Something to Reflect On
A 2005 study*** of people two to 15 years following retirement broke retirees down into four distinct groups:
• Empowered reinventors - 19%
• Carefree contents - 19%
• Uncertain searchers - 22%
• Worried strugglers - 40%

Empowered Reinventors
For this group, retirement is the next stage of life, filled with new challenges. They have done more planning and preparation. Fifty-six percent feel empowered after retirement, while only three percent feel depressed about retirement. Ninety-two percent agree that their retirement has worked out the way they planned it.

Carefree Contents
These people are also successfully adjusting to retirement, but through an approach very different from the empowered reinventors. Eighty-seven percent felt optimistic about their retirement lifestyle, but they are not taking on adventure or new challenges. Few are continuing their education, doing meaningful work, or pursuing hobbies that are important to them.

Uncertain Searchers
These folks in retirement are still trying to figure out what to do with the rest of their lives. In general they did less preparation for retirement than the empowered reinventors, and this is showing up now. They are less likely (59%) to feel they are on track financially, and only 36% of them are comfortable that they know how much money they will need in retirement.

Worried Strugglers
These folks are having the most trouble in retirement. Thirty-eight percent report being worried, 34% feel bored, and 19% report feeling sad. Only 31% say they are greatly enjoying their retirement.

The Skinny
One of the major lessons from this study was that the more time retirees had spent preparing during the pre-retirement period, the better they were faring in retirement.

Mind the Mix
Retirement planning is a complicated mix of the financial and psychosocial. It is important to understand what you want for your post-work years, and then to assign a price tag to achieve these dreams. However you choose to approach this task, the sooner you start planning, the better off you will be.

Case Report #1
Dr. Bob H is a 62-year-old general dentist. He is married to Joyce, who is 61. They have three children, ages 35, 32, and 30, and six grandchildren, with number seven on the way. Joyce has not worked outside the home since they were married. Both Bob and Joyce’s parents are financially independent and are not expected to be a financial burden. By the same token, neither Bob nor Joyce is expecting a significant inheritance.

Bob and Joyce’s assets:
• $1,200,000 in practice 401(k)/profit-sharing
• $1,000,000 in a taxable brokerage account

Bob and Joyce anticipate $30,000/year in social security starting at age 67. They would like to be able to spend $10,000/month in today’s dollars while in retirement.

Is Bob in a position where he does not have to continue to practice dentistry? Maybe.

If Bob were to close the doors of his practice and walk away, he and his wife would have only a 70% chance of living to age 92 without running out of money, according to a financial planning program incorporating Monte Carlo analysis.† Not bad, but not entirely reassuring. However, if Bob were able to realize $300,000 from the sale of the practice, the odds of success rise to 95%. Not bad.

The real questions facing this couple fall outside of simple number crunching. As Bob and Joyce are so close to retirement, they should already have spent time preparing. They should be working on their vision of what they want once they are financially independent and do not have to go to work. Where will they be living? What will they be doing? How much will they be traveling, and what sort of travel? Will they be volunteering? If so, where and how often? Will they increase the time they spend on their current hobbies, or pick up new ones? Will they be gainfully employed, and if so, will it be by necessity for income or benefits, or because they choose to? What about their family and social network after they have left the social network of employment? Will no longer being “Dr. Bob” affect self-image?

 

Case Report #2
Dr. Tom T is 62 years old. He is married to Janet. They married in their mid-40s and do not have any children. Their passion is golf, and they travel several times each winter to warm locales to play. Dr. T. is tired. He would like to be done with dentistry so he can spend more time playing golf with Janet and his golfing buddies. Tom met recently with a financial planner who indicated the assets saved are not enough to support Tom and Janet in the $12,000/month lifestyle they would like to have in retirement. Tom and Janet are not interested in living on a budget or trimming their expenses. Janet has worked in various retail jobs at higher end boutiques to provide for her spending money, but never stayed at one long enough to accumulate any significant retirement assets.

Tom and Janet’s assets:
• 401(k)/PSP of $500,000
• Brokerage account of $500,000
• The latter came as an inheritance from Dr. T’s parents, who passed away last year. Janet has six siblings. Her parents live simply in southern Minnesota, and she is not expecting any inheritance.
• Dr. T is willing to work five more years to age 67 and contribute $50,000/year to his retirement account over that time period.
• Same social security of $30,000/year starting at age 67 as Case #1.

Unfortunately, Dr. T. has started his financial planning late, and is not on track to realize his dreams in the timeframe for which he was hoping. His options are more limited than in our first example. He certainly needs to get some value for the practice if possible. He’ll also need to balance working beyond age 67 and/or saving more now vs. spending less per month in retirement and having a lower standard of living.

Dr. T needs to look at trade-offs such as golfing some, working some, living at a lesser lifestyle, and delaying the retirement process. Another option is that if Dr. T has a large enough patient base, he could bring in a partner to work with him for the next five or so years, then have the partner take over the whole practice in such a way that Dr. T can maximize both his current income and buy-out price.

Case Report #3
Dr. M is 50 years old. He is married and has three children, ages 20, 18 and 16. His 20-year-old is at school at a small eastern liberal arts school, and the other two children would like to go there as well. Dr. M. and his wife have agreed to pay for college for all three children, but have let the children know they will be on their own for graduate school. Dr. M’s income has gone to building up the practice, which is thriving, but he has neglected savings.

Dr. and Mrs. M’s assets:
• 401(k)/PSP of $600,000
• Brokerage account of $100,000
• Social security of $30,000/year starting at age 67.

The couple’s goal is to retire at age 60 with $10,000/month in spending in today’s dollars.

Dr. M is hoping that if he contributes $45,000 annually to his 401(k)/PSP for the next 10 years, that will put him on track to catch up and be financially independent at 60. Unfortunately, that is not the case, and as in our second case, Dr. M. needs to consider working longer, saving more, or spending less in retirement.

Part of this doctor’s problem is that in order to put more each year into the retirement plan at the practice, such as through a cash balance plan, he will have to put a great deal more away for his many employees. One creative solution might be to sell the practice and have a long-term contract with the new owner to provide dental services as a separate entity. This way the staff will still have their jobs, all the benefits they were promised, and the patients will be well cared for. Now the dentist can put away $150,000/year or more into his retirement account and meet his retirement needs. At the same time, the new owner is gaining equity in the practice and is able to meet his own needs to grow his business.