Planning for a longer retirement

This article from Heritage Financial Consultants 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.

Americans are living longer than ever, thanks to advances in healthcare, improved diets, and better exercise. A 65-year-old today can reasonably expect to live another 15 or 20 years. Among retired couples, there is a 50% chance that one spouse will live past the age of 90, according to the Society of Actuaries.

This is great news of course. But it also presents you with a significant financial challenge: making sure your money lasts as long as you do. The possibility of running out of money is one of the biggest risks many retired dentists will face in the years ahead. If you are close to retirement or contemplating a transition for your practice, it's more important than ever to think about how to make your money last by addressing some key issues.

Your spending habits

Don't assume that your expenses will decline significantly once you stop practicing dentistry. The old rule that you'll only need about 70% of your preretirement income may not make sense for you. Like many other retirees today and in the future, you may be much more active than previous generations and pursue a lifestyle that requires more money. True, some expenses may go down, if you downgrade to a smaller home, for example. But others -- such as travel and leisure, healthcare, and prescriptions -- will almost certainly increase.

Your portfolio

More years spent in retirement gives inflation more time to erode your purchasing power. Conventional wisdom is to become less aggressive with your investments as you near retirement. The problem is that bonds and other fixed-income investments may not keep up with inflation. This means you'll probably want to start your postcareer life with a healthier allocation in growth-oriented investments such as stocks. For outpacing inflation, stocks have had a better track record than other forms of securities, although they also carry greater risk and volatility.

Your withdrawal strategy

The amount of money you draw from your portfolio each year will have a big impact on whether your savings can go the distance. In the past, retirees often could safely withdraw 8% a year or more from their portfolios to cover living expenses. That's not often the case anymore. Today, withdrawing more than 5% a year (adjusted for inflation) can significantly boost the risk that you may run out of money during retirement.

To help generate a steady stream of income for a period of years or over your entire lifetime, consider annuitizing a portion of your portfolio. You can use an annuity as a guaranteed account for covering necessities (bearing in mind that a guarantee is subject to the claims-paying ability of the issuing insurance company). Think of your other investments as resources that will allow you to live your dreams -- the ones you feel comfortable doing when you know the necessities are covered.

Your healthcare costs

An extended retirement may mean a greater need for specialized medical care down the road. Therefore, your plan should also set aside some assets to pay for long-term care. According to a MetLife report, the national average cost for care in an assisted living unit in 2012 was $3,550 a month -- an amount that can quickly deplete a retirement portfolio. That makes it imperative that you plan for unforeseen medical and healthcare problems before they occur.

Steps you can take now

If you review your situation and discover that you're not as well prepared as you had hoped, don't panic. You can make plenty of smart moves to get on track:

• If you're like most dentists, your practice is your greatest asset. As you approach transition, consider judicious investments that will enhance practice valuation and increase the sale price.
• You might also consider looking for ways to build up your retirement savings, for example, by saving more or investing any inheritance you receive.
• Another option is to increase your investment allocation to stocks and high-yielding fixed income instruments (if you can tolerate the risk) or to vehicles that will help ensure a lifelong income stream.
• You may also decide to join the growing number of dentists who are choosing to delay retirement or shift to a reduced schedule as part of an agreement with the new practice owner.

In short, you have options. The key is to start planning now. Your situation will most likely change over the years, so you'll need to meet with your financial planner periodically to discuss your financial plan, how it is performing, and if changes have occurred that could affect it.

By giving yourself as much time as you can to implement a comprehensive financial plan -- and to review it along the way -- you'll increase your chances of achieving a comfortable and secure retirement from dentistry and living the life you've dreamed of for decades to come.

John G. McCarthy III is a partner with Heritage Financial Consultants and a registered representative of Lincoln Financial Securities offered through Lincoln Financial Advisors, a broker-dealer (Member SIPC) and investment advisory. Heritage Financial Consultants is not an affiliate of Lincoln Financial Advisors. Lincoln Financial Advisors does not provide legal or tax advice. CRN-1559901-080116

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.