Retirement Thomas E Nolan MD MBA Abe Mickal

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

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

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

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

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

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

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.

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

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

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

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

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)

The Basics • • • Food, housing, upkeep Clothing Medical expenses Transportation Entertainment and hobbies Gifts and taxes

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)

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!

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

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!!!!!!

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

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

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”

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

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)

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

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

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

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

Contribution Limits Year < age 50 > age 50 2004 3, 000 3, 500 2005 4, 000 4, 500 2006 4, 000 5, 000 2007 4, 000 5, 000 2008 5, 000 6, 000

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

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

Contribution Limits 401 (k), 403 (b) Year < age 50 > age 50 2004 13, 000 16, 000 2005 14, 000 18, 000 2006 15, 000 2007 15, 500 20, 500

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

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

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

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

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)

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)

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

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

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

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

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