Retirement
Thomas E. Nolan, MD, MBA
Abe Mickal Professor and Chair
of Obstetrics and Gynecology
Director, Women’s and Newborn
Services
LSU-Health Science Center
New Orleans
Objectives
• At the end the presentation the
participant should
– Understand what retirement needs are
important in the planning process
– How to achieve these needs by goal
setting
– Resources available in achieving goals
Retirement
• Changed dramatically in the United
States over the past 30 years
• Individuals are living longer and are
healthier
• More individuals are retiring earlier,
working part time or changing
careers
Retirement
• The never ending question is: HOW
MUCH DO I NEED TO SAVE??!!
• Variables at work:
– What do you want to do
– What are your responsibilities—children
at later ages, invalid parents
– Inflation, investments and longevity
Retirement
• Standard answers are:
– 70-80% of pre-retirement salary
• Probably high for physicians because they
consistently have higher incomes, with
more discretionary income
• Yearly withdrawals of 4, 5 or 6% of
total invested assets
– Assumes inflation numbers are stable
– Assumes investment returns are stable
Retirement
• Other driving forces are:
– Expensive desires (travel, property,
boats, grandchildren, etc.)
– Age of collection of social security
– Health care and cost—may have to wait
until Medicare and pharmacy benefit
becomes available to retire
– Investment losses in 2000-2003
changed a lot of individuals plans
Retirement (Non tangibles)
• Comfort of spouse with significant
other in the house (huge!!!)
• To move or not to move, downsize
• Boredom, no hobbies
• Loss of perceived importance
• First 2 years, plan on spending as
much as pre retirement on travel, etc.
How to Estimate
• Multiple websites available to
estimate needs:
– Smart Money Magazine
– Fidelity
– Financial Engines (uses Monte Carlo
simulations)
• 2 most important variables:
investment return and inflation
How to Estimate
• Time value of money concepts
– What can you expect investments to
return (usually range is 5-9% depending
on stock: bond: cash holdings)
– Inflation—remember the late 70’s and
early 80’s. Usual range is 3-4.5%
– Currently, 3-5 million is considered safe
for physicians @ 200,000 per year
The Basics
• Evaluate where you are:
– The family balance sheet, starting with the
most liquid assets, moving to less liquid,
and elements of cash flow (rental
properties)
– Value items at Fair Market Value, cost basis,
and current return
– Liabilities, especially long term (mortgage,
boat payments, vacation homes), child
support alimony, outstanding judgments
The Basics
• Income statement
– Housing cost: Property taxes,
downsize? Payoff mortgage?
– Current costs on a monthly basis
averaged over a year
– Replacement items: cars, appliances,
general housing costs
The Basics
• A critical appraisal of net worth,
monthly and annual income needs
• Rainy day planning
– Hospital co-pays
– Pharmacy costs
– Natural disasters (hurricanes, blizzards)
The Basics
•
•
•
•
•
•
Food, housing, upkeep
Clothing
Medical expenses
Transportation
Entertainment and hobbies
Gifts and taxes
The Basics
• Finally, aligning portfolio to meet
these needs:
– Annuities
– Volatility of portfolio (can you ride out a
bear market like 2000-2003??)
– 100—age = % of equities – how valid is
this assumption, especially with
longevity (Fidelity uses age 92 for
males, 94 for female)
Keep it Real
• Keep accounts separate if possible in
case of divorce (community property)
• Be generous with your spouse
– If they stay at home, give them contributions
– Makes you look nicer to the judge
• Protect your backside!!!
• 50% in most divorces go to the spouse
anyway, so save the transfer tax!
Retirement
• Major changes:
– Defined benefit programs are declining
in availability and funding
– Companies changing plans or have
reorganized because they can not fund
defined benefit plans
– Cost of retirees and benefits on every
new GM car approaches $1700-2000
Retirement
• Business has been responding by
putting the burden on the employee
with 401 (k) plans, or other plans
• Less expensive programs (Cash
balance, defined benefit plans
eliminated) put the employee at risk
• Therefore, you have to be your own
best friend!!!!!!
Retirement
• Government recognizes problems
and is increasing limits for donation,
number of potential programs, i.e.,
Universities now have defined, 403
(b), 457. Self employed SEPs, IRA
• The Social security problem
• Medicare and health care cost are
sky rocketing
Retirement Planning
• Starts with your first practice and will
continue through your career
• Tax deferred vehicles enhance
portfolio growth and should be the
most important goal
• As you age and your portfolio grows,
diversification becomes more
important
Retirement Planning
• Rules have changed substantially in the
past 5 years
• Recognition of poor savings, especially by
the “boomers”
– Many breaks for those individuals over 50 with
increased contribution levels
• More companies looking at employees to
automatically “opt in” and if not, then must
make a conscious effort to “opt out”
Retirement Plans
• Many corporations once had a
defined benefit plan for employees
• Additionally, they may offer a 401(k)
with matching contributions
• Non-profit organizations may offer a
403 (b) plan, essentially the same as
a 401 (k), with limitations on
investments vehicles
Retirement Plans
• Newer plans are being offered that allow
high income earners to start their own
plan, but it requires substantial and
continued vesting for minimum of 5 years
(i.e., 100,000 per year for 5 years)
• When evaluation plans, make sure that
employees are considered (or you can pay
significant penalties and go to jail)
Retirement Plans
• Self employed physicians have
choices (Stocks, bonds, annuities,
mutual funds, real estate, CDs—no
life insurance allowed!!):
– IRA: Most physicians make more than
Roth levels (150-160,000). Maximum
contribution is $4,000 and earnings are
not taxed until withdrawal
Traditional IRA
• May fund until age 70 ½, earned income
• 10% penalty if withdrawn prior to age 591/2,
minimum distributions after 701/2
• Phase out for non-taxable contribution for
2005 is 70,000 joint, 50,000 single
• May use post tax dollars
• Grows tax free
• Keep your statement—post tax dollars will
not be taxed again
Roth IRA
• May contribute after 70
• Contributions are after tax dollars,
but after 5 years, money is tax free
when distributed
• No minimum distributions except
beneficiary
• 2010 may role traditional IRA to
Roth’s but have to pay income tax on
proceeds
Roth IRA
• Income limitations 150,000 joint
95,000 single with phase outs
(160,000 joint, 110,00 single)
• May use $10,000 for first house
• Same contribution limitations as
traditional IRA
Contribution Limits
Year
< age 50
> age 50
2004
3,000
3,500
2005
4,000
4,500
2006
4,000
5,000
2007
4,000
5,000
2008
5,000
6,000
Deferred Compensation
• 401 (k) and 403 (b) can be set up with
employer matches and varying vesting
programs
• In most hospitals programs, it generally
pretax dollars from employee (no match)
• Plans can offer company stock, etc. in
401 (k)
• Never have more 35% of company stock
Important Message
• Watch your roll over designation
• In some jurisdictions, IRAs and roll
over IRAs were “pierced” for
judgments. 403 (b)’ s have not!
• Therefore, if you roll over a 403 (b),
roll it into a 403 (b) rollover account
Contribution Limits
401 (k), 403 (b)
Year
< age 50
> age 50
2004
13,000
16,000
2005
14,000
18,000
2006
15,000
20,000
2007
15,500
20,500
SEP IRA
• SEP Plan if employees involved. SEP-IRA if
sole proprietor. No IRS reporting
necessary, individual maintains paperwork
• You must keep original paperwork and all
transactions in your possession
• 20% of net earned income (after self
employment tax) to maximum of $45,000
(net of $225,000 income)
• 25% of employee may be given up to
45,000 with max same as IRAs
SEP IRA
• No, I am not confused:
– The employee gives the first part of IRA,
i.e., the total allowed by year and age
– The employer then contribute up to 25%
to max of 45,000
– Contributions are not mandatory by
year, but must be “fair”
– Employee is eligible if employed 3 years
in past 5 years
Keogh Plans
• Very similar to SEP plans, but with
more reporting requirements
• Advantage used to be amount that
could be saved, now same as SEP
• Employees must be included after 1
year if vesting requirement or 2 if not
• Less popular over past few years
Retirement Plans
• Profit sharing plans: 15% of overall pay up
to $30,000 individual. Have become
extremely complicated
• Age weighted plan, money purchase plans
and defined benefit plans. Becoming rare
because of complex administrative issues,
including taxation
• Use third party administrator—these can be
very tricky reporting and tax wise
SIMPLE IRAs
• Contributions are limited for highly
compensated employees (defined as
> $100,000 annual salary)
• Done on a 2 or 3% of income
• Good for small business with < 100
employees and limited compensation
(think construction, janitorial
services)
Retirement Plans
• The worst mistakes are:
– Not doing anything because the laws
are complicated and may change:
that’s why you get a CPA and financial
advisor
– Procrastination
– Not funding your plan
– Not including your employees (this
really gets the feds and IRS upset)
Retirement Plans
– Using a cookie cutter approach that is
sent to you by a banker, broker or
insurance agent
– Trying to be the investment manager —
Would you trust your surgery to a stock
broker?
– Trying to outsmart the IRS—they always
win
– Ignoring reporting requirements
Spouses
• Every marriage may become a
potential divorce
• Be fair with dividing assets when
things are going well—it will make
the separation phase of a divorce
cheaper and easier to sort out
• Attorneys make their money from
acrimony, not fair settlements
Spouses
• Consider using a financial planner
early, in conjunction with the
attorneys to better reach settlement
• Accountants may also be helpful in
dividing assets. In many cases, they
have a better handle on your lifestyle
by preparing your taxes
Your Team
• Accountant—tax planning and
advice, not your best source for
financial planning
• Stock Broker—remember, he or she
only makes money by trading and
selling
• Life and disability insurance—
compare and consider buying on
internet
Your Team
• Attorney—early on wills and power
of attorney, later setting up trusts for
estate planning
• Financial advisor (quarterback): if
possible, look for Certified Financial
Planners (CFP) and use “fee only”—
they are not selling products