When one of my clients retired, he initially underestimated the amount of money he could spend in retirement.
While working, he paid a number of expenses from the practice – cell phone bills, landscaping maintenance, internet fees, medical insurance, and car repair expenses. After retiring, at first, he didn’t realize these expenses were a part of his ongoing personal finances – leading to tens of thousands of dollars in expenses he hadn’t counted on.
Once a dentist sells his or her practice and retires, they have three financial priorities:
- Establish a budget and monitor your spending;
- Create a sustainable, tax-efficient withdrawal strategy to meet your cash flow needs; and
- Treat their well-being and health as an asset and pursue joy.
Adjust Your Budget to Fit a Lifestyle You Can Afford
I ask all retired dentists to review their spending for expenses that will continue once the practice has been sold. Then, create a budget that reduces or even eliminates spending on certain items.
For example, I’ve had clients who paid their adult children’s cell phone and auto insurance bills for years since these expenses were lumped into their monthly fees. These are certainly the kinds of expenses an adult child can handle.
Others need to examine their lifestyle and consider scaling back expenses made possible by a dentist’s regular high income. This is especially true for those who spent even more in recent years due to a strong stock market that produced above-average investment income.
For example, one client and his spouse have several friends who enjoy overseas travel, expensive hunting trips, and own boats – all expenses that were easy to afford during their working years. But now, if they continue, these costs will eat into their budget in retirement. Be sure to review your lifestyle expenses with your advisory team to determine if adjustments to your annual expenses are necessary.
You should have enough cash in the bank to cover several months of your retirement expenses so you don’t have to dip into investments to cover an unexpected, major expense.
Next, Create a Sustainable, Tax-Efficient Strategy to Withdraw Money in Retirement
An investment portfolio has two main goals: First, the ability to pay for any near-term income needs – this could be a new car every few years or major renovations to your home; and second, growing enough to last for 20 or more years in retirement.
It’s critical during the first several years of retirement to manage your investment portfolio and the amount of funds withdrawn. The percentage of assets withdrawn is important to ensure you do not run out of money while in retirement.
Bill Bengen, the creator of the “4% rule,” suggests that a retiree with a diversified portfolio of 60% stocks and 40% bonds should be able to sustainably spend 4% of their initial portfolio value and increase the distribution to keep up with inflation each year without much concern about running out of money.
In addition to maintaining a diversified portfolio, you don’t want to take out too much money or be forced to sell too many shares if these investments are not performing well. If a high proportion of negative returns occur in the early years of retirement, a poor withdrawal strategy may reduce the amount you may be able to withdraw over your lifetime.
There are a few strategies within one’s control that can be utilized to mitigate risks. Here are a few strategies to consider:
- Utilize a “dynamic spending” strategy which involves adjustments to annual spending due to changes in market investment returns and inflation;
- Temporarily turn off the reinvestment of dividends, income, and capital gain distributions which can help to generate cash income from the investment portfolio;
- Consider the sale of any nonproductive assets such as land which come with ongoing expenses such as real estate taxes;
- Consider creating other forms of income such as renting out a second home during the months in which you are not occupying it; and
- Explore the possibility of initiating other forms of income such as Social Security benefits earlier than previously expected.
Everyone wants to avoid outliving their assets in retirement. They don’t want to have to worry that 10 or 15 years down the road, they won’t have enough money to pay for basic needs or enjoy the small pleasures in life.
By following our first two priorities, any retired dentist and their family should feel more comfortable focusing less on whether they have enough money and, instead, focusing on spending more time with those that you love and cherish and engaging in the activities that matter the most to you!
If you are preparing to sell your practice a need a financial plan in retirement, feel free to contact me at BCovert@mcgilladvisors.com. We offer a free consultation to discuss how a comprehensive financial plan can enable you to enjoy retirement.