As physicians age and their investment time horizon shortens, they should consider reallocating their assets into increasingly conservative investments to best limit their exposure to loss. Additionally, careful consideration must be made to properly limit downside risk, potentially through fixed income and alternative investments.
The idea of reallocating to more conservative assets can be troubling to those who are 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 should 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, then it effectively reduces the overall potential performance of the entire portfolio because a high number of shares will need to be liquidated to get the income expected, thus leaving fewer shares in the portfolio to grow. Sequence of returns risk may not be as important during the wealth accumulation phase, but during the withdrawal phase it is one of the most critical factors in the overall success of a retirement plan.
Strategizing Withdrawals
Although a dermatologist’s primary financial focus is to save and accumulate funds for retirement, the design of a withdrawal strategy is equally important to financial health in retirement.
Selecting a Withdrawal Rate
A fundamental pitfall in static retirement plans is setting a withdrawal rate that is fixed over 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 tax rates and personal spending habits could also change. Because of these changing variables, it is essential that flexibility be built into retirement planning. By having flexible planning models and periodically adjusting them 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.
Making Room for Taxes
No one knows what tax rates will be upon retirement. This does not mean physicians should ignore tax planning, but 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 affect withdrawals and liquidations. Having a plan that considers which withdrawals will trigger ordinary income taxes, which will incur capital gains, and which will realize no tax is essential.
Lastly, dermatologists should understand that delaying distributions from their assets will have the greatest impact on their ability to have a successful retirement. They may have the option of easing into retirement and exploring varying roles within a practice, perhaps transitioning to a consult-only role. This can allow a physician to generate a supplemental income for several years, thus moderating the stress on their portfolios by reducing the rate of withdrawal.
Conclusion
Most dermatologists see a comfortable retirement as a reward for decades of hard work. Do not let the absence of preretirement planning in the “retirement red zone” hinder this goal. While understanding the 3 strategies above is a good start, there is no substitute for working with an experienced adviser in the field who can make analyses and recommendations specific to your situation. The authors welcome your questions.
David Mandell, JD, MBA, is an attorney and author of more than a dozen books for doctors, including Wealth Planning for the Modern Physician. He is a partner in the wealth management firm OJM Group (www.ojmgroup.com).
Andrew Taylor, CFP, is a partner and wealth adviser. They can be reached at 877-656-4362 or mandell@ojmgroup.com.
Disclosure
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This article contains general information that is not suitable for everyone. The information contained
herein should not be construed as personalized legal or tax advice or as a recommendation of any particular security or strategy. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently; accordingly, information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
