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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

  • 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
  • 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
  • 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
  • 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
  • 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
retirement non tangibles
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.
how to estimate
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
how to estimate9
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
the basics
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
the basics11
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
the basics12
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)
the basics13
The Basics
  • Food, housing, upkeep
  • Clothing
  • Medical expenses
  • Transportation
  • Entertainment and hobbies
  • Gifts and taxes
the basics14
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)
keep it real
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!
  • 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
  • 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!!!!!!
  • 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
retirement planning
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
retirement planning20
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”
retirement plans
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
retirement plans22
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)
retirement plans23
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
traditional ira
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
roth ira
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
roth ira26
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
deferred compensation
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
important message
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
sep ira
  • 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
sep ira32
  • 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
keogh plans
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
retirement plans34
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
simple iras
  • 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)
retirement plans36
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)
retirement plans37
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
  • 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
  • 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
your team
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
your team41
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