An aging physician population means more doctors are preparing for retirement. Unfortunately, there is a lot of misinformation circulating on the do’s and don’ts of retirement planning. With the help of the National Association of Personal Financial Advisors, we reached out to several certified financial planners (CFPs) to help us bust these retirement myths.
Myth 1: Municipal bonds will serve you well
Many believe that the safety of municipal bonds can’t be beat. But are they all that safe, really?
“This is a myth I hear from physicians frequently because saving on taxes is typically (understandably) top of mind. However, owning municipal bonds often only makes sense in years that you are in a top tax bracket (over $628,300 if filing jointly or $523,000 if filing a single for 2021). While this may be the case for some of your high-earnings years, with solid tax planning, you will likely not be in a top tax bracket through all of your pre- and post-retirement years. You should also never own tax-free municipal bonds in a retirement account,” said Matt Elliott, CFP, CSLP, of Pulse Financial Planning.
"Owning municipal bonds often only makes sense in years that you are in a top tax bracket."
— Matt Elliott, CFP, CSLP
“Also, municipal bonds are not risk-free and can potentially contain significant risk. While treasury bills backed by the US government are often referred to as ‘risk-free,’ municipalities can potentially default on their debt. If you don’t believe me, ask the Michigan residents who owned some of Detroit’s $18 billion in debt at the time of bankruptcy in 2013. I’m not saying it never makes sense to own municipal bonds. It does in many cases. It is a topic that gets discussed in the breakroom and taken as a strategy that makes sense for everyone, which it does not,” he added.
Myth 2: Always adhere to the 4% rule
The 4% rule refers to the financial guidance that during the first year of retirement, you should withdraw only 4% of your retirement savings. In subsequent years, you can withdraw this initial 4% plus any more adjusted for inflation. By adhering to this rule, your retirement savings should last 30 years if 50% stocks and 50% bonds.
“The ‘4% Rule’ is an overly conservative rule of thumb based on a set of rigid and simplistic assumptions that often leads an individual to sacrifice quality of life while living, only to leave a larger-than-planned legacy at passing,” said Anthony Watson, CFA, CFP, of Thrive Retirement Specialists.
Myth 3: Employee retirement plans suffice
To be prepared for retirement, physicians should mobilize various investment vehicles, according to Anjali Jariwala CPA, CFP, of FIT Advisors.
“I think one of the biggest myths is that if you put away the max employee deferral into your 401(k) that is enough for retirement,” she said.
"I think one of the biggest myths is that if you put away the max employee deferral into your 401(k) that is enough for retirement,"
— Anjali Jariwala CPA, CFP
I think one of the biggest myths is that if you put away the max employee deferral into your 401(k) that is enough for retirement, “Since physicians require more education and training, they have a late start to saving for retirement and less time for those investment dollars to grow. Thus, physicians are further behind than someone who started contributing to a retirement account at age 22. In order to be prepared for retirement, many physicians may need a taxable investment account on top of any retirement buckets (401k, 403b, backdoor Roth IRAs, deferred compensation plans) to fund their retirement,” she added.
Myth #4: You’ll spend less during retirement
It may be soothing to think that you’ll spend less during retirement, with the kids grown and the house paid off. But, this may not be so, according to G.M. (Buz) Livingston, III, CFP, of Livingston Financial Planning.
“For many people [spending in retirement goes down], but for everyone, healthcare costs rise. We use a higher inflation number for healthcare costs, 5.05% versus 2.25% for overall inflation. Retirees should plan on potential significant long-term care expenses, too,” he said.
Myth #5: Your portfolio should become more conservative as you age
Further into retirement—and further away from your peak-earning years—it may be tempting to think that risk should be avoided. But, this rationale may not be prudent, according to Lewis J. Altfest, Ph.D., CFP, CFA, CPA, PFS, at Altfest Personal Wealth Management.
“If you are financially independent, that is, you are not concerned with running out of money (several doctors are in that position), you should maintain your risk profile, particularly if you care about how much money you can accumulate and give to your heirs,” he said.