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Retirement - PowerPoint PPT Presentation

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Retirement. Thomas E. Nolan, MD, MBA Abe Mickal Professor and Chair of Obstetrics and Gynecology Director, Women’s and Newborn Services LSU-Health Science Center New Orleans. Objectives. At the end the presentation the participant should

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Thomas E. Nolan, MD, MBA

Abe Mickal Professor and Chair

of Obstetrics and Gynecology

Director, Women’s and Newborn Services

LSU-Health Science Center

New Orleans

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  • At the end the presentation the participant should

    • Understand what retirement needs are important in the planning process

    • How to achieve these needs by goal setting

    • Resources available in achieving goals

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  • Changed dramatically in the United States over the past 30 years

  • Individuals are living longer and are healthier

  • More individuals are retiring earlier, working part time or changing careers

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  • The never ending question is: HOW MUCH DO I NEED TO SAVE??!!

  • Variables at work:

    • What do you want to do

    • What are your responsibilities—children at later ages, invalid parents

    • Inflation, investments and longevity

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  • Standard answers are:

    • 70-80% of pre-retirement salary

      • Probably high for physicians because they consistently have higher incomes, with more discretionary income

  • Yearly withdrawals of 4, 5 or 6% of total invested assets

    • Assumes inflation numbers are stable

    • Assumes investment returns are stable

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  • Other driving forces are:

    • Expensive desires (travel, property, boats, grandchildren, etc.)

    • Age of collection of social security

    • Health care and cost—may have to wait until Medicare and pharmacy benefit becomes available to retire

    • Investment losses in 2000-2003 changed a lot of individuals plans

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Retirement (Non tangibles)

  • Comfort of spouse with significant other in the house (huge!!!)

  • To move or not to move, downsize

  • Boredom, no hobbies

  • Loss of perceived importance

  • First 2 years, plan on spending as much as pre retirement on travel, etc.

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How to Estimate

  • Multiple websites available to estimate needs:

    • Smart Money Magazine

    • Fidelity

    • Financial Engines (uses Monte Carlo simulations)

  • 2 most important variables: investment return and inflation

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How to Estimate

  • Time value of money concepts

    • What can you expect investments to return (usually range is 5-9% depending on stock: bond: cash holdings)

    • Inflation—remember the late 70’s and early 80’s. Usual range is 3-4.5%

    • Currently, 3-5 million is considered safe for physicians @ 200,000 per year

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The Basics

  • Evaluate where you are:

    • The family balance sheet, starting with the most liquid assets, moving to less liquid, and elements of cash flow (rental properties)

    • Value items at Fair Market Value, cost basis, and current return

    • Liabilities, especially long term (mortgage, boat payments, vacation homes), child support alimony, outstanding judgments

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The Basics

  • Income statement

    • Housing cost: Property taxes, downsize? Payoff mortgage?

    • Current costs on a monthly basis averaged over a year

    • Replacement items: cars, appliances, general housing costs

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The Basics

  • A critical appraisal of net worth, monthly and annual income needs

  • Rainy day planning

    • Hospital co-pays

    • Pharmacy costs

    • Natural disasters (hurricanes, blizzards)

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The Basics

  • Food, housing, upkeep

  • Clothing

  • Medical expenses

  • Transportation

  • Entertainment and hobbies

  • Gifts and taxes

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The Basics

  • Finally, aligning portfolio to meet these needs:

    • Annuities

    • Volatility of portfolio (can you ride out a bear market like 2000-2003??)

    • 100—age = % of equities – how valid is this assumption, especially with longevity (Fidelity uses age 92 for males, 94 for female)

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Keep it Real

  • Keep accounts separate if possible in case of divorce (community property)

  • Be generous with your spouse

    • If they stay at home, give them contributions

    • Makes you look nicer to the judge

  • Protect your backside!!!

  • 50% in most divorces go to the spouse anyway, so save the transfer tax!

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  • Major changes:

    • Defined benefit programs are declining in availability and funding

    • Companies changing plans or have reorganized because they can not fund defined benefit plans

    • Cost of retirees and benefits on every new GM car approaches $1700-2000

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  • Business has been responding by putting the burden on the employee with 401 (k) plans, or other plans

  • Less expensive programs (Cash balance, defined benefit plans eliminated) put the employee at risk

  • Therefore, you have to be your own best friend!!!!!!

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  • Government recognizes problems and is increasing limits for donation, number of potential programs, i.e., Universities now have defined, 403 (b), 457. Self employed SEPs, IRA

  • The Social security problem

  • Medicare and health care cost are sky rocketing

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Retirement Planning

  • Starts with your first practice and will continue through your career

  • Tax deferred vehicles enhance portfolio growth and should be the most important goal

  • As you age and your portfolio grows, diversification becomes more important

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Retirement Planning

  • Rules have changed substantially in the past 5 years

  • Recognition of poor savings, especially by the “boomers”

    • Many breaks for those individuals over 50 with increased contribution levels

  • More companies looking at employees to automatically “opt in” and if not, then must make a conscious effort to “opt out”

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Retirement Plans

  • Many corporations once had a defined benefit plan for employees

  • Additionally, they may offer a 401(k) with matching contributions

  • Non-profit organizations may offer a 403 (b) plan, essentially the same as a 401 (k), with limitations on investments vehicles

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Retirement Plans

  • Newer plans are being offered that allow high income earners to start their own plan, but it requires substantial and continued vesting for minimum of 5 years (i.e., 100,000 per year for 5 years)

  • When evaluation plans, make sure that employees are considered (or you can pay significant penalties and go to jail)

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Retirement Plans

  • Self employed physicians have choices (Stocks, bonds, annuities, mutual funds, real estate, CDs—no life insurance allowed!!):

    • IRA: Most physicians make more than Roth levels (150-160,000). Maximum contribution is $4,000 and earnings are not taxed until withdrawal

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Traditional IRA

  • May fund until age 70 ½, earned income

  • 10% penalty if withdrawn prior to age 591/2, minimum distributions after 701/2

  • Phase out for non-taxable contribution for 2005 is 70,000 joint, 50,000 single

  • May use post tax dollars

  • Grows tax free

  • Keep your statement—post tax dollars will not be taxed again

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Roth IRA

  • May contribute after 70

  • Contributions are after tax dollars, but after 5 years, money is tax free when distributed

  • No minimum distributions except beneficiary

  • 2010 may role traditional IRA to Roth’s but have to pay income tax on proceeds

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Roth IRA

  • Income limitations 150,000 joint 95,000 single with phase outs (160,000 joint, 110,00 single)

  • May use $10,000 for first house

  • Same contribution limitations as traditional IRA

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Deferred Compensation

  • 401 (k) and 403 (b) can be set up with employer matches and varying vesting programs

  • In most hospitals programs, it generally pretax dollars from employee (no match)

  • Plans can offer company stock, etc. in 401 (k)

  • Never have more 35% of company stock

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Important Message

  • Watch your roll over designation

  • In some jurisdictions, IRAs and roll over IRAs were “pierced” for judgments. 403 (b)’ s have not!

  • Therefore, if you roll over a 403 (b), roll it into a 403 (b) rollover account

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Contribution Limits 401 (k), 403 (b)

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  • SEP Plan if employees involved. SEP-IRA if sole proprietor. No IRS reporting necessary, individual maintains paperwork

  • You must keep original paperwork and all transactions in your possession

  • 20% of net earned income (after self employment tax) to maximum of $45,000 (net of $225,000 income)

  • 25% of employee may be given up to 45,000 with max same as IRAs

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  • No, I am not confused:

    • The employee gives the first part of IRA, i.e., the total allowed by year and age

    • The employer then contribute up to 25% to max of 45,000

    • Contributions are not mandatory by year, but must be “fair”

    • Employee is eligible if employed 3 years in past 5 years

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Keogh Plans

  • Very similar to SEP plans, but with more reporting requirements

  • Advantage used to be amount that could be saved, now same as SEP

  • Employees must be included after 1 year if vesting requirement or 2 if not

  • Less popular over past few years

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Retirement Plans

  • Profit sharing plans: 15% of overall pay up to $30,000 individual. Have become extremely complicated

  • Age weighted plan, money purchase plans and defined benefit plans. Becoming rare because of complex administrative issues, including taxation

  • Use third party administrator—these can be very tricky reporting and tax wise

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  • Contributions are limited for highly compensated employees (defined as > $100,000 annual salary)

  • Done on a 2 or 3% of income

  • Good for small business with < 100 employees and limited compensation (think construction, janitorial services)

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Retirement Plans

  • The worst mistakes are:

    • Not doing anything because the laws are complicated and may change: that’s why you get a CPA and financial advisor

    • Procrastination

    • Not funding your plan

    • Not including your employees (this really gets the feds and IRS upset)

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Retirement Plans

  • Using a cookie cutter approach that is sent to you by a banker, broker or insurance agent

  • Trying to be the investment manager —Would you trust your surgery to a stock broker?

  • Trying to outsmart the IRS—they always win

  • Ignoring reporting requirements

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  • Every marriage may become a potential divorce

  • Be fair with dividing assets when things are going well—it will make the separation phase of a divorce cheaper and easier to sort out

  • Attorneys make their money from acrimony, not fair settlements

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  • Consider using a financial planner early, in conjunction with the attorneys to better reach settlement

  • Accountants may also be helpful in dividing assets. In many cases, they have a better handle on your lifestyle by preparing your taxes

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Your Team

  • Accountant—tax planning and advice, not your best source for financial planning

  • Stock Broker—remember, he or she only makes money by trading and selling

  • Life and disability insurance— compare and consider buying on internet

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Your Team

  • Attorney—early on wills and power of attorney, later setting up trusts for estate planning

  • Financial advisor (quarterback): if possible, look for Certified Financial Planners (CFP) and use “fee only”—they are not selling products