This column draws on the same core materials that are included in the management consulting program for Levin Group clients. By gaining a deeper understanding of their financial situation and the options available to them, dentists can make informed decisions that will enable them to reach their retirement goals sooner.
— Roger P. Levin, DDS
John G. McCarthy III is a partner with Heritage Financial Consultants.Longer lives and better health translate into longer retirements and new concepts of what retirement should be. Many of today's retired dentists view retirement as a time to shift gears but not necessarily to slow down.
They stay active by taking on new roles or starting businesses. They continue learning new skills by going back to school as both teachers and students. Some choose to serve on boards as directors or to pursue creative and artistic passions.
However you define retirement for yourself, the bottom line is that you want to have enough money to live your life without constantly worrying that you'll run out. It certainly pays to be prepared and to stay on plan.
What to look for
A successful retirement plan begins, of course, with making smart savings and investing decisions long before you contemplate retiring. But of equal or even greater importance is how you manage your money after you've left your dental practice and begin to turn to your investments to provide the income that supports your lifestyle.
To boost the chances that your savings will let you live comfortably in retirement, you need to address five primary areas of risk:
1. Timing and withdrawals
The amount you withdraw from your retirement portfolio and when you do so are two of the main determinants of how long the portfolio will last. For example, taking large withdrawals during bear markets, such as those in 1973 to 1974 or 2000 to 2002, makes it hard for a portfolio to recover and grow.
To the degree possible, you want to minimize drawing on your capital in a weak market since you'll have less capital for the rebound. Your annual withdrawal rate should be smaller than your average annual return less inflation. Of course, to be conservative, you could bring it down even further and your assets may continue to grow positively even though you're making withdrawals.
2. Market volatility
Related to the first risk, you need to position your portfolio to withstand inevitable swings in the market, and the way to do this is through diversification and asset allocation -- holding a combination of stocks, bonds, cash, and alternative investments that matches your risk profile.
Returns on these investments should be noncorrelated, so that when one area is down, another area is up. In retirement, you need diversification to perform a balancing act of having enough growth-oriented investments to help achieve acceptable long-term returns, along with bonds and other fixed income securities to provide steady income. Annuities also could make sense to provide at least a portion of your retirement income.
3. Longevity
The good news is that you have a good chance of living to a ripe old age, but the risk here is essentially that you could outlive your assets. For a married couple who both reach age 65, there is more than a 60% chance that one of them will live to age 90 (source: Ibbotson Associates, 2006). That means that if you retire at 65, you may need to plan for 25 years or more in retirement.
4. Taxes and inflation
Don't underestimate the ability of inflation to destroy spending power. Over the past 25 years, during which inflation has been fairly tame, the consumer price index (CPI) -- the cost of a basket of goods and services determined by the U.S. Bureau of Labor Statistics -- has more than doubled. If inflation accelerates to 6%, prices would double in about 12 years.
5. Healthcare costs
The CPI is often not the most accurate measure of your personal inflation rate, since you may spend disproportionately on healthcare as you age. These costs have traditionally run at double or triple the overall rate of inflation and are not under control. In addition, consider long-term care insurance as a way to help pay for some of the potential nursing home costs as you get older.
Writing the next chapter
Thanks to a combination of advances in medical technology and better lifestyle choices, Americans are living longer and more active lives. Nonagenarians (people between the ages of 90 and 100) are becoming commonplace. Enjoy your retirement years, however you decide to spend them. Spending some time with your financial advisor today can help you enjoy true financial security tomorrow.
John G. McCarthy III is a partner with Heritage Financial Consultants and a registered representative of Lincoln Financial Advisors.
For information about the comprehensive suite of financial planning and wealth management services offered by Heritage, contact the author at 410-771-5677.
Disclaimer: The comments in this article are not meant to be taken as financial advice. Levin Financial Group recommends that you always consult with your financial planner before making any significant changes in your financial situation.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
