Facing Down Retirement

Strategies for outwitting an economic downturn, too much time on your hands and other challenges.

By René Luthe, Senior Associate Editor

The prospect of retirement is often intimidating enough in the best of times, with its concomitant worries about having sufficient funds to last the rest of one's life and having to suddenly redefine oneself after a long and demanding career in medicine. For many, the recent economic tumult has sharpened fears about retirement. Paul Koch, MD, of Koch Eye Associates in Warwick, RI, sums up current unease about ending one's career well.

"I think that a lot of people my age and in my situation have had a bit of ice water thrown in our faces. We've always thought, if we put so much aside and get a 10% return, we can live forever," he says. "Now we know that what you put aside isn't there anymore, and those returns aren't available to us anymore, either. Not having a corporate or government pension, we have to support ourselves."

But fear not, say financial planners and even some retiring ophthalmologists; with a carefully constructed plan, implemented in a timely fashion, you too can achieve a stable and enjoyable retirement.

Financial Planning Challenges

Some retirement-related challenges transcend the current economic downturn. In talking with financial planners who specialize in working with physicians, it seems that there are two main mistakes doctors make when it comes to their retirements.

The first involves a change of mindset regarding their investments. "The biggest challenge, mentally, is to go from an accumulation phase of investing to an income stream, or distribution," says Donna W. Howell, JD, LLM, president of Carnegie Wealth Strategies in Atlanta.

Most doctors, she explains, are not concerned with income when they are investing, but with capital gains. "As they approach retirement, they've got to totally reconfigure both their portfolio and their thinking," she says. "Because the worst thing you can do is to try to rely on selling capital gains in the stock portfolio to fund your retirement." That strategy only works when the stock market is going up, Ms. Howell points out, and as people who have retired in the past few years have learned the hard way, the stock market does not always go up.

To make that mental shift into the distribution phase, Ms. Howell advises her clients to figure out what they will need in income a few years prior to their planned retirement date. Then would-be retirees need to examine their nest eggs.

This is the time to examine expenses and look for ways to reduce them, according to David Sebastian of Physician Wealth Management Group, Summit, NJ. For instance, those with second homes or other properties may want to examine the expenses that pertain to real estate — property taxes, upkeep, etc. — and sell in order to reduce expenses and acquire some additional capital before retirement.

Ms. Howell emphasizes to her clients that they should not have any debt at the time of retirement. And the need to reduce draws on one's income stream becomes particularly urgent considering that we have a longer life expectancy than our parents, both Mr. Sebastian and Ms. Howell point out.

Doctors need to assess their lifestyle and calculate the likely expenses. "Ask yourself: 'How much money do I need to have set aside in order to support that type of lifestyle?'" says Mr. Sebastian.

If they have an annuity that pays them their pension, Mr. Sebastian explains, they need to determine how much income they need a month, and how much what they have set aside is likely to generate. "Let's say they have a million dollars set aside; if that throws off between 4.5% and 5%, which is a reasonably good drawdown, for every $45,000 you pull out of your account, you need a certain amount of money. So if you need $1 million to draw down $45,000, well for $90,000, you would need $2 million."

This is frequently the "eye-opening" part of planning as retirement nears, says Ms. Howell. "It's naive, if you're living off half a million a year, or $750,000 a year, to continue that income stream in retirement unless you've got $15 million in investable assets."

To have the funds they will need, Mr. Sebastian says that physicians must overcome one of the most common mistakes of retirement planning: not starting to save early enough. "What's interesting is that physicians sacrificed a lot of their energies and didn't make a lot of money when they were completing their medical studies, then they get out and maybe they're paying off some of their debt, but they are quick to keep up with their peers, so that they want to buy a big house, they want to buy a nice care, they want a nice lifestyle," Mr. Sebastian says. The savings process suffers.

And while that procrastination is understandable, Mr. Sebastian says the advantages of beginning the savings process earlier in your career are significant. For one thing, those who put money aside earlier in their careers do not need to take as much risk in order to get a bigger return in a relatively short time frame. Additionally, Mr. Sebastian notes, building an aggressive retirement account earlier frequently allows them to save money on taxes, and to be generally less vulnerable to uncertainty in the economy, or the healthcare industry.

That kind of stability is particularly important considering the longer life expectancy contemporary physicians face, a point that was emphasized by these consultants repeatedly. "There is a real concern about outliving your money," says Mr. Sebastian. "The challenge is to make your funds stretch until you're maybe 90, just in case you live that long."

Ms. Howell agrees and warns that new retirees frequently spend as if longevity is not a concern. She calls the early phase of retirement the "go-go phase."

"People travel, do all the things they've put off doing, and they're healthy enough and they look at this nest egg and think they've got enough money to do it all," she says. "And what you don't want to is at the age of 80 go be a Walmart greeter because your $2.5 million is gone."

(Planning Your) Exit Stage Right

But financial planning is not the only thing physicians typically don't start soon enough. According to Lawrence Geller, vice president of consulting services for Medical Management Associates of Atlanta, most ophthalmologists wait too long to plan an exit strategy from their practices as well. Mr. Geller, who specializes on exit strategies for the solo ophthalmologist, believes that physicians should begin planning by the time they reach their mid 50s, even if they intend to continue working another 10 years.

"The longer a physician waits to begin transition planning, the greater the likelihood that what the physician perceives to be an asset will in fact become a liability," says Mr. Geller, citing the office lease or custodianship of the medical records as examples.

And just as delaying saving for retirement can reduce one's options to risky investment strategies, delaying choosing an exit strategy can limit options too. For those who have choices in how to exit their practices, there are three options, Mr. Geller says: closing the practice, selling it to another group, or recruiting an associate who will become a partner and be obligated to buy out the retiring physician.

Selling Out vs. Bringing in New Blood

Closing the practice is not an option for most, leaving selling the practice as a possibility. This, consultants warn, entails variables such as the demand for your specialty in a particular region, whether the practice includes assets such as property or surgery centers and who likely buyers might be. According to Mr. Geller, 10 years ago there was a surge in the sale of eyecare practices, but that trend has ended.

"Yes, hospitals are acquiring practices, are employing physicians, but ophthalmology is not one of the specialties that most hospitals are focused on," Mr. Geller says.

That leaves bringing in an associate. Mr. Geller calls it "the most viable alternative." He recommends bringing in another physician at least five years before you plan on retiring. The new physician should work for you for two or three years as an associate, he says, at which point the physician becomes eligible for a partnership and to become a shareholder in the practice. After another two or three years, the partner would have the opportunity to buy you out.

"The disadvantage is that you might get less value for your practice than if you had sold it at the time of retirement, but that's offset by having that guaranteed purchaser," Mr. Geller says.

Amir Arbisser, MD, of Eye Surgeons Associates, with five offices in Iowa and Illinois, went the associates route. As the associates graduated to partnerships, they purchased equity in the practice until Dr. Arbisser and his wife and practice partner were in a minority position.

"The transition has to do, really, with transferring assets along the way and not retaining them all for myself and then having a sales problem at the other end when I retire," Dr. Arbisser says. "It's interesting in meeting with other practices to find it's a very common issue with a senior partner who's the majority owner of the equity, and then it becomes such a large item that no one wants to step up to the plate and deal with it."

In addition to making the equity easier for his partners to take on, Dr. Arbisser says that his strategy encouraged his younger associates to gradually take on more responsibilities for decisions they would have to live with in practice. "After all, for me to sit and make decisions that a younger person might be dealing with 15 years from now might mean that he remembers me with not such kind thoughts," Dr. Arbisser jokes.

He also identified his likely successor as leader a few years before and gradually assigned him more administrative responsibilities, including the recruitment of new doctors so that the person staying on would assemble the team he would work with. Additionally, the practice hired a chief executive officer to work hand in hand with the lead physician. The strategies, Dr. Arbisser believes, made for a "pretty seamless transition when it came time for someone else to kind of hold the scepter."

I. Howard Fine, MD, in private practice in Eugene, Ore. and clinical professor at the Casey Eye Institute at Oregon Health & Science University, Portland, also brought in associates in anticipation of retirement. He sought out two ophthalmologists he found "uniquely talented" and initially stipulated the terms of their employment as being only two years. He had each buy 24% of the practice more than seven years ago, leaving Dr. Fine 52%; the sale agreement included an option for them to buy him out in seven years.

"I did that for several reasons," Dr. Fine says. "I thought I would be ready to retire and I thought that for them to have the type of career they want, they would have to be running their own program. To have a senior man hanging around for 30 years is death to the young men, because they never emerge."

Bringing in associates and gradually cutting down on their hours also allows physicians to continue to bring in more income before they begin drawing on their retirement accounts, a boon to those worried about the economic downturn. Mr. Sebastian says that his clients increasingly express a desire to postpone the day they have to rely solely on their savings.

"Anytime I talk to a physician about retirement, I hear most of them say, 'Sure, Dave, when you're doing a retirement plan for me, put that I'll work until 55 or 60, but I'm probably not going to retire, I'm going to work as long as I can.' So you're seeing them work until the age of 65 or 70."

The benefits of this delay, however, Mr. Sebastian believes are more than financial. "It gives them something to do. I've found very few folks who can comfortably step away from their business and golf all day."

It's an Emotional Journey Too

Both consultants and veteran physicians warn that the necessary personal redefinition is often the hardest part of retirement.

"I knew that retirement could be a problem because I've had colleagues here in Eugene that really got into trouble," Dr. Fine explains. "They got bored, got depressed, a couple of them died young."

According to Ms. Howell, it is crucial that people not ignore the psychological and social aspects of retiring. "Doctors are used to working their butts off," she says. "A lot of doctors say, 'Oh, I'll just play golf.' Well, you can't play golf seven days a week, eight hours a day — that gets old awfully fast."

Ms. Howell advises clients to find something to do part-time to ease into retirement. Often, that means an abbreviated schedule at their own practices.

Dr. Fine decided to book a visit with a mental health specialist who was part of his practice's insurance plan and whom he had learned worked a lot with people who were retiring. "I sent him a copy of my CV and I made an appointment to see him," Dr. Fine says. "On the first visit, he told me, 'There's no way someone like you is going to be able to retire without some feelings of guilt and some loss of self esteem. This is how we are going to work around that.'"

The method entailed a few visits per year for three years, as well as a reading list. "I learned the ways in which my activities were nourishing me, and the ways in which I could minimize the emotional impact of the loss of those activities. It helped me enormously," he says.

Initially, Dr. Fine reduced his practice schedule to four days a week, then three. On his 73rd birthday, he stopped practice altogether for three months, and now he is back to four half days per month. He has kept his faculty appointment at Oregon Health and Sciences University, where he trains residents, something he very much enjoys, and still travels to some international meetings.

Dr. Arbisser, too, has entered into a staged process of reducing responsibilities. He feels that it gives him a chance to enjoy a taste of his life-to-be while still enjoying ophthalmology. He points out, though, that he has been nurturing other activities for years in advance of retirement.

Dr. Fine agrees that those other activities are key to a successful psychological adaptation to the next stage of life. "As much as I enjoyed dealing with other people's opaque lenses and refractive errors, there is a lot more to life outside of that," he says. OM