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    Is ‘retirement’ based on outdated rules?

    With many physicians not retiring until age 70, some misconceptions should be pondered


    Rule of thumb 1

    You need 65% to 75% current expenses in retirement. This point has not been reality over the past 30 years. In fact, because retirees are healthier and have more free time in retirement, they tend to spend the same or even more than before, at least for the first 5 years.

    Rule of thumb 2

    The 4% withdrawal might have worked in the past, but given the predicted lower growth of the equity markets and low interest rate environment expected over the next 10 to 15 years, this will be closer to 3% or less.

    Also, unlike the accumulation phase of your life, the volatility of the markets actually was helpful because you were dollar-cost averaging into the markets. In retirement, during the distribution phase of your life, if the markets turn down­—especially during the first several years of retirement­—it could have a devastating effect on your portfolio.

    This is referred to as a negative sequence of return. As the value goes down, the fixed amount withdrawn automatically becomes a higher percentage, creating a vicious cycle of erosion.

    Rule of thumb 3

    The last misconception is about leaving the equity markets because all you need is income. The first reason this is not a prudent approach is because even at age 70, you would have a life expectancy (time horizon) of 20 years or more.

    Physicians will have to protect themselves against inflation. Growth will be necessary to protect against future rising costs and this is imperative in planning, especially if a spouse is involved.

    It is preferable to pull income from many sources including annuities, Social Security, fixed income, and total return portfolios. Imagine how much money is needed in a money market account to have enough income.

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