Professionals - doctors, lawyers, accountants, dentists, etc. - represent about 16% of Millionaire households and 21% of households with over $5 million of net worth. An additional 5% fall within the $100,000 to $1 million net worth segment. Because we perceive that doctors, lawyers and other professionals have a rather privileged lifestyle, based on what we see on television and in the movies, there is no reason to believe that these individuals will have anything but a fabulous retirement. Don't they all move to Arizona and live on a golf course?
But the reality for all of these professions is changing dramatically and professionals need to be as diligent as others in preparing for retirement. In many cases, they do not have the built in benefit systems that people in large corporations or the government may have access to, so they must diligently plan and pursue retirement planning differently than others.
There are currently 954,000 doctors according to the American Medical Association. It is anticipated that there may be a shortfall in the future due to the new healthcare reform. There are approximately 150,000 dentists, according to the Bureau of Labor Statistics. At year end 2007, there were approximately 1,128,729 lawyers according to the American Bar Association.
Keep in mind that many of these professionals spent a significant amount on their educations and thus are often unable to start saving money for retirement until at least their mid-thirties. That is about the same time that the costs of children kick in, with college following in the age 40 range. So while it is perceived that they are "socking" away a lot of money, many times it is not what may be anticipated by outsiders. Thirteen percent plan to "never retire", either for financial reasons or merely not wanting to give up their profession.
While some doctors may be included in a benefits and retirement system of a larger hospital group, it may not always be available. Additionally, few hospitals today offer a defined benefit or pension plan, so the options are either a traditional 401(k) plan or a 403(b) plan. Some have their own practices, maybe just themselves or with a group of doctors. They need to identify benefit and retirement options for themselves and their employees. Dentists, however, are generally more similar to a small business/sole proprietor and must also identify his or her own benefits packages as well as coverage for employees.
Lawyers, for example, may be part of a large firm that provides benefits similar to a larger corporation, or alternatively, a sole practitioner or small firm that behaves more like a small business.
Sometimes professional associations have benefits available but the breadth and depth of these options may vary.
So what should a professional think about?
0. Evaluate retirement and non-qualified plans that may be available, in addition to or instead of traditional defined contribution (401(k) or 403(b)) plans. A solo defined benefit plan may be an option for some, however, the number of people included has to be minimal (1-2). These plans, however, allow for assets to be tucked away tax free and then distributed in the form of a pension upon retirement. The largest contribution to a 401(k) plan in 2010, however, is $16,500 and may be only a small portion of what a professional needs to save to meet their long term goals. Many professionals also use SIMPLE or SEP plans. These plans may also be helpful for small law firms. Also, various non-qualified and executive compensation vehicles may also be appropriate. You must, however, meet with a tax and estate expert to evaluate these options.
1. Unlike business owners, professionals generally do not have the ability to liquify and sell their business upon retirement. In some cases, however, a practice does have a value that can be paid for by others. Determine when to bring younger professionals into the practice and determine whether they need to contribute to the practice. What is the value of the practice and any goodwill? Perhaps you can establish a payout over time to assist in funding your retirement. Once the professional is self-established, however, look for this payment system to end. Experts indicate it takes 3-5 years to appropriately leave a firm upon retirement.
2. Review your portfolio. Spectrem research indicates that 25% of Professionals in the $5 million net worth market invested more in CDs in the past year than prior to the Recession. With the economy recovering, it may be time to reassess overall risk tolerance. Most professionals identify themselves as having "moderate" risk tolerance.
3. Work with a professional advisor to identify your income needs in retirement. Explore the various options available. Will your existing portfolio guarantee an adequate income stream? Do you need to consider a structure bond investment portfolio? What other retirement income options are available. Be sure to include your 401(k) or other retirement savings. Most individuals project needing 75% of the annual income received the last few years before retirement.
4. Set up a trust and an estate plan. While the future of estate and other personal tax laws is clear for the next few years, anticipate future changes. Only 47% of households with $1 million of net worth have established a trust. This may be the appropriate time to begin planning.
5. Identify how you will pay for healthcare during retirement. Unless you are fortunate enough to have access to a retiree health care plan, Medicare will probably not be enough. Think about and research various supplemental options.
6. Disability and life insurance are important for these households. They must determine the needs of their family should their income disappear.