By Robert B. Wolfe, CFP

Published July 2001

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In order to determine what assumptions you should use in your own retirement plan, ask yourself the following questions:

How much will you be able to save once you have an "Empty Nest?" Many physicians plan to set aside more money for their own retirement after their children have been raised and educated. Often, however, these well-meaning plans never come to fruition because of increased spending patterns as life progresses. Other physicians have their best intentions thwarted when they encounter unforeseen responsibilities, such as paying for a child’s advanced degree, caring for sick or elderly patients, or supporting grown children. A recent survey conducted by Money Magazine determined that approximately one in three retirees provide financial assistance either to parents, children or grandchildren.

A better strategy would be not waiting until your children "leave the nest" to start your retirement plan contributions. Keep your lifestyle in check and begin a disciplined savings plan early. Even if this means setting aside what you would otherwise consider a paltry amount, start now! Turn your saving and investment programs into good habits. Also, make regular and systematic increases to the amount you invest, especially when you receive a pay raise, and take advantage of tax-deferred retirement plans.

How much income growth are you expecting? Physicians sometimes overestimate their future income potential or believe, at the very least, their income will steadily increase throughout their careers. Unfortunately, the medical profession is frequently unpredictable, at best, and many underlying circumstances could cause a physician’s income to remain fixed, or even worse, decrease. Furthermore, a career change, a costly divorce, or disability could immediately and/or permanently reduce your earnings growth potential. Base your retirement plan on your current earnings, but if you feel compelled to factor in a growth rate for your income, make it a conservative estimate.

What long-term return can you expect from your investments? Attractive returns over the last decade have substantially distorted many investors’ expectations. Investors cannot prudently assume the next 10 years will deliver the same combination of excellent stock market performance and low inflation. In addition, physicians who delay their preparation for retirement will force themselves into the unenviable position of needing to invest more aggressively than would otherwise have been necessary.

Again, establish an overall investment plan early in your career, diversify your portfolio, and maintain realistic performance expectations. Buying relatively safe, blue-chip stocks as you initiate an investment plan, then holding on to them over the years, will provide much more security and likely as much gain in the long run as taking wild risks on "get-rich-quick" stocks later in life. You’ll end up with fewer gray hairs, too.

Are you investing to get to or through retirement? Investing for growth should not end the days you see your last patient. If you stop paying attention to your nest egg, inflation will dramatically and simultaneously reduce your purchasing power and quality of life. Admittedly, you may want to invest more conservatively upon retirement, but it is not a necessity. In fact, as long as you remain financially active, the most important determinants of the level of risk you need to take in your investment portfolio are your specific financial goals and objectives.

Determine your goals and objectives, then construct an investment portfolio that will give you the highest likelihood of reaching your goals with the least amount of risk along the way. Even in retirement, continue to watch your investments for opportunities to maximize their potential.

Where will your retirement income come from? Some physicians overestimate the contribution their pension plans and Social Security will make towards their overall income requirements in retirement. For the most part, both of these income sources are fixed benefits, which will not buy the same level of goods and services on an inflation-adjusted basis year after year.

It is important to take steps now to minimize your reliance on these fixed benefits. Instead, plan to grow your investable assets to cover inflation-adjusted income needs in retirement. Endeavor to create an investment portfolio that pays you in retirement while continuing to grow in value.

Will your expenses decrease in retirement? One of the most ridiculous "rules of thumb" I encounter is the contention several personal finance magazines make, that the average person will need only about 70 to 80 percent of his or her pre-retirement income to maintain their desired standard of living in retirement. Why? Because each person’s situation is dramatically different. The thinking is that people will live on less after retiring because they no longer have workplace expenses like business clothing, daily travel and costly lunches to contend with. In reality, retirees have more time to pursue the activities they may have previously only dreamed about and as a result, many of the retired physicians I work with have actually spent more in retirement than they did while working. In fact, several of these physicians actually spend in excess of 150 percent of their pre-retirement income once they are fully retired!

Although they may have been diligent savers while working, once these physicians retire, many of them start taking advantage of things like extensive travel opportunities, or they indulge themselves in expensive hobbies like sailing, antique cars, or even something as simple as golfing on a daily basis. Still others, who fell in love with an exotic (expensive) location like Hawaii or the Caribbean, decide to purchase a retirement property there.

When planning for retirement, scrutinize your financial goals very carefully. Spend time with your spouse, or anyone else who may figure in your plans, to determine what the "perfect" retirement looks like and how much you feel it really will cost. (I would be very surprised if it is even close to being as low as 70 percent of your pre-retirement income.) Make realistic projections of what you can afford, and don’t forget to consider inflation as a potentially limiting factor.

How long do you expect to live? Of course this is impossible to answer conclusively, but it should give you cause to contemplate your life expectancy, if only for a moment. With the average life expectancy in this country dramatically increasing over the last century and all of the medical advances and breakthroughs that continue to occur, it is imperative to plan for accruing the financial resources to spend at least one-third of your life in retirement.

Develop your retirement plan based on the assumption you will live 30 percent longer than the average life expectancy dictate. For example, if the life expectancy for your particular sex, racial background, and personal lifestyle is 75 years, create your retirement plan as if you are going to live to 98 (75 x 1.30). This may appear overly optimistic, but you must remember that life expectancy is nothing more than the average age that someone born into a certain demographic group is expected to live. Be prepared for the best possible scenario.

Once you answer all of these questions and determine which assumptions are prudent to use in your retirement plan calculations, you will be ready for a successful, rewarding and enjoyable retirement.

Robert B. Wolfe, CFP is a financial planner with Capital Planning Group based in Fort Lauderdale, FL.