Posted by Treloar & Heisel on Oct 16, 2023 11:04:00 AM
Perhaps you’ve started setting aside some money toward retirement in one or more different savings vehicles. Or maybe you’d like to save, but you don’t know where to get started. What we frequently come across in our practice are dentists who haven’t given much thought to retirement planning.
One of the worst pieces of news you could hear five or six years into retirement is that your money won’t last and that you’ll need to go back to work. It happens more often than you would imagine. Working with an experienced advisor and starting to think about retirement as soon as possible may help you avoid many of these scenarios.
How To Start Retirement Planning
Speak With a Financial Advisor
If there is one thing neither you nor I have any control over, it is the performance of the stock market. What can we control? Our saving and spending!
As basic as it sounds, the most useful thing a financial advisor can do for you in the introductory phase of your relationship is to help you figure out how much you need to save and how to create those savings.
Understand Retirement Planning for Dentists
Once you know how much you can save, then you can talk about a realistic timeframe for your retirement. Most importantly, a good advisor will talk to you about your vision for retirement and the kind of lifestyle you would like to lead in retirement. This conversation is necessary for determining how much retirement will cost. Because dental professionals spend so much time in training, and invest so much to obtain that training, retirement planning for dentists comes with unique considerations.
Everyone will have a different income picture in retirement. Will you have guaranteed income? Pension income? Did you own a practice? Were you a faculty member, or did you work for a hospital? Identify all of your income sources, and consider the streams you will derive from each (and how they will be taxed) to get a sense of how much money you will have at your disposal.
Your Cash Burn Rate
Everyone has different spending habits. You should have a good sense of what yours will be. For many retirees, in their first 10 or 20 years of retirement, their spending tends to be the same as in their working years. At some point, for instance, in your 80s or so, spending often declines as inactivity increases.
Utilize Tax Efficient Retirement Withdrawal Strategies
Tax efficiency is one of the last things average investors look for when thinking about where to put their money. It should, however, be their first priority. Some investment vehicles are tax-preferred at the time of contribution; others are tax efficient when you take withdrawals. You need to know your options (Roth, defined benefit plans, IRAs, etc.) and choose wisely for your particular situation.
Now that you know what you can afford versus how much you can expect to spend, the real work begins. Your advisor should present some strategies to help you bridge the gap between where you are today and where you’d like to be.
Consider Your Retirement Portfolio Allocation
Portfolio allocation means the distribution of stocks to bonds and cash in your overall portfolio. Your investments must be aligned with your retirement goals. If you have plenty of time you can afford to take more risk, but if retirement is around the corner, you’ll want to allocate more conservatively.
In our financial planning practice, we suggest that clients maintain two to five years of living expenses in cash equivalents such as money markets, laddered CDs and whole life cash values. The reason for this bucket strategy recommendation is that when the market goes down, you won’t be selling off devalued assets to meet your daily living expenses.
Also, if you use cash you won’t affect your overall asset allocation. We recommend two to five years' worth of cash equivalents because it may give you time to wait for the market-invested accounts to recover.
Retirement Planning for Dentists Includes Stress Tests and Risk Considerations
Stress Testing
Your existing retirement program needs the equivalent of a boot camp. Will it be able to withstand the ups and downs of the markets? How much before it breaks? Thankfully, in the financial industry, we have access to tools that can simulate stormy seas without risking your real cash. Your advisor should be using Monte Carlo simulations to assess the realism of your assumptions. Granted, there are no guarantees in life, but your retirement plan definitely needs a reality check.
Once you’re all set up, it’s easy to forget about your investments. At a minimum, you should review your portfolio each year, re-evaluate, stress test, and make sure you are staying on track.
Mitigating Risks
A properly designed retirement savings plan strategy integrates disability income insurance, life insurance, and property and casualty insurance wherever the need exists. Any risk that you absorb now takes money away from your future. Why not shift that burden to an insurance company? For a relatively small premium, you can avoid the potential for a large out-of-pocket payment that could jeopardize your larger plans.
Get Help With Retirement Planning and More
Sit down with a financial planner — one who has experience with retirement planning for dentists — early on to do some big-picture thinking. Understand what’s feasible and what’s not, and create a game plan. We frequently hear: “I didn’t realize it would take so long or cost so much…if I had known this 10/15/20 years ago, I could have made it work with less pain.”
That said, it’s never too late to start planning. Contact us today to plan and protect the future of your career!
About Treloar & Heisel
Treloar & Heisel, an EPIC Company, is a premier financial services provider to dental and medical professionals across the country. We assist thousands of clients from residency to practice and through retirement with a comprehensive suite of financial services, custom-tailored advice, and a strong national network focused on delivering the highest level of service.
