Think you're squirreling ample cash to live out those post-career years? Then you're not alone. Just don't bank on it definitely being the case upon reaching your mid-60s or target retirement date. There are, in fact, several reasons that many well-compensated doctors typically do not save quite enough to last.
Here are the five most common:
The first flaw in factoring retirement savings is often the lack of planning for inflation. People often overlook the fact that you might need $10 in retirement to buy something that costs $1 today. Over the past 100 years we have had an average inflation rate of over 3 percent, so what does that mean for your retirement? If you needed $200,000 in today's dollars 20 years from now, you would need an account with over $390,000. Hence the importance of planning ahead.
Another fatal flaw is improperly accounting for taxes down the road. Although we don't know what will happen to taxes 10, 20 or 30 years from now we can rationally predict that they will still be around. Most physicians save their retirement dollars into pre-tax accounts like a 401k or 403b. Pre-tax accounts like this are helpful today from a deduction standpoint because they lower taxable income, however, every dollar pulled from these accounts at retirement will be taxed at ordinary income rates.
That's all understandable but here's the problem: If you are in the 28 percent tax bracket and need to buy a new car (say $30,000) in retirement you will have to pull out $38,400. That $30,000 car just got a lot more expensive.
It's wise to start thinking about saving money in a post-tax bucket. These would be things like Roth IRAs or utilizing a Roth conversion aka "back-door" Roth strategy. Another option would be certain forms of permanent life insurance, which must be structured and funded correctly to work efficiently.
Underestimating the length of time you will be drawing on your funds can be devastating to a financial strategy. According to the social security website (ssa.gov) 25 percent of 65 year-olds today will live past the age of 90. Given the future of medicine imagine what that number will be when you turn 65!
One of the biggest unknowns in the retirement preparation world, especially for young physicians, is social security. The moral of the story here is simply not to overestimate the amount of social security you will get in retirement and finding yourself having to supplement that.
There is a myth out there that at retirement the home will be paid off and therefore expenses will be lower. While many doctors will indeed pay their home off, that does not necessarily equate to lower expenses. In conjunction with living longer, for instance, come more healthcare expenses.
Let's face it: Retirees have more fun. They travel more, they golf more, they do what they want more. The other under calculated expense is gifting. Many retirees have a desire to take care of grandkids education costs, they want to bring the family on trips, and they want to leave money behind to charities. At the end of the day, they want to leave a legacy but aren't preparing for those expenses.
Don't fall into that trap, contact me to get your finances in order before one of these five surprises hurt your retirement fund.
Compliments of Wes Sharp, Financial Advisor.