Retirement Isn’t Contingent On Having Retirement Accounts

Personal finance, as it relates to gaining financial security and being able to retire some day, can get quite complicated for physicians. With nearly 1,000,000 licensed physician in the USA, we can generate quite a bit of income for various groups such as banks, insurance salespeople, brokerage firms, lawyers and financial advisers.

This post is a simple one, I could summarize the entire thing by saying that you do not need a retirement account in order to retire or become financially independent. So let’s delve into it.

Defining Retirement

Retirement is a bit of a contentious term so let’s focus on the function it’s supposed to serve, namely allowing the person to have more control over their time and have the assets/means to support the lifestyle of their choice without needing to rely on a job.

In practice, a person who wants to retire or not have to earn any more income must be able to pay for their food, housing, healthcare, transportation and whatever else they desire beyond these basic necessities.

Either they need to save enough money in order to pay for all their anticipated future expenses or they need to figure out a way to not have to ever pay for them again. A steady income stream from an investment could offer the money needed to pay those expenditures, while cutting out the majority of one’s expenses could drastically diminish the need for an income altogether.

Traditional Retirement

In a traditional retirement we save and invest a portion of our income every month and pay down all of our debt for several decades. Most doctors also try to vest in some sort of pension plan and get their fair share of social security income. We work until we’ve had our fill or cannot work any longer and then we start living off of those investments and retirement incomes.

Physicians will often start preparing for their retirement the decade before their actual retirement. According to my HR department, about 25% come back to work for their medical group as per diems – and if they were in good standing, they get a much better hourly wage than per diems get.

With the help of a financial adviser, the physician will come up with a strategy to minimize taxes and fees when it comes to drawing down from their retirement accounts. It’s often quite complicated by that time, with most of these being present:

1. Pension
2. Social Security
3. Annuity
4. IRA
5. Roth IRA
6. 401k/403b/457
7. HSA
8. Real estate
9. Business
10. Private brokerage
11. Cash savings

Retirement Without Retirement Accounts – Alternative Retirement

A retirement account is any account which allows the physician to set aside money while minimizing or deferring taxes. You cannot avoid taxes with retirement accounts, at least not in a worthwhile sum – you are only able to defer paying those taxes into the future, when your expenses are likely lower, possibly putting you in a lower tax bracket, hence saving you money on taxes.

The advantage of retirement accounts are that they allow you to pay less tax on your income now, which means you can take that extra income and put it towards either more investments or even better, towards paying off your debt. And because of the power of compounding interest, the more money you can set aside to grow in investment accounts early on in your life, the more time they will have to grow.

Yet another advantage, investments or savings in a retirement account will grow tax-deferred. If your xyz investment goes from $50/share to $100/share, you don’t have to pay taxes on the dividends or growth until you take the money out of the account. However, in a regular account, any such gains or dividends would be taxed annually.

Why The Emphasis On Retirement Accounts?

Here comes one of my terrible analogies – brace yourself. From my experience with my own patient population, those who have gym memberships are in better health/shape than those who don’t. However, health has nothing to do with a gym membership. In this example, the gym serves as a recognizable blip on a person’s health-graph.

I would say that my healthiest patients are those who did everything in moderation. Never too sedentary, never too stressed, never drank too much and walked/biked/ran/swam a few times a week. They ate a better than average diet but not by much.

A physician who is internally drive, self-directed and is able to capitalize on economic changes, will likely be incredibly wealthy in their later years – completely irrelevant of whether they took advantage of a retirement account or not.

In fact, money which is invested in retirement accounts can’t be easily accessed in order to invest it in businesses or real estate. For the most part, it can be invested in fairly vanilla investments such as mutual funds.

Investing In Private Brokerage Accounts

I have a friend who is a very savvy business woman. She always says “I don’t like and don’t trust retirement accounts.” I totally get it and I wish that she would never put her money into one, but out of guilt/fear she puts a little bit of money into a SEP IRA.

Most of her money is held in cash, in savings accounts, and in private brokerage accounts which her investment adviser invests for her. Her goal in retirement is to use whatever she needs from these accounts until it runs out.

So, you can skip the 401k, Roth IRA, traditional IRA, SEP or backdoor Roth or whatever other kinds our financial system comes up with every few years. You will pay the taxes on the money you make now instead of deferring the taxes into the future. You then take whatever extra money you have every month, after paying for your overhead, and you can invest this in a private brokerage accounts.

In fact, you can buy all the same investments which are offered within traditional retirement accounts, and more. You can buy bonds, stocks, index funds, actively managed mutual funds, etc.

Keeping Your Money In Cash

Keeping your savings in cash means that you keep it in a savings account – not dollar bills under your mattress. Keeping it in cash, literally, could be an option but it requires some serious foresight. I won’t get into it here but there are some really interesting online resources for those who want to keep their money in tangible currency.

Savings accounts could be traditionally shitty savings accounts at your local bank with horrible returns, or they might be CD’s, or money market accounts.

Spending A Lot Less Money

This section deserves a lot more than a few paragraphs. However, if you decide or choose to spend a lot less money than the traditional household in order to support your lifestyle, by nature of our economy and its fiat currency, you will be able to live perfectly fine on your savings alone, without ever needing a retirement account.

You likely will still have access to your social security income if you have worked long enough (built up adequate credits). If you live on very little then your social security income alone may be all you need. SS income is also indexed to inflation, unlike most pensions, meaning that the value will remain the same even if the dollar amounts vary.

Living On Your Own Custom Pension

If you have heard about an annuity then you know where I am going next. You can annuitize a sum of money in order for it to return to you a fixed month/annual payment until your death or until a certain age.

I can take a sum of cash, turn it over to an insurance company who will invest it in their own portfolio and in turn give me a monthly amount. There are a lot of details to consider. Annuities can be set up in all sorts of ways and can be a brilliant tool for financial planning.

Yes, there are some really horrible annuity products out there – just like there are some really horrible doctors out there… and some really horrible Mexican food.

Here is a fun (?) annuity calculator to play with from BankRate. You can fill in any 3 fields and it will calculate the other fields for you. You can also visit immediate annuities in order to figure out how much you could get every month if you traded a sum of cash for that benefit.

Acquiring Everything You Need And Want Now, Avoiding Inflation

Just as you can cut your overhead drastically in order to ensure that you never run out of money for your retirement, you can also buy the last car you’ll ever own. You can buy the last home you will ever own and grow your own vegetables in your own garden. How ‘radical’ do you want to get with it – it’s up to you.

The reason the above method is so powerful is because the value of money goes down with time – it’s buying power decreases, it inflates. That’s how money is designed to function in our society.  

Inflation can prove to be a disaster for a person living on ‘fixed’ income or on a portfolio of savings which doesn’t keep up with inflation. If that person has to buy a car 20 years from now then they will have to pay a much higher sum of money for it. Same goes for a house or any other major purchases.

Other things which can inflate greatly are property taxes, cell phone prices, cell service, home internet, healthcare, food prices, cost of fuel and the cost of travel. The more you can protect against these items inflating, the less exposure you will have to inflation.

You can read more on controlling your personal rate of inflation here.

Using Retirement Accounts Is Going To Make You Richer

From everything I have researched, if you use a retirement account then you are likely to have a larger stash during your older years. No, this isn’t guaranteed, but statistically, comparing 2 physician households with very similar situations, the one who takes advantage of the tax-deferred retirement accounts will have a higher net worth than the one who decides to not use retirement accounts.

There are all sorts of graphs out there that show how a high earning employee who puts money away in retirement accounts will have a lot more wealth by way of lowering their taxes, having their investments grow tax-deferred and minimizing portfolio risk through conservative low-fee index fund investing.

It is undoubtedly true that if you work a traditional physician’s career path then you will be quite well off by following the traditional retirement savings model. If that model meshes well with you then you should pursue it, if it doesn’t then you may have to take a slightly less conventional path towards retirement – and that doesn’t mean you will be any less successful.

Retirement Options

1. Contribute to retirement accounts and invest in mutual funds.
2. Keep your money in CD’s and bonds, outside of retirement accounts.
3. Keep your money in cash/bonds/money market accounts within retirement accounts.
4. Invest your money in businesses.
5. Invest your money into a real estate empire.

Doctor Type 1. Most professionals will invest a minimal amount in an S&P500 passive index fund which they consider as their ultimate safe base. If all goes to hell, they will always have this money to use or build up from. These doctors often have their own medical practice.

Doctor Type 2. Some professionals will invest all their money in index funds because they never want to worry about what they should do with their money, when they should sell, when they should buy and keep up to date with economic trends. These are often employed physicians who rely on pensions, retirement accounts and social security to build their retirement income portfolio.

Doctor Type 3. Then there are the healthcare professionals who have zero faith in the securities market. Mutual funds, stocks, bonds, none of these make sense to them. They are their own best investor and company to invest in. They own a broad portfolio of real estate, businesses, side gigs and have a lot of faith in their own abilities.

So which type of doctor can you relate to more? Perhaps once you can determine this for yourself, that’s when you will know where to put your money without worrying about exposing yourself to unwanted risk.

Would it be okay to keep your money in cash in the meantime? I don’t see it as a big risk to keep your money for a short time in cash until you know what kind of investor/saver you are or want to be. Keeping money in cash for too long might expose you to too much inflation risk.