By Katherine Vessenes, JD, CFP®

The last few years before you hang up your stethoscope can be critical to a doctor's successful retirement. In this episode of More Money Minutes for Doctors, Katherine Vessenes, CEO and founder of MD Financial Advisors, covers the five things every doctor should do before handing in their resignation. These tips can make retirement not only more successful, but a lot less stressful.

#1 Pay Big Expenses Before You Retire

Your income is going to be a lot higher now and you have some possibilities for taking deductions that may not be available after you retire. Consider medical, transportation, home, and education expenses.

Medical expenses like new glasses, a new CPAP machine, a hip replacement, or cataract surgery will likely be cheaper before retirement. What will your medical insurance look like before and after retirement? Maybe you’ll need a new car or want to remodel the kitchen, add a deck, or finish the basement for use during retirement. Now, while you still have income, is the time to do this. The same goes for putting away some money for your grandchildren’s college funds.

Taking care of all of these expenses now will reduce your expenses later.

#2 Let Compound Interest Work for You

A great example of this is Warren Buffett. You've probably heard the name Buffett; he's considered one of the foremost investors ever. He's currently worth a staggering $136.9 billion. What's more compelling is that he didn't become a billionaire until the age of 56. He turns 94 this month.

What's interesting about this, from a compound interest standpoint, is that over 99% of his wealth was accumulated after the age of 56. No, you're not going to need billions to retire, but with compound interest, your savings are growing exponentially the closer you get to retirement. I'm not saying that you have to do what Buffett did, continue to work at 94, but I will say that if you want to push your retirement out a year or two, you can continue to accumulate more.

I've covered this concept a lot lately. Feel free to check out our previous podcast on compound interest, if you're interested in more information.

#3 Live on the Income You Think You’ll Have

I've found most of our doctors have absolutely no idea how much money they need to live on in retirement. Many times, we actually run through a retirement budget for them. We take their existing expenses, figure out which of those are going to continue into retirement, which ones are going to be more, and which are going to be eliminated so they can have a better idea. I find this is very beneficial for doctors closer to retirement. Young doctors usually have too many variables and can’t picture certain future expenses, but for those of you considering retirement in the next few years, you really need to take a look at what these expenses could be in your ideal future.

We suggest you live on the future income by using your expenses to come up with a number. For example, let's say you think that after taxes you'll be able to live in retirement on $180,000 a year,

Yes, you're still going to be able to travel. Yes, you're going to be able to play golf. Yes, you're going to be able to see the grandkids. You're thinking $180,000 a year will be sufficient. A couple years before retirement let's set up a special account that you pay all your expenses out of. Put in $15,000 a month ($180,000 annually) and see if you can live on that. If it’s easy and you have money leftover, yay! If you are getting strapped every month and you have to keep dipping into savings, that’s a good sign that $180,000 a year is not a realistic number. Not to worry, you did this early and still have time to adjust. It’s best to know now and not later when you're drafting too much money out of your savings account.

#4 Stress Test Your Portfolio

Many doctors don't take calamities into consideration when they're doing their retirement projections. Small things like higher taxes or extended inflation can really change how long a portfolio will cover you in retirement. These are some of the things that you need to consider when you stress test a portfolio. I found that most online calculators don't even think about this and they can give doctors a false sense of security if they're relying on the calculated projections.

When we do projections, we like to consider many different variables. Let’s look at an example.

Dr. Jane is a 60 year old cardiologist. Her husband is already retired. Dr. Jane is burned out and wants to retire today to open a yoga studio. Here is what happened when we ran the numbers:

In Scenario A, Jane retires today, living on $150,000 per year. We estimate her investments and social security will get her to 95 years old 99 times out of 100. In other words, she would only run out of money 1% of the time. However, that is assuming today’s tax rate and an average inflation rate of 3.74%.

In Scenario B, we add in 10 years of travel expenses. Jane wants to travel a lot domestically and internationally. We also added in some medical expenses. This is one expense that many doctors don’t prepare for, especially medical expenses not covered by insurance. With these new numbers, her chance of getting to 95 drops to 97%, meaning she is likely to run out of money 3% of the time. Still pretty good.

In Scenario C, we added in a long-term care event. There’s a high probability that either Dr. Jane or her husband will have a medical event that will lead to the need for some sort of nursing home or care facility. We put in spending an additional $80,000 a year for five years. This brings the success rate down to 91%, meaning 9% of the time this portfolio will run out of money before Jane reaches age 95.

In Scenario D, Dr. Jane wanted some more spending money. We upped her income to $175,000 a year. This is adding only a little over $2k each month. However, it takes the success rate down to 73% and the failure rate increases to 27%. This is not a scenario I would recommend to Dr. Jane and her husband, but some doctors are okay living with that risk.

I personally could not take that risk. I would have balked at Scenario C’s 9% failure rate. If you've listened to some of my other podcasts, you know that it did happen to my family. My mother was left in a tough spot when my stepdad, a very prominent bariatric doctor, died suddenly leaving her without any money. It's a painful situation that I really hope to help our clients avoid.

#5 Get a Second Opinion on Your Finances.

If you had an illness, you'd likely get a second opinion. Why don’t you do the same with your finances? I think it’s particularly important for your distribution strategy, especially when you're accumulating wealth quickly.

In my experience, a vast majority of financial advisors just work on accumulating wealth. That's fantastic and we have a whole set of protocols that we use for accumulating, but how do we distribute that wealth in a tax-efficient manner during retirement is much more important. Not enough financial advisors do these calculations. I haven’t yet had a doctor come to me and tell me that they had done some calculations on this on their own. It's crucial and something that I encourage you to do before you retire.

We like to talk about these in terms of tax buckets. Your money is saved in different types of accounts that all fit into a certain bucket based on their tax situation. How you pull money out of these buckets at different times to increase your after-tax income is your distribution strategy.

This can be difficult when a doctor comes to us at age 60 and wants to retire at age 62, but doesn’t have enough funds in the tax-free bucket. It’s much easier when doctors come to us at age 35 or 45 because we have years to accumulate money in the right buckets and prepare a distribution strategy for retirement.

We have some very sophisticated software that shows us the pros and cons of different accumulation strategies and how it impacts the distribution strategies. I recommend this for every single client, because I've seen doctors who didn't plan ahead spend $1,000,000 or even more in retirement on unnecessary taxes because they didn't take this vital step. Make sure that you get a second opinion on your distribution strategy.

My mission for you is to have financial independence. I want you to be able to retire safely and never have to worry about running out of money. Remember to take care of yourself.

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

Katherine Vessenes, JD, CFP®, is the founder and CEO of MD Financial Advisors who serve 600 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.