Essentials To Planning For A Successful Retirement
The fantasy of retirement is one which many people occasionally turn to in order to get through the difficult stretches of a workday. The warm, sandy beaches of the mind are crowded with reclining metal chairs and the residue of tropical drinks that have no name, fishing poles bent in the direction of luckless mahi-mahi, and thousands of flip-flopped feet, attached to dozing, lotioned bodies. The reality of retirement, however, can knock the taste of salty air right out of your mouth. There are no true statistics that can tell how many of us are financially underprepared for our winter years, but rest assured there are likely more than any Gallup Poll could possibly reach. Medical practitioners also must be aware of the challenges their chosen profession poses for successful retirement planning. No one wants to work forever, but how can you tell if you have the financial wherewithal to stop working? “Traditionally, a well-conceived retirement plan consisted of tax reduction planning, various insurance matters, investing and portfolio management, practice succession and estate planning,” explains David Marcinko, DPM, MBA, a healthcare economist. “For modern physicians, these disciplines and many more must be incorporated into the mix, and in a managerially and psychologically sound manner that is not counterproductive to individual components of the retirement plan. As a sobering caveat, the integration of these protean disciplines is no longer an academic luxury, but a pragmatic survival imperative.” Should You Sell Your Practice? The first retirement investment most DPMs consider is their practice. However, there are pros and cons involved in the selling of a practice and a number of nuances to consider. “One of the largest assets that any podiatrist will have will be the equity built up in his or her practice,” says Steven Peltz, president of the New York-based Peltz Practice Management and Consulting Services. “For podiatrists just opening their own practice, they must see the practice as an investment, similar to an IRA or a pension plan and take care of it as such. They must reinvest in it. Ten or 20 years later, when they have a new partner buy in, they’re going to start to get some of the equity that they’ve built up come back to them.” The same holds true, Peltz notes, if they’re joining an established practice. “The payments a new doctor makes to the senior practitioner is the investment he or she is making in establishing the practice,” he says. Peltz says you should think about how to improve the practice. You also must consider how to build the practice so it’s big enough for you to bring on another DPM five or 10 years later when you are ready to bring in a partner. However, Dr. Marcinko urges caution when contemplating the sale of a practice. “Practices are quickly diminishing in value today and the future is uncertain,” he explains. “Some 40 percent of all allopathic physicians are currently employees. This trend is increasing as reimbursement is decreasing. It is a bit different for most podiatry practices that are smaller, more collegial and informally modeled. You also may or may not be able to sell your practice upon retirement, or you may not receive full value for it.” To make your investment as valuable as possible, Dr. Marcinko recommends branding your practice with a group identity long before you retire or sell. “We are now in an environment where cachet value matters, not individual practitioner accomplishments,” notes Dr. Marcinko. “Hot medical groups, not individual doctors, will flourish going forward and transferable operations are the key to premium practice value. Mom and pop offices are ‘out.’” Dr. Marcinko says it’s important to identify the right buyer, seller or merging partner. You should ensure each party has the necessary capital and that you do not assume all the financial risks in the transaction. He says you should look for a good philosophical match in a buyer “since your lifeblood went into building the practice and you should want it to flourish going forward.” Peltz says the act of selling or transferring a business is not indigenous solely to medical practices. “This happens every day in every business,” he explains. “Do you think a successful car dealer closes his dealership when he decides to retire? Of course not, he has partners who are going to buy him out. This is the cycle in any normal, successful business operation. It’s just that healthcare providers have no experience and very little education in the way businesses are run. Most practitioners don’t have the experience in identifying problems in their business because their experience is identifying problems in our health.” Cutting Back Your Schedule: Can You Make It Work? Some DPMs intent on “easing” into retirement by ratcheting back their schedules might run into some surprises. Dr. Marcinko notes that for many doctors, this is not economically possible due to today’s high office overhead costs and malpractice issues. Peltz says such an arrangement is fine under certain circumstances. “(This can work) as long as the podiatrist in question has someone in place to buy him out,” he argues. “Ideally, if you and I are in practice, you own 50 percent of the practice and I own 50 percent. At age 60, instead of working four and a half days a week, I only want to work three days a week. That means that you’re going to begin to buy me out. However, I want to still work three days a week, so I’ll work as your employee, while you buy me out and while you bring on a new, younger person to buy into the practice. It’s a cycle.” Peltz also gives a thumbs-up to DPMs who want to work part-time, even after retirement. As he notes, practicing medicine without worrying about issues such as staff problems, insurance reimbursement, supplies, bookkeeping, and the telephone and computer systems can be an attractive idea to some podiatrists. “If they get the opportunity to come in and work part-time, you’re getting someone who has 30 or 40 years of experience with patients,” says Peltz. “A new practitioner who has taken over a senior practitioner’s practice gets all that experience for 35 percent of collections. That’s all you have to pay him or her, plus covering his or her malpractice insurance. The older practitioner gets the opportunity to do what he or she has always wanted to do and the younger clinician gets the senior practitioner’s name still there, because that person has a reputation with patients and the community. The more experienced practitioner has also acquired a lot of different skills. So it should benefit both parties.” Make The Right Investment Decisions Early As Dr. Marcinko notes, the core of your retirement planning is the quality of retirement investments you make at various stages of your career. “Current economic theory suggests that all people should invest for ‘total equity return’—i.e., capital appreciation, dividends plus interest payments—rather than for some ‘fixed rate of return,’ as seen with bonds, CDs or other debt instruments,” explains Dr. Marcinko. “Beware of inflation, even in this tame environment. The long-term trend is always up.” For DPMs just starting out, it is imperative to be as debt-free as possible, which means paying off those high-interest student loans and practice start-up loans. Dr. Marcinko says home mortgages, auto-related debts and student debts are impediments to start-up loans. “I’ve seen far too many students risk a life of professional economic servitude with these onerous debts,” he notes. Dr. Marcinko adds that putting your personal life together has economic as well as emotional implications. “You should postpone marriage and child rearing until you are psychologically and fiscally ready,” says Dr. Marcinko. “And if you are married, do not get divorced. Divorce is the bane of all retirement planning. If you remarry, get a QTIP (qualified terminal interest property trust) designed for those with children from prior marriages.” Dr. Marcinko also extols the virtues of having adequate insurance to indemnify contingent liabilities, like your life and the life of your spouse, your possessions and practice, your health and for personal disability. “Remember, insurance is a method of risk transference and is not an investment,” notes Dr. Marcinko. “Title life insurance contracts carefully. You should usually not own your own life insurance policy as proceeds are income tax-free, but may be included in your estate tax.” Finally, you should also begin contributing to a retirement plan, either a qualified or non-qualified type, as soon as possible. Dr. Marcinko emphasizes the use of tax-free vehicles like a Roth IRA before using a simplified employee pension (SEP) or defined contribution plan. If you are a salaried doctor, Dr. Marcinko says you should maximize your 401(k) contribution or defined benefit plan. Peltz concurs. “The key is to start as early as possible and get into the habit of making regular, periodic contributions,” says Peltz. “When you have a practice that is not very profitable, you can put money in an IRA. When you have a practice that allows you to put more money away than the IRA limitations, look to establish a SEP or a 401(k). Even if it’s a small amount of money that you put away, over 10 or 20 years, money will double and triple, even at a low interest rate. You must diversify. Don’t put everything in stocks or bonds or mutual funds. It’s amazing. After ten years or five years of making regular periodic payments, and you get your statement at the end of that time, you’ll say, ‘Wow, that’s not too bad.’” Why It’s Never Too Late To Plan Your Retirement Dr. Marcinko has similar advice for those DPMs who are starting their retirement investing late. “Contribute maximally to your retirement plans,” he says, “but make sure to pay yourself first and invest outside of retirement plan vehicles. Future tax laws are uncertain and an economically constrained federal government may change all the rules by political fiat.” He also cautions against assuming that the appreciation of your personal residence will bail you out of bad retirement planning decisions. “Do not buy the largest home in the neighborhood,” cautions Dr. Marcinko. “A home is where you live and is the bedrock of your retirement. It is not an investment. Beware of home equity credit lines. Do not borrow against your home and try to pay off the mortgage faster than the stated time period.” Consider Investment Risks And Rewards Peltz suggests timing the risk of your investments to certain criteria, most notably your age and anticipated date of retirement. “When you invest at a young age, you still have 20, 30 or 40 years to work,” notes Peltz. “You can take more risks. When you’re 40 or 50, if you take the same risk as when you’re 20 or 30 and the investment fails, you’re left with nothing and you have to build it back up again.” Peltz uses his own recommendations to clients as an example. “As you get older, the type of investment that we normally recommend goes from aggressive to less aggressive to moderate to non-aggressive,” notes Peltz. “For people who are in their 20s and 30s, we put 80 percent in growth and 20 percent in fixed. For people who are in their 50s, we reverse it. We put 20 percent in growth and 80 percent in fixed. In between, we adjust that balance. Maybe at 40 or 45 years of age, it’s 50-50. The reason we do that is there are a lot of people who wanted to retire between 2002 and 2004, but they had a lot of money invested in aggressive, growth-oriented investments, most of which crashed with the stock market. At age 50 or 55, they may have lost 30 or 35 percent of their retirement assets.” One of the most common mistakes medical practitioners make when investing is that they want to hit a home run every time they invest. “People listen to their friends or broker, who tell them a certain investment will double or triple their money in a short period of time,” notes Peltz. “Very rarely does that happen. We wind up losing clients because their friend or advisor or brother-in-law says, ‘Oh, I invested $10,000 with this person and he claims I’m going to triple my money in 15 minutes.’ So they do that. If it works, more power to them, but usually it doesn’t. The absence of common sense is one of the biggest problems we encounter.” Dr. Marcinko cautions against making investment decisions “based on either greed, as in the recent past, or fear, as in the present environment. Never assume the past is indicative of the future or that good or bad economic times will remain static. Remember, the 95/5 rule that all good economists hold dear—in the future, 95 percent of all economic assumptions will be wrong within five years.” Will You Have Enough To Support Your Retirement Lifestyle? One of the key considerations all would-be retirees must address is what lifestyle they envision having in their winter years. Although in the past, the standard was that an income of about 70 percent of pre-retirement earning was sufficient, Dr. Marcinko says psychologists today suggest aging baby boomers will go through three phases of economic retirement. • Early retirees who want to support a lifestyle of recreation may work part-time for additional disposal income since such a lifestyle requires up to 130 percent of pre-retirement levels, he says. Good health and more free time equate with more opportunity to consume and spend for pent-up needs and wants. • Since many tangible assets are paid off, mid-retirees do not work and have decreased spending needs. Therefore, they direct their attention to charitable opportunities and spending time with family or friends. • People spend late retirement in senescence, making healthcare insurance vital, points out Dr. Marcinko. They may consider long-term care insurance if sufficient assets are not available for personal use. Peltz again calls upon his experience with clients to determine how they should plan financially for life after their practice. He asks clients to list all the important numbers they deal with every month, such as their mortgage payment, property taxes, car insurance, homeowners insurance, support for children or elderly parents, entertainment spending and vacation expenses. He totals those key indices and tells them what they need to earn to maintain that level of expenditure. “Say it adds up to $6,000 a month. That means they must earn in the neighborhood of $8,000 or $9,000 a month pre-tax in order to have that $6,000 left over,” says Peltz. “Usually, their retirement income at that point is insufficient to cover that kind of spending. Then we get to talking about what they plan on doing. Some of them decide to sell their house and move to a warmer climate. Some of them decide to sell their house and move into a condo or smaller home in the area, because they have family there. “The time to begin doing this is about five years before they plan to retire,” adds Peltz. “Some decide to continue to work on a part-time basis for as long as they can.” The ultimate mistake anyone can make in retirement planning is to do nothing. “If you are a mature doctor who can’t afford to retire comfortably after practicing through the ‘golden age’ of fee-for-service-medicine, then you have not been a good economic steward of your financial resources,” says Dr. Marcinko. “You will either have to continuing working, or live off the societal resources of others.” Plan Your Leisure Time Well Peltz and Dr. Marcinko agree that a final, non-financial consideration all doctors should make as part of their planning is exactly how they intend to spend their leisure hours once they’ve taken the plunge. “If you plan on retiring, you need to find something that’s going to keep you busy and out of your spouse’s hair,” Peltz laughs. “Get a hobby or something. I have many clients who are 68, 70, 72 years old, who are still working. So I ask them, ‘Why?’ They look at me sheepishly and say, ‘Because my wife doesn’t want me home that much.’ While I’m sure these clients of mine love their spouses and their spouses love them, they’ve been away from each other during the daytime for 25 or 35 or 40 years. And now, suddenly, they’re going to be around and underfoot.” “Begin developing new avocations, hobbies or interests, long before you retire,” concurs Dr. Marcinko. “Do not equate what you do as synonymous with who you are.” Editor’s Note: Mr. Smith is a freelance writer who lives in Cleona, Pa. Dr. Marcinko is a licensed financial advisor, insurance agent and certified financial planner who has written a dozen finance and management textbooks for medical professionals. He is a healthcare economist and the Academic Provost for www.MedicalBusinessAdvisors.com, a practice enhancement resource center for physicians and their business consultants. Dr. Marcinko can be reached at: (770) 448-0769 (phone), (775) 361-8831 (fax), or via e-mail at MarcinkoAdvisors@msn.com. Steven Peltz, CHBC is the president of Peltz Practice Management and Consulting Services. He can be reached at (914) 277-4070 (phone), (914) 277-7584 (fax), or via e-mail at firstname.lastname@example.org.