Yes, you can retire early

Yes, you can retire early =

To make sure your nest egg will be big enough by the time you need it, take these steps.

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Oct 22, 2004 <= /p>

Medical Economics

If you're hoping to retire sooner ra= ther than later, it's not hard to understand why. Malpractice worries, managed care hassles, ridiculous Medicare reimbursements, endless paperwork, and = long hours may make you wonder why you wanted "MD" or "DO" after your name in the first place.

What's more complicated, however, is figuring out if you can afford to leave your practice behind. To ensure that a nest egg lasts for at least 30 years, many financial advise= rs suggest that a retiree withdraw no more than 4 percent of his or her retirement assets each year. If you hope to escape medicine at a fairly y= oung age, however, you should plan on pulling out even less, warns William Bernstein, a neurologist and a principal of Efficient Frontier Advisors, a money management firm in Eastford, CT. "Anyone who's thinking about retiring before age 60 should live on just 3 percent of retirement assets= per year," he says. (Both calculations assume that at least half of your assets will remain invested in stocks throughout your retirement.)

With those guidelines in mind, your = first step should be to figure out how much you're apt to have saved by your ta= rget retirement date, and how much you could realistically afford to withdraw annually. How does that compare with the amount you'd like to spen= d in retirement?

When doing the calculations, don't overlook the big elephant sitting in the room—income taxes. Withdra= wals from your tax-sheltered accounts are subject to federal income tax of up = to 35 percent, plus any applicable state taxes. The only exception is the Ro= th IRA, which allows tax-free withdrawals.

If you need help running your retire= ment projections, you can get software designed specifically for that purpose = at the Web site of Analyze Now (www.analyzenow.com ), or use a general personal fin= ance program such as Quicken.

If your nest egg is too skimpy Suppose your savings will fall well short of= the amount you should have set aside before retiring. In that case, you may h= ave little choice but to delay retirement—at the very least, you'll hav= e to take serious steps to save more and spend less. Here are some ways to sta= rt:

Boost your retirement contributio= ns. Once retirement plans are established, many physicians forget to increase their contributions as the years go by. Each year you should examine whether you can boost your savings in tax-sheltered accounts. You can contribute, for example, up to $15,000 to a 401(k) in 2006, a $1,000 jump from last year.= A physician who's 50 or older can stash away an extra $5,000 this year. In 2006, a doctor 50 or over can contribute a total of $20,000. Sock away ev= ery cent you can.

If you have an IRA, fund that, too. = You'll qualify for a Roth IRA only if your adjusted gross income doesn't reach $160,000 (assuming you're married and filing jointly) or $110,000 (if you= 're single); but there are no income restrictions on a nondeductible IRA. For either type, you can kick in $5,000 in 2006, and if you're at least 50 you can add $500 more.

Make sure your practice's retirem= ent plan is managed well. A poorly managed plan will undermine your effor= ts to save more. All too frequently, the professionals handling a practice's 401(k), profit sharing, or defined-benefit plan are mediocre at best, says Linda Gadkowski, a certified financial planner at Beacon Financial Planni= ng in Boston and Cap= e Cod. Often the stockbroker or attorney who set up the retirement plan ends up managing the money, whether or not he has any experience with portfolio management. Or he may give the job to someone with whom he has business t= ies and the physicians may not know about it. Gadkowski knows of one practice where a pediatrician, who was an amateur investor, picked the investments himself. Over the 20 years when the doctor managed the plan, she says, it returned just 6 percent, before factoring in fees.

When Gadkowski's husband, an anesthe= siologist, was thinking about joining a group practice years ago, she talked him out= of it because a stockbroker was managing the practice's retirement assets poorly. The other physicians seemed unconcerned about the group's lacklus= ter investment returns, but they enjoyed being wined and dined by the broker twice a year. Walter Gadkowski ultimately decided to subcontract with the group and he invested his retirement contributions elsewhere.

If you have your own practice and yo= ur retirement plan's returns are disappointing, solicit bids from several investment firms before choosing a new one to manage the plan's assets. You'll want to ask about their investment approach, fees, and qualificati= ons. Have each firm give you a sample portfolio containing investments similar= to the types your practice could expect, and ask what sort of returns other portfolios with those assets have generated.

Each firm should also give you a cop= y of its Form ADV, which is filed with the SEC or state securities regulator. = The form includes background on fees, the education and business background of members of the firm, lawsuits and arbitration proceedings, and any potent= ial conflicts of interest. Finally, make sure the firm you choose writes an investment policy statement for your plan; it should contain the investme= nt goals, guidelines to be followed, and a review process.

Ease out of the working world. If you just can't afford to quit working cold turkey, you might consider sca= ling back your responsibilities rather than retiring, advises Kathleen Kee, director of financial planning at Pacific Investment Advisors in Portland, OR. Besides reducing the amount you need to withdraw from your nest egg, you = may still qualify for healthcare benefits and retirement plan opportunities if you work enough hours. Moreover, it allows you to transition into retirem= ent more easily.

Easing out of work could mean simply cutting back your practice hours. Or if you need a change of pace from patient care, another option is to shift into a different type of work. S= ome doctors do drug research for pharmaceutical companies. Others review long-term care applications or insurance claims. Additional possibilities include acting as a case-history reviewer for the Social Security Administration or teaching. And some physicians fill in for solo practitioners who are on vacation.

Cut back spending. "It's= much more efficient to scale back your lifestyle than to accumulate the capita= l to support it," says John Henry McDonald, president of Austin Asset Management in Austin, TX.

For some physicians, an obvious plac= e to start will be their homes. If the kids are long gone, keeping a 3,500-square-foot house that generates high maintenance bills and onerous property taxes may be impractical. Buying something cozier could free up = lots of cash. And if you're still giving those grown kids cars, cash, and other perks, it's time to stop.

Not all budget trimming needs to be painful. As you reduce your work hours, you can also slash your insurance costs. Gadkowski's husband, for instance, was able to significantly cut h= is malpractice coverage because he now works part time. Also re-examine how = much disability coverage you need, once you cut back on your hours.

Keep in mind, though, that your best efforts to scale back won't work if you don't also convince your spouse t= hat it's necessary and enlist his or her cooperation.

Other ways to assure your escape<= span class=3Darticle-articlebody> Even if you're basically on track for early retirement, you can take some additional steps to fine-tune your finances= and make the transition as smooth as possible:

Begin planning five years in adva= nce. Giving yourself a head start will help you prepare without panicking, because yo= u'll still have time to make any additional financial or lifestyle adjustments that may be necessary. "Most doctors I know don't do enough cash-flow planning," says Steve Kanaly, vice chairman of Kanaly Trust Company = in Houston.

One of your top goals during this transition period should be to aggressively pay down your mortgage, sugge= sts McDonald. Although you'll shrink and eventually lose your annual tax deduction for mortgage interest, in exchange you'll enjoy greater financi= al security. Not only will you build home equity faster, but depending on st= ate law, part or all of that home equity will be protected from creditors.

Invest tax efficiently. The a= ssets in your tax-sheltered retirement accounts aren't the only ones that matte= r. Dodging unnecessary taxes on any investments you hold outside those accounts will also help you stretch your retirement dollars. One option i= s to tuck your taxable cash into low-cost, tax-efficient mutual funds. Lipper, which generates mutual fund statistics, estimates that the average stock = fund investor loses up to 24 percent of yearly return to taxes, while the typi= cal bond fund investor loses up to 45 percent.

Vanguard, Fidelity, and T. Rowe Pric= e are among the fund families that offer no-load, tax-managed options. Exchange-traded funds, which resemble index funds but trade on exchanges = like stocks, are also excellent candidates for taxable accounts, because they rarely spin off capital gains distributions.

Spread the income tax burden. Even if you're not retiring as early as you'd like, it may pay to start withdrawing cash from your IRA at age 65 or earlier, suggests Kee. "= It reduces the amount that must be distributed each year, and spreads the ta= xes over more years." In addition, reducing the balance of your retireme= nt plans may have estate tax benefits, she notes.

Get help if you need it. Doct= ors who make financial mistakes, says Kee, are often the ones who won't ask questions. "Physicians don't want to show that they lack expertise, = but they shouldn't worry about it," she says. "No one expects them = to be experts in all areas of their lives." So if you need help managing your investments so they'll last as long as possible, or if you're wonder= ing whether you need to make other changes to ensure a comfortable retirement, don't hesitate to consult a financial adviser.