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  1. Retirement Thomas E. Nolan, MD, MBA Abe Mickal Professor and Chair of Obstetrics and Gynecology Director, Women’s 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 responsibilities—children 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 cost—may 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) • Inflation—remember the late 70’s and early 80’s. Usual range is 3-4.5% • Currently, 3-5 million is considered safe for physicians @ 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??) • 100—age = % 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, CDs—no 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 statement—post 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 Roth’s 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

  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)

  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 administrator—these can be very tricky reporting and tax wise

  35. SIMPLE IRAs • Contributions are limited for highly compensated employees (defined as > $100,000 annual salary) • Done on a 2 or 3% of income • Good for small business with < 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: that’s 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 IRS—they always win • Ignoring reporting requirements

  38. Spouses • Every marriage may become a potential divorce • Be fair with dividing assets when things are going well—it 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 • Accountant—tax planning and advice, not your best source for financial planning • Stock Broker—remember, he or she only makes money by trading and selling • Life and disability insurance— compare and consider buying on internet

  41. Your Team • Attorney—early 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 only”—they are not selling products