Planning Your Income-Streams For Retirement
I decided to write this post because it’s something I would want to know if I was getting close to retiring. I realize that many physicians love what they do, they have no intention of retiring anytime soon. Yet some are thinking of alternative careers or cutting back or even quitting medicine altogether.
Regardless of which category you find yourself in, it’s important to know how you will fund your lifestyle in retirement. In this post I want to list various income sources that physicians will likely have in retirement.
I can tell you that the majority of retired doctors agree that they should have retired sooner, they saved way more than they needed and that they ended up spending far less than they anticipated in retirement.
Most say that the first couple of years were the most spendy, owing to a lot of travel, purchasing toys and helping out family. After the first 2-3 years the expenses were fairly predictable.
By age 50 most professionals start taking retirement seriously and scramble to find a financial adviser or learn about what it takes for them to retire by their desired age.
Many will sit down with their CPA for investment advice or find a shitty financial adviser through a sales-luncheon who uses the name of some big firm to give themselves some clout. The CPA knows how to do your taxes, they aren’t experts in investments and retirement planning. And the big-firm financial adviser is good at one thing, selling you shit!
Hopefully the professional didn’t wait until age 50 to start planning for retirement and that they did their homework to find a worthwhile financial adviser.
The main question the soon-to-be-retiree will be asked is how much they will anticipate they will spend in retirement and how much of that expense can be replaced with income outside of their full-time job.
Most American doctors will have the following by the time they retire:
- social security
- dividend income from investments
- sales of appreciated investment income
- and possibly a pension
Supplementally they may have other investment income; some of these aren’t as common but I’m sure financial advisers come across them quite regularly.
- whole life policy payout
- inheritance income
- income from an annuity
- income from a sale of real estate
- income from sale of a business
- income from an active business
- rental income from real estate
Now, back to you, what portion of your income comes from your paycheck and how much comes from anything in the categories above?
Most of us will probably work for several decades and save a portion of our income every year as we pay down our mortgages and student loan debt. And when we’re closer to retirement age we start freaking out just a little more every year, often increasing our income so we can put more into our retirement savings. Or we may start cutting back on expenses to increase that savings rate.
If you’re in your late 30’s like myself then you likely have some student loans left to pay off, you likely have some money invested on Wall Street, some money in savings accounts, a primary residence and possibly a condo or home you’re renting out on the side.
Maybe you have a couple hundred thousand dollars invested which should be making you a dividend rate of 2% annually. Let’s say you had $250k saved up, this would gross you about $5k of passive income per year. You’re probably too young for social security but maybe you have your own medical practice, building up equity in it for every year that you operate it.
Work hopefully is fun, something we’re excelling at day by day. It shouldn’t be thick mud we’re wading through. Naturally if it’s something we enjoy then it’s okay to just go with the flow, make some money, spend some of it and save some of it. But we don’t exactly know when that date will come when we want to retire.
It’s not like the 1970’s when workers were expected to retire in their mid 60’s. Now we have the option of working til we drop or retiring as early as age 35.
YOUR Various Incomes In Retirement
Okay, let’s list all the various incomes that you could and probably should have. Every household is a little different so one thing will make more sense for one person than another.
Using Your Savings
This gets overlooked but you likely will have some cash once you’re ready to pull the plug on your job. Keeping an emergency fund is no longer a high priority since you are retired and should have adequate access to funds.
You might be too young to take distributions from a pension or from social security. In this case you simply use up your savings to get you through the first few years of retirement.
If you spend around $60k per year and have $150k saved up then you could get through the first 2 years of retirement with some left to spare. Who knows what will happen in those 2 years. You might even find something to do which you love, making you a decent bit of income on the side.
INCOME FROM MUTUAL FUNDS
By the time you near your desired retirement age you likely will have a decent portion of your savings invested in stocks, bonds or mutual funds.
It’s not hard to predict how much these investments will make you. Sure, there will be bear markets and there will be bull markets. But in the end a diversified portfolio goes up – it does so because the market demands it. If these investments don’t make money in the long-run it’s unlikely that the demand for them will continue to exist.
The dividends from such investments alone should get you around 2% per year. It may not seem like much but think about it, your overall investment is growing through appreciation of the stock and you are investing in companies which you hopefully find worthwhile. All the while you can enjoy a 2% kickback from your investment year after year.
At $1 million you would have around $20k to spend. It isn’t much but if you need $60k a year then you are already 1/3rd of the way there.
Doctors working for larger medical groups will likely enjoy the benefit of having a pension. Those in private practice may set up something similar, however the traditional pensions are a lot more lucrative for the retiree.
Nowadays pensions are getting converted over to cash balance plans which are less costly for medical groups to operate. These are wanna-be pensions, not quite as desirable but still nice to have.
It’s hard to put away more than $53k a year right now in retirement accounts per individual. Even though the IRS caps retirement contributions at $53k (in 2016) it is actually possible to put away more than this but that gets a bit complicated for this discussion.
With 401k’s, IRA’s, Keogh’s and money purchase plans it’s very easy for a doctor to hit the $53k a year of retirement savings. And hopefully if the money in these is wisely invested then it’s quite likely to have a compounding interest of somewhere in the 4-6% range a year.
These accounts are harder to access if you are <60 years of age but not impossible. Your actual income from these accounts comes from either the dividends paid to you or by selling some of the appreciated funds.
Real Estate Income
A paid off home can be your primary residence or it can be a source of income. Either you sell the appreciated property and spend the profits or you generate a monthly cash flow from the rental of it.
Being willing to downsize is a big plus for doctors. Most of us live in larger metropolitan areas close to hospitals, a prime location for homes.
Downsizing doesn’t mean that you have to go from a 3-bedroom house down to a 1-bedroom condominium. You can move from an expensive neighborhood that’s close to your work to a place further away that’s more affordable.
If you are willing to move from one state to another then you essentially gave yourself a raise by either benefiting from the sales of your appreciated primary residence or by lowering your overall monthly expenses in the cheaper cost-of-living location.
I don’t know many doctors who own their own practice. The ones that do aim to sell it once they enter retirement and using the proceeds towards their retirement spending.
Interestingly, my friends who are trying to buy medical offices tell me that the docs who own them pretty much refuse to let go of them. They put them on the market and after some negotiations the seller gets cold feet and they decide to hold onto it. Interesting.
As you get older with more savings you might decide that buying a business is the right next step for you, hoping to run it with minimal involvement, allowing you a nice income with less work on your part.
There are doctors who don’t even get into business-investing until they retire. They suddenly decide to become silent partners or invest in chain stores etc. So keep that option on the table.
I like to throw this in there. Busy physicians who spent years working their asses off don’t do too well if they are left with a ton of free time. Having a side-gig that makes an income is a great way to reduce their need for income in retirement.
If your overhead is $5k/month and you are bringing in $2k/month you suddenly reduced your income-need by 40%.
The ability to do this gives you a few great advantages:
- less reliance on your retirement savings should they underperform for a period of time
- ability to weather tough economic times
- not having to save quite as much for retirement
- not having to work quite as long before retiring
I’m making side-income writing for other websites and consulting for a couple of companies. How much am I making? It all depends on how much I want to work – the flexibility is wonderful.
Why Talk About Retirement Income Now
The best time to talk about retirement income is right now! Let’s say you are 38 years old. Now imagine yourself being retired. You have decided to pretty much stop working, not caring if your medical license expires, not caring to live close to a medical center. So where would your income be coming from?
I’m a nerd so I can actually picture myself exactly in that situation. I know I want something steady, I don’t care what it is. Something that’s fairly hands-off, that generates a base income for me without much effort on my part.
By the time I’m ready to completely pull the plug I will have the follow income-trio:
- a piece of real estate
- a little side-gig
- income from a business
The real estate will probably be a former primary residence of mine, the side-gig will be online consulting or writing and the business will be something health related – either an urgent care or laser hair clinic or dental office.