planning is paramount. Consider tapping the equity in your home.
Next, risk is an important consideration too! Some people are fine with “risk” (volatility) and some just cannot be invested in the market: a “good” annuity might be right for them.
That advice depends on risk and fundedness is so important, it has its own blog: Why Standard Retirement Advice Is Usually Wrong.
You must know your risk level and fundedness when thinking about retirement: does that advice apply to you?
So, if you have oversaved and are willing to take some risks, what are the issues you still must address in retirement?
Top Issues in your Physician Retirement Plan: Big Rocks
Number one on the list of big rocks you must address in your physician retirement plan: taxes.
For those who oversave for retirement, taxes are the largest expense.
If you still have some time before you are 72, you might have a tax planning window. The goal during that time is to take advantage of partial Roth conversions and get some tax diversification in your life.
This is the best chance you have to control your taxes in the future. Tax Diversification is key!
On the topic of taxes, there are several associated issues we should look at next.
Big Rocks with Taxes in Retirement
In addition to ordinary income taxes, you also need to worry about the following big rocks associated with taxes in your physician retirement plan:
IRMAA is a surcharge on your Medicare. It is a cliff penalty, which means if you are a dollar over the MAGI for IRMAA, you (and you spouse) have to pay extra for the same Medicare services for the next year. It is an insidious though only modestly painful penalty if you have saved too much money in retirement
Don’t forget that capital gains sit on top of ordinary income. There are better times than others to recognize the capital gains, and you may want to do some capital gains harvesting if you find the opportunity to do so. This may be to avoid NIIT, or to fill up the 0% capital gains bracket
Also known as asset location, tax optimization is important to make sure you pay as little in taxes as possible yet keep your appropriate overall asset allocation.
Social Security in the Physician Retirement Plan
Social Security is still important, even for those who oversave for retirement. It is usually the largest source of stable, guaranteed, inflation protected income for most in retirement.
The larger earner of a couple should delay social security until he or she is 70. The other spouse has much more flexibility, but may want to delay as well if you are trying to debulk your IRA a little bit
What about other sources of income in retirement?
Big Rock: Other Sources of Income in Retirement
What are the sources of income in retirement? This is an important consideration as retirement, at least from a financial perspective, is the process of making income from your assets.
Let’s look at a few other big rock decisions in retirement: other sources of income.
Almost ironically, the home is the asset left for the kids when it is the last asset they want! While most folks who have oversaved don’t need a reverse mortgage, reverse mortgages are for the wealthy, too!
And by the way, it is ok to have a mortgage in retirement, too.
Pensions are a great source of ongoing income if you have one available.
You are going to have ongoing (“floor”) expenses that last your entire life. It is almost never the wrong idea to annuitize part of your assets in order to meet these ongoing expenses. Mathematically if you take the money from the bond portion of your asset allocation (annuities are bond-alternatives), you are apt to have more left over for your heirs with an annuity than without.
Health Care and Long-Term Care Insurance Are Big Rocks in Retirement
Health Care and Long-Term Care needs cause the spending smile to go up the last few years of life.
Fortunately, health care is a mitigated risk (since you have insurance).
Long-term care insurance, on the other hand, is a difficult decision to make. You don’t need it, but do you want it. If you have a large amount in pre-tax money, a hybrid policy is almost certainly a waste of money. What are the alternatives and pitfalls of long-term care insurance?
Big Rocks: Risks In Retirement
There are big rock risks in retirement you must address.
Current inflation fears are likely overblown, but over a 30-year retirement it is very likely that inflation will be most painful. As an experiment, take your current nest egg and cut it in half. How do you feel about that? That’s what inflation will do to you in the next 20 years. TIPS are an option, but real assets and equities are the major cure for inflation. I bonds are now sexy again!
Longevity is the great multiplier of every other risk. The longer you live the most likely you are to suffer from the other risk that might affect you in retirement. You can consider longevity insurance or not, but certainly you need to optimize in case you live a long life.
Sequence of Returns Risk
Let’s look at this next via asset allocation.
Asset Allocation in a Physician Retirement Plan
Estate Issues in Retirement
For those who have oversaved for retirement, estate issues are huge. How can you optimize what you leave behind to heirs?
Or, do you have charitable intent for your legacy?
Remember, you need to consider that someone is going to pay the taxes. There is a large widow penalty that you must consider, and also if you want to optimize what you are going to leave behind, you need to consider your kids income tax bracket as well as your current and future ones.
Most won’t have estate tax issues, but if you do, consider a SLAT to lock in the current estate tax exemption.
Finally, qualified disclaimer estate planning is for anyone who has an IRA. This is the easiest, most efficient way to optimally pass on your pre-tax assets and is a must as a part of your estate plan.
Conclusions: Issues in your Physician Retirement Plan
Those are the big rock items I see before retirement. If you check most of these off your list via the physician retirement checklist, I think you are well on your way to having a good retirement plan.
The rest is all detail.