Retirement

1
Retirement

• Thomas E. Nolan, MD, MBA
• Abe Mickal Professor and Chair
• of Obstetrics and Gynecology
• Director, Womens and Newborn Services
• LSU-Health Science Center
• New Orleans

2
Objectives

• 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

3
Retirement

• 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

4
Retirement

• The never ending question is HOW MUCH DO I
  NEED TO SAVE??!!
• Variables at work
• What do you want to do
• What are your responsibilitieschildren at later
  ages, invalid parents
• Inflation, investments and longevity

5
Retirement

• 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

6
Retirement

• Other driving forces are
• Expensive desires (travel, property, boats,
  grandchildren, etc.)
• Age of collection of social security
• Health care and costmay have to wait until
  Medicare and pharmacy benefit becomes available
  to retire
• Investment losses in 2000-2003 changed a lot of
  individuals plans

7
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.

8
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

9
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)
• Inflationremember the late 70s and early 80s.
  Usual range is 3-4.5
• Currently, 3-5 million is considered safe for
  physicians _at_ 200,000 per year

10
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

11
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

12
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)

13
The Basics

• Food, housing, upkeep
• Clothing
• Medical expenses
• Transportation
• Entertainment and hobbies
• Gifts and taxes

14
The Basics

• Finally, aligning portfolio to meet these needs
• Annuities
• Volatility of portfolio (can you ride out a bear
  market like 2000-2003??)
• 100age of equities how valid is this
  assumption, especially with longevity (Fidelity
  uses age 92 for males, 94 for female)

15
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!

16
Retirement

• 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

17
Retirement

• 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!!!!!!

18
Retirement

• 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

19
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

20
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

21
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

22
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)

23
Retirement Plans

• Self employed physicians have choices (Stocks,
  bonds, annuities, mutual funds, real estate,
  CDsno 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

24
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 statementpost tax dollars will not be
  taxed again

25
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 Roths but have
  to pay income tax on proceeds

26
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

27
Contribution Limits
Year lt age 50 gt age 50
2004 3,000 3,500
2005 4,000 4,500
2006 4,000 5,000
2007 4,000 5,000
2008 5,000 6,000
28
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

29
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

30
Contribution Limits 401 (k), 403 (b)
Year lt age 50 gt age 50
2004 13,000 16,000
2005 14,000 18,000
2006 15,000 20,000
2007 15,500 20,500
31
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

32
SEP IRA

• 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

33
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

34
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 administratorthese can be very
  tricky reporting and tax wise

35
SIMPLE IRAs

• Contributions are limited for highly compensated
  employees (defined as gt 100,000 annual salary)
• Done on a 2 or 3 of income
• Good for small business with lt 100 employees and
  limited compensation (think construction,
  janitorial services)

36
Retirement Plans

• The worst mistakes are
• Not doing anything because the laws are
  complicated and may change thats 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)

37
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 IRSthey always win
• Ignoring reporting requirements

38
Spouses

• Every marriage may become a potential divorce
• Be fair with dividing assets when things are
  going wellit will make the separation phase of a
  divorce cheaper and easier to sort out
• Attorneys make their money from acrimony, not
  fair settlements

39
Spouses

• 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

40
Your Team

• Accountanttax planning and advice, not your best
  source for financial planning
• Stock Brokerremember, he or she only makes money
  by trading and selling
• Life and disability insurance compare and
  consider buying on internet

41
Your Team

• Attorneyearly 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 onlythey are not selling products