MEconomics, Part 5: Will You Work Until You Drop?

The first four editions of this post series on my personal financial journey into medicine addressed borrowing, earning and spending money. Today, in Part Five, I'm going to examine a topic most doctors I know don't think about enough: retirement planning.

In Part Four, I rebutted the concept of "working until you drop." Doctors, of all professionals, know most people don't simply drop dead. First, you develop hypertension, then an NSTEMI, then a teeny bit of atrial fibrillation. Your next hospitalization is for systolic failure, and when you are discharged you realize you have just doubled the number of drugs you take daily. Still, you keep up your daily exercise, only a nagging pain in your knees--osteoarthritis--begins to limit your endurance. You put on a bit of weight. Your doctor talks about "pre-diabetes." It seems to you that people are either mumbling or shouting at you. One day, hesitating for a moment on the front porch because one of your knees sometimes gives way for no reason, you fall down and break your hip. You have an ORIF, go to rehab, and a nice home health nurse makes sure you're walking okay at home using a front-wheeled walker. Within a month you're back in the hospital with a touch of pneumonia. After you get out of the hospital, you overhear your children saying "he hasn't been the same since the surgery." Pretty soon, that annoying habit of forgetting where your keys are has turned into advanced dementia, and you need an in-home caregiver. Your home soon fills up with a hospital bed, a bedside commode, a Hoyer lift, and all the other paraphenalia of aging into frailty. Despite your family's best efforts, your needs soon outstrip their abilities and they reluctantly place you in a nursing home, where you develop urinary tract infections (5 days in the hospital), pneumonia (4 days), and infected bedsores (10 days). If you're lucky, someone calls hospice and they usher you to a comfortable death. If you're not lucky, some idiot calls 911 to intubate your frail, bedbound 92 year-old body just because you had the bad taste to stop breathing, and your family's last moment with you is standing around your ICU bed just before a hospitalist withdraws care.

Depressing scenarios aside, the truth is that most people outlive the limits of their working lives. The current life expectancy for a nonsmoking, somewhat active, normotensive woman at age 40--me--is 82. Assuming a retirement age of 65, I might expect to live for 17 years after retirement. In 1950, I would have only expected to live another 15 years. Advances in medicine and public health have prolonged our lives, with the result that we have to fund a longer period of retirement.

The working person of 1950 could also expect to receive a pension at age 65, which provided an adequate if not luxurious fund for many retirees. As most of us have realized by now, the era of the pension has ended as working people move between jobs and corporate culture adapts to a mobile workforce. (Fallout from corporate corruption doesn't help matters, of course.) Most doctors will never work for an organization which funds their retirement, unless they work for the military, the prison system, or another government agency. Even my FQHC clinic does not fund a retirement plan, although they do have a profit-sharing plan that would award me 1-4% of my salary each year, assuming a profit, of course.

So it becomes painfully obvious that physicians, like the majority of Americans, have to plan for their own retirement. And, like the majority of Americans, most physicians haven't the slightest idea how to go about doing it. I suppose I shouldn't generalize to all physicians, but I do know a bunch of them, and none of them have been thinking enough about the future. A few examples: one of my colleagues just began putting money away into a SEP-IRA last year--at age 50. Another one is struggling to manage expenses and admits to putting away all of $10,000 last year--and he's 49. As for me, I managed to max out my 403b contribution last year, but that won't be happening this year since I am no longer an employee of the FQHC but a per diem physician, so I've got to make some decisions about how to salt away money for my nest egg this year.

Why so doctors do such a bad job planning for retirement? I haven't found a good answer to this anywhere, but as usual I have a few theories:

1. We are average Americans, and we suffer from the same "oh-well-I'll-cross that-bridge-when-I-come-to-it" mentality as average Americans.
2. Unlike people who work in other professions, I think we also suffer from the traditional image of Marcus Welby, M.D., who never retired. Heck, he never took a day OFF! There is still an idea out there that doctors don't really retire until their health no longer permits them to do the job. Even doctors of my generation, who don't want to work until their bodies give out, haven't caught up with the notion that they have to plan for the day when they stop working and, consequently, stop earning.
3. We don't have time to plan our financial future, or at least we don't think we have time. In truth, we don't have time to waste and we should be planning right now. Many physicians hire accountants and financial advisors to do the planning for them, but this is an expensive business and doesn't solve the problem of becoming an informed investor and steward of your own future.

You may add your own reasons to the list, of course. I know some doctors aren't funding their retirement accounts because they're losing money in their private practices, or they are choosing to fund education accounts for their kids instead. Many financial advisors argue that the latter is a mistake, because students can apply for very favorable educational loans (discussed at length in Part Two), whereas no one is going to float you a loan just over Prime for your retirement years. I'm not going to go much deeper into the subject of saving for your kids or saving for yourself, because I'm not a parent and I don't claim to have the perspective on the issue that a parent-doctor would have, but if you do have kids, you must be on top of your plan for the future.

Okay, so how do you go about planning for your future? There's about 1,000,000 books and TV shows out there about personal finance, and all of them take a different tone or approach to the issues, but there are some core elements to all of them. Here's what I gleaned from my (self-) education:

1. Determine your life expectancy: There are a lot of online life expectancy calculators out there, and they will give you varying answers. My favorite is the one at MSN Money, because it give me a life expectancy of 100 years, whereas the calculator at the Wharton School of Business gives me 88 years. The truth is, predicting life expectancy is a bit of a crapshoot. I use 85 for my retirement plans.
2. Define a target retirement age: 65 is a magic number most people use for retirement, unless you're one of those go-getters who wants to set sail around the world at age 50. However, most doctors don't get rolling in their professional lives until age 30 at the earliest, so retiring at 50 is a bit of a stretch. Consider your ideal retirement age, but be ready to adjust it upward as you progress further in your plans. I use 65, but sometimes I use 70 because I frankly don't know when I want to retire.
3. Estimate your expenses in retirement: this is the hardest step, I think. Everyone assumes their expenses will decrease significantly in retirement, and to some degree that is true. You don't have to commute once you've retired. You don't have to wear business clothes (although I don't wear business clothes now). If your house and educational loans are paid off, and your kids are supporting themselves, then your expenses should be significantly less than they are now. But don't forget healthcare costs; a commonly-cited estimate for out-of-pocket healthcare expenses for people retiring in 2008 is $225,000. That's in today's dollars, and represents the total out-of-pocket expenses for the duration of retirement. I'm still chasing down the methodology used to arrive at this number, but it is as good a starting point as any. The bottom line is: everything you save on loan payments and childrearing may immediately be converted into healthcare costs. With this in mind, most financial advisors recommend saving enough money so that you can have 70% of your current income after you retire. There is a minority opinion that you do not need to save this much for a comfortable retirement, spearheaded by Laurence Kotlikoff at Boston University, and if this were true, we could all breathe a bit easier, but most people will fall back to something in the 70% range of replacement income for retirement. I use 60%, because I'm planning to have my house and loans paid off by retirement, and I'm saving into a healthcare fund right now so I won't have to come up with the entire $225,000 after I retire.
4. Define what role Social Security will play in your retirement plan: Nobody, especially the Federal government, knows what's going to happen to Social Security in the next 30 years. I don't know, you don't know, John McCain and Barack Obama don't know (even though they talk as if they do, but--in my humble opinion--they really don't). I suspect that by the time I reach 65, there will probably be some SS funding left over for me and my generation, but I'm not betting the farm on it. Everyone gets an annual SS statement telling you how much you're eligible for if you start drawing on SS at age 65 or 67. I think my benefit would be $2,200/month, but again--I'm not counting on it. Whether you want to include your anticipated SS income in your retirement plan is up to you. Sometimes I do, sometimes I don't, or sometimes I compromise and assume that I'll receive 50-75% of the stated amount. Depends on how sanguine I'm feeling about the U.S. leadership at the time. Lately I've been leaving SS out of my calculations entirely.
5. Decide how much money you want to leave behind: In a nebulous financial world, whether or not to leave money after you die is the greyest area I can imagine. Most people with children assume they need to leave an estate behind, but some financial advisors suggest settling money on your kids when you are still alive and they are young and need a good footing in life. If you do this, you can be free to spend the remainder of your nest egg on yourself and your own needs as you age. This is the Die Broke philosophy espoused by Stephen Pollan, who wrote the book of the same name. I think Die Broke is an important alternative perspective on retirement planning, although not for everyone. It is especially attractive to people without children, like myself. In my plans for the future, I don't envision leaving any money behind at all. So there.

Okay, just a few more assumptions before I show you my own retirement portfolio:

• Most online retirement calculators factor in about 3% historical average annual inflation into your plan.
• They also ask you to estimate your annual salary increases. I am stymied by this question, because although my income has increased yearly since residency, it has done so mostly by the sweat of my brow than any actual increase in compensation. So sometimes I exclude salary increases from my calculation, but in the scenario below, I have assumed a 1.5% increase per year.
• You also have to guess how much return on your savings you expect before and after retirement. Before retiring, you'll probably have most of your money in stocks, which have a historical annualized yield of 10%. After retiring, you're going to be invested in much more conservative vehicles such as bonds, annuities, etc., so you're likely to get half that yield.

Enough suspense yet? We're almost there! But first, just to let you know how much I have saved for retirement as of June 27th, 2008:

• Roth IRA #1: $5,983.79
• Roth IRA #2: $2,394.58
• 403b: $42,160.58
• Saved so far this year, to be put into a SEP-IRA: $2,588.79
• Total retirement savings: $52,127.74

Oh, and some other savings in non-retirement accounts which, as I mentioned in Part Four, are as important as savings within retirement accounts:

• Brokerage account: $10,571.10
• Online savings account #1: $3,106.06
• Online savings account #2: $15,084.33
• Online savings account #3: $9,819.76
• Checking: $17,010.26--but I've got bills to send out next week, so don't get too excited.
• Total non-retirement savings: $55,591.51

FINALLY, here's my retirement calculator, screenshot courtesy of Dinkytown's Retirement Planner Calculator. They have a great selection of financial calculators, by the way.

Here's a retirement scenario assuming a life expectancy of 85:

And here's a scenario assuming a life expectancy of 95:

Hmmm, living to be 95 looks more like a blessing AND a curse, doesn't it? If I'm going strong at age 65, I should plan on working a few more years. Here's the impact of working until age 70, assuming a life expectancy of 95:

I could go on and on with these examples, but it gets tiring and not a little depressing after a while. What working on these examples has taught me is that I need to save somewhere between 11.5-15% of my gross annual salary in order to retire on 60% of what I make currently, which should be about $20,700-$27,000 per year. Obviously, I'm falling short of these numbers with my current savings plan of $1,725/month. Poop.

OK, now I'm demoralized so I'm not going to spend a lot of time on where and how to invest your retirement savings. The big personal finance websites, such as Bankrate and CNN Money's Personal Finance actually do a good job covering the basics of these issues. Every individual's approach to investing is a tad bit different, anyway, but the take home messages of this edition of MEconomics are the following:

• Yes, it's going to happen to you too; no one is excluded from aging.
• Dropping dead before you run out of money is the fate of only a lucky few. Plan for the long decline.
• Yes, you DO have time to think about retirement savings, and if you don't, you have to MAKE time to plan for your retirement. Remember, nobody is going to finance your extreme old age.
• Although a mediocre source of healthcare advice, the internet is a pretty good source of resources for financial planning. Try the sites I've linked above--I use them and think they're useful.
• Recognize that retirement planning is an imperfect process. However, the low likelihood of arriving at a correct answer is no excuse for failing to plan for the future.

Next week: MEconomics, Part Six: More Case Studies in Personal Finance.

Comments

[Theresa]

Hi CancerDoc,

Thanks for the input. You're right, I used 10% for the blog calculations because that number is widely used as the annualized stock market yield, but I often use 8% for my own calculations.

Very, very good points about using financial advisors. I do NOT use one and have educated myself instead. Of course, the results have not been perfect but at least they are my mistakes and not anyone else's, especially anyone I *paid* to act in my best interest.

I meant to get into investment vehicles--I use Vanguard funds primarily--but ran out of energy. My big message is: START SAVING. I should follow my own advice.

[CancerDoc]

I wandered onto your blog from another medical blog, and have enjoyed it. I, too, work in a rural community (Texas). It can be a challenge.

Due to too much training (PhD, etc), I did not start making a decent income until age 36. Once I achieved that, I thought I needed help. Unfortunately, I fell victim to a "financial advisor" who only recommended investments that were in HIS best interest. After that experience, I have tried to educate myself.

I don't want to panic you, but those calculators that you have used suggest an annual return of 10% -- that may not prove to be. Past performance is not a guarantee of future success. In the past 5 years (since I finally got out of debt but a mortgage), I have socked away a bit, but my return, with the recent drop in the stock market has been 1.6%!! OK, now is a bad time to be looking.

I think your post makes some very good points. No one is going to be responsible for you but you. It is also important that we educate ourselves about investments and savings -- relying on "advisors" make cost us dearly. Look at the cost of the investment -- the expense ratios on mutual funds, etc. Don't invest in insurance vehicles -- they cost too much to be true investments. Don't get me wrong, I am insured, but I don't look at my insurance as an investment. I do have part of my retirement money in a low cost annuity -- only because that is protected asset in the state of Texas (but that is another topic....).

Keep up the good blogging.