27 Apr Establishing Financial Fitness
Seven years ago, I retired from a very busy pediatric cardiac surgery practice, an event long-planned through savings and investments. My wife, our senior financial adviser and I worked together to manage our portfolio in a conservative yet innovative way. Since retirement, I have had discussions with many colleagues wondering how much money they might need to invest, how to invest it, and how much it would have to return to support them.
There is no real magic around planning for retirement. Young trainees starting their practice, should start planning early by establishing a detailed budget which includes a certain amount of saving per month (RRSP and practice saving). If you are already several to many years in practice, the planning is the same but the amount put away has to be seriously increased.
Working harder to save more money, however, is not the solution. For one thing, we are getting older, and probably tired. For another, the only way to make more money is to work longer hours and to on-call more often. On top of a work week already around 55 to 60 hours is nearly impossible and is unhealthy.
Successful saving Strategies vary widely. A financial advisor can review current investments, readjust them if needed to maximize return, and help plan toward retirement investment income. The latter is most important. I strongly believe that it is not the amount of money we need in the bank that will guarantee a successful retirement, but how we will spend it.
I suggest that your planning process will look something like this:
Rule #1: Do a detailed budget of expected income (all sources, spouse included and expenses (both personal and practice.) Be detailed. Include nail-care, haircuts, books, food, wine, dining out, trips, kids, and so on. Put it all on a page with three columns, labelled “income,” “personal” and “company expenses.” Then you are in a position to really assess what you are currently spending and where cuts and/or savings can be made. Personally, I was surprised, let me tell you, but it was the best exercise in planning for retirement.
Rule #2: Follow your detailed budget. You will soon have a good sense of how much you need in relation to what lifestyle you want to maintain. I will caution you, though, that with the average income of Canadian doctors you will have to curtail or adapt your lifestyle. Let’s face it, you can make just so much money and savings during thirty years of practice. To maintain a comfortable lifestyle, you will need $250,000 to $300,000 of available income before tax. As it would be difficult to earn more, the size of your investment portfolio should be more about how much an investment can return monthly than the gross amount it represents. As the amount of gross capital you will need will vary in relation to your chosen return options and your lifestyle expenses, a gross capital quoted number would be totally misleading. That’s why reviewing investment strategies and their retirement income options with your financial advisor must be part of your plan.
Rule #3: A middle-of-the-road number for fixed expenses should be around 32 to 38% of your total income. Believe me, it is much higher before retirement. I learned this only after maximizing my investment strategies for a monthly stable income, which I achieved only by decreasing my lifestyle. This rule brings us to rule #4.
Rule #4: Examine the remaining amount to be paid on your mortgage. To achieve fixed expenses of 32 to 38% of your yearly income, it might be time to sell the big house for a smaller one. Look at all the other assets you may have in the same way, paid or unpaid, including boat, vacation home, and cars. Do you need two? Do you need three? A big home means higher tax, higher insurance, and higher expenses overall. It is the same for vacation homes, cars and boats. All of these “fixed” expenses can be reduced if need be. The 32 to 38% number is not magic, but I know from experience that it has helped me maintain a comfortable lifestyle and to enjoy my retirement.
Rule #5: Minimize all debts. Assess your credit card costs, business and personal, if relevant your spouse’s cards at the same time, as well support for your children. It all adds up. In going into retirement, pay all the cards down, buying a new car if the one you have is getting old, and do any needed house repairs if needed. It will be a lot harder to do so on a limited retirement income.
Rule #6: Make a long-range plan, to ensure that your assets are protected, your investment return is maximized and your heirs can inherit the maximum amount. Three aspects are important here: have enough funds to cover estate costs, have a written will to avoid difficulty with provincial law, and, finally, consider that the average physician can live 20-30 years after retirement, and probably longer for your spouse. Plan for it.
I would like to add a word of caution. These rules are not written in a book and do not come from a financial investment firm or a senior financial advisor. I developed them as guidelines, and then followed them. They have been useful for me. I believe they can be helpful to many physicians doing their personal planning. Unfortunately, I have many colleagues would ask for a sum total they must put aside, as it is easier to work towards. Perhaps, but sums like that really mean nothing. Retirement is a daily fitness exercise: physically, personally, mentally and financially. It starts long before you actually retire.