Practical strategies to get you back on track when you’ve fallen behind in your retirement savings goals
Q: I’m 55 years old and I’ve been practicing emergency medicine for 20 years, but I don’t have much to show for it. My retirement portfolio is about $500,000. I’m getting tired of working nights and weekends, and I feel like I’ll never be able to walk away. What should I do?
First, you’re not alone. I’ve spoken to numerous physicians your age and older who feel the same way, both with regards to their finances and their shift work. After you turn 40, your ability to adjust to night shifts goes down significantly. Second, you’ve acknowledged that you’re behind in the retirement game, and that is a positive step. Whatever the reason that you’ve fallen behind, here are five steps you can take to transform your financial outlook.
1. Figure out what investment portfolio you need to retire
This is actually a very complex calculation with numerous variables, but it begins with getting a ballpark idea of what you think you’ll be spending during retirement, then factoring in Social Security payments (yes it will exist for you) and any other income (such as part time work). You then backtrack the shortfall and figure out the size of your retirement portfolio that will allow you to spend the desired amount of money.
For example, suppose you want to retire at age 65 with a $2 million investment portfolio (in future dollars). Then with your current portfolio and assuming a 7% annual rate of return, you’d have to save close to $75,000 annually.
2. Play catch up in your accounts
The question then becomes, how do you maximize your contributions? The good news is that above age 50, you’ve got more help from the government. If you are an employee, you can contribute a maximum of $17,500 into your 401k plan plus an additional $5,500 catch up contribution above age 50 for a total of $23,000. And remember your employer may match a portion of that.
As an independent contractor, if you’ve set up a SEP IRA, then you can contribute a maximum of $51,000 assuming your income allows you to. I suggest you open a solo 401k so you can split the contributions between employee and employer. That results in your ability to take advantage of the $5,500 catch up contribution on the employee side for a max contribution of $56,500 this year. If you’re truly serious about saving, then set up a defined benefit plan which may allow you to contribute far more than the limits above to reach your $75,000 annual savings goal.
You can also play catch up in a traditional IRA and contribute $5,500 (plus $1,000 catch up above age 50) for a total of $6,500. So if you contribute the max to a solo 401k and traditional IRA, that’ll bring you up to $63,000. The remaining $12,000 should be invested in a taxable brokerage account.
3. Balance the risk/reward equation
You’ve probably heard that as you approach retirement, you should cut down the risk in your portfolio. I think that rule of thumb is OK if you’ve built up a sizable retirement portfolio, but you’re behind, so you’ll need to take some risk. The right way to think about this is that if you’re committed to saving $75,000 a year, then the new contribution effectively creates a 15% cushion on the value of your portfolio. In other words a 15% drop from market losses is offset by the new contributions you add. The high savings rate allows you to take more risk even though your age doesn’t.
4. Be flexible
Realize that assumptions are just educated guesses and that it’s unlikely actual events will play out as you’d hoped. For example, suppose you achieve a negative return of -10% per year for the first two years (still assuming you contribute $75,000 annually and get 7% return after second year), then to get to your $2 million target you’d have to start saving about $100,000 annually. Unfortunately that’s a feat most EPs simply won’t achieve. So you could delay retirement by just one year, in which case you can bump up your savings by about $5,000 more annually and still get to $2 million.
From a career perspective, negotiate a lower salary with your group in exchange for not working nightshifts. This buys you more years to work and reduces the burden of contributing so much annual money to your retirement accounts.
And finally, another key to successfully achieving your retirement goal is speed. Twiddling your thumbs and hitting for par just isn’t going to cut it. You simply don’t have as much time as the fresh faces graduating from residency. Action, not procrastination, gets results.
Setu Mazumdar, MD, CFP® practices EM and he is the president of Lotus Wealth Solutions in Atlanta, GA www.lotuswealthsolutions.com
Final Step: Make Some Uncomfortable Adjustments
No one wants to be told to simply give up on some goals, but unlike the government you can’t just print money out of thin air to fund your fantasy retirement. So make a list of current big expenses you’ll have to cut down or eliminate. Here’s a start:
- If you’ve got kids in college and you’re footing the entire bill, get your kids off your leash and make them work to generate income. Or tell them you’re not sending them to an out-of-state public university or private college – in state will get you there just fine.
- If you have a mortgage, refinance it at today’s lower rates and consider NOT paying it down. That’s unconventional advice but your first priority is to shore up your tax deferred accounts not pay down the 2.6% 15 year fixed loan.
- Downsize your home even if you have a loss. The lower mortgage payment, lower maintenance costs, and lower property taxes can be used to invest instead.
- Move to a state with a lower cost of living or lower state income tax. Assuming you find an equivalent job and pay, this move automatically boosts your investment contributions