Two items we talk about in every first meeting we have with doctors are: retirement, and financial independence. It’s common knowledge in the financial world that doctors already start at a disadvantage for retirement. By the time doctors are attending and able to start saving significant amounts toward retirement, other professionals have had a decade of retirement savings under their belt. This doesn’t even touch on the fact that medical school costs can far outweigh that of other schooling.

Today, we’re covering some helpful tips on how to avoid these 9 major landmines while gaining financial independence and saving for retirement:

Landmine #1: Danger Window

Time Period: 10 years before retirement and the 10 years after retirement
This is the most vulnerable financial time period for everyone
Your returns matter more in this window, as there isn’t as much time to recover from losses in the market
There are several ways to protect yourself during this period
- Make certain investments with downside protection
- Re-evaluate risk tolerance
- Transition to preserving wealth, not accumulating wealth, during the danger window

Landmine #2: Sequence of Returns

Average returns aren’t as important as the sequence of returns
You need to know how to protect yourself from a bad sequence
Our goal is to get returns that are 3% or more above inflation, over the course of saving (this averages out to 6-7% overall)
See the graph below for three different types of portfolios and how they average out over time:

Landmine #3: Average Returns Don’t Matter as Much During Retirement

We wanted to see how a variety of sequence of returns would impact identical, initial investment amounts, so we studied separate $1,000,000 initial investments started at different time periods. The returns sequence results all ended up vastly different! What did we learn?
- Your investment strategy needs to change if you’re getting close to retirement—changing the risk level will help preserve your retirement savings, as the bond/stock ratio changes
- We may look at pulling retirement money from bonds while stocks recover if you are already in retirement
- We might even look at a home equity line of credit, to help offset pulling funds in a down market

Landmine #4: Changing Tax Brackets

Tax brackets change every two years due to congressional updates
Most doctors think they will be in a lower tax bracket in retirement, but this isn’t always true
- The majority of our doctors want to continue to live at the income level they had before retirement, meaning they would not qualify for a lower bracket
Learning how to take advantage of Roth conversions and other strategies will help you avoid incurring more tax penalties if you are moving from lower to higher brackets

Landmine #5: Ordinary Dividend or Interest Tax

Many doctors don’t realize that there are taxes on stocks and bonds
- Stocks produce dividends that can be taxed
- Bonds produce interest that can be taxed
Ordinary dividend taxes are at your highest bracket (often 37%+) with capital gains rates (often at 15-23.8% at the federal level, as well as your specific state’s capital gains rate)
Using the right investments in these type of accounts can save you thousands of dollars in taxes each year
We frequently use “Tax-managed Mutual Fund” accounts in brokerage accounts to reduce these taxes. Some pundits estimate this can increase the after-tax return by as much as .75% per year. This adds up to a lot of money, so it is an important strategy for doctors to implement early on in their career

Landmine #6: No Long-Term Care Plan

Long-term care (LTC) costs are extremely unpredictable
Long-term care needs can go on for 10+ years
According to a 2020 Genworth study, the monthly cost of national nursing care for an individual is $8,517. That’s $102,204 a year!*
Some solutions include:
- Long-term Care Insurance (although this is like Home-owner’s Insurance, you don’t get paid out if you don’t use it)
- There are some life insurance policies that allow you to access the death benefit early, in case you need it for long-term care

Landmine #7: No Asset Location Plan

Your brokerage, 401k, and Roth IRA plans should be holding different investments based on their tax efficiency
The goal is to increase your after-tax wealth without increasing your risk
The differences can amount to thousands of dollars saved in retirement
Revisit our podcast on the Tax Triangle for more details

Landmine #8: Unaware of Bracket Arbitrage

Knowing how to play the tax-rate game in retirement is key
- If taxes are high, we want to pull money out of the tax-free accounts
- If taxes are low, we want to pull money out of the tax-deferred accounts
New taxes start at different tax levels
Keeping under taxable income thresholds can save thousands over time while giving you the same retirement income
0% Capital Gains by staying under a taxable income threshold
Avoid the additional 3.8% Net Investment Income Tax (NIIT) by staying under a taxable income threshold, it will save you 3.8% on the federal level
Solution here: we work with your CPA to create strategies to make sure you can stay under the next bracket and help maximize the arbitrage

Landmine #9: Unrealistic Retirement Mindset

Some doctors are so unhappy with their work that they insist on retiring early
Let’s look at a hypothetical case study:
- Doctor couple: Joe and Jane. They are both 62 and insist on retiring this year
- He is a psychiatrist earning $250K/ year and she is a neurologist earning $300K/year
- Yes they have accumulated some wealth, about 3 million dollars, but about $2.7 million is in retirement accounts that have never been taxed.
- Our projections show that about 25% of the time they will run out of money in retirement, and that assumes they don’t have any LTC needs, taxes never go up and inflation stays low
- Personally: I want the probability of success to run about 98 to 100%! Who wants to be 95 years old and not have any money?
- Solutions:
  - Work part time for 5 to 7 years—this does a number of things (protects funds if it’s a down market, lets investments grow, relieves some work stress, etc.)
  - Think about creating a work environment where you love your work so much you don’t need to retire!
    - For psychiatrists, maybe it is having their own private practice or only taking cash patients
    - For Emergency Med, it might mean doing Urgent Care instead
    - For Orthopedic surgeons, it might mean doing expert witness work
  - Take a good hard look at these numbers, and make changes before you retire!

It’s important to start planning early, no matter what stage you are in your career. If you are unsure whether or not your retirement plan avoids these landmines, we recommend reaching out to your advisor to make sure you are on the right track for retirement. We love helping doctors gain financial independence, and are more than happy to give you a second opinion, contact us at info@mdfinancialadvisors.com.

*https://www.genworth.com/aging-and-you/finances/cost-of-care.html

Learn More Here

Katherine Vessenes has been interviewed on this same subject by Brown University’s Dr. Kristy McAteer. If you’re interested in listening to more about retirement landmines, click here: Avoiding the Retirement Reef.

Listen on Apple Podcast, Google Podcast or Spotify

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Remember that you can send us any questions or potential topics at: Info@MDFinancialAdvisors.com

Katherine Vessenes, JD, CFP®, is the founder and CEO of MD Financial Advisors who serve 500 doctors from Hawaii to Cape Cod. An award-winning Financial Advisor, Attorney, Certified Financial Planner®, author and speaker, she is devoted to bringing ethical advice to physicians and dentists. She can be reached at Katherine@mdfinancialadvisors.com.