Many physicians see retirement as a financial finish line. Unfortunately, the journey does not stop there. Even though you may have saved sufficiently to live your best life in your golden years, retirement does have recurring expenses. Here are some of the ones physicians should plan for. Inflation This is the mother of all retirement expenses because it affects every expense in this post. In all probability, the dollar you put away in 1990 won’t have the same buying power in 2030. According to the Bureau of Labor Statistics, the US inflation rate has ranged from 1.3-2.3% annually since 2011. The data indicate that everyday expenses, such as food, gas, and utilities, will become more expensive as time progresses. Doctors looking for a financially secure retirement should account for inflation when setting retirement-savings goals. Taxes Physicians can also expect the steady upward creep of taxes. According to Trading Economics, the personal income tax rate in the US stood at 35% in 2004 before it climbed to 39.6% in 2013. These days, it stands at 37%. In other words, it’s reasonable to expect that doctors may pay more in income taxes in retirement than they do today. This is problematic for several reasons. The first, doctors tend to have better-than-average standards of living, which they aim to maintain in retirement. This requires wealth. Secondly, income is generally fixed for retirees. They make roughly the same amount of money year-over-year. And finally, while income remains steady, expenses tend to go up, due to inflation and taxes. This is where some shrewd investing, or working with a financial advisor, can pay. While it’s wise to cash in on any retirement account matches offered by your employer, these matches are generally for tax-deferred accounts, such as 401(k)s or 403(b)s. While you’ll lower taxable income in the present, you may pay more taxes on that income in retirement, when you start making withdrawals and have a fixed income. Balancing those tax-deferred contributions with tax-exempt contributions, such as funding a Roth IRA, may be a wise tactical choice. With a Roth, you pay taxes upfront, not when you make qualified withdrawals later in retirement. In other words, you’ll pay the (likely) lower tax rate now instead of paying the (likely) higher tax rate in retirement. Finding the right balance between tax-deferred and tax-exempt can be tricky. If you have doubts, work with an expert. Housing According to the National Association of Realtors, the median price of existing homes increased by a record 23.6% in May 2021 (the most current data available). For the sake of comparison, recall the housing market crash of 2008. Record highs and epic lows spell volatility. Regardless of how the real estate market is behaving when you retire, you will need housing. Current market conditions highlight the wisdom of not having a mortgage payment in retirement. For example, let’s say you’re planning to relocate in retirement to a more tax-friendly locale. You will need housing in your new location, just as you did in your old. Unfortunately, there’s no telling what the housing market will look like when you retire. It could look like the present, 2008, or something we’ve never seen before. If you were to retire and relocate right now, using a mortgage to finance the purchase of your home, you would be paying top-of-market prices with interest. If, instead you use the proceeds of your former, paid-off home to purchase your new home, you will avoid interest altogether. Plus, an all-cash offer will make you a more attractive buyer. Having a paid-off home in retirement may also help offset senior-care expenses as you age. While many financial advisors don’t want you to think of your home as a vehicle for funding retirement, it’s a pretty safe bet that your home will have some value when you no longer need it–value that you can parlay into offsetting costs. Healthcare Odds are, someday you’ll be some young resident’s older patient. It’s an unavoidable fact of a doctor’s life. While you can’t avoid some age-related decline, you can ensure that the associated expenses are covered. The Centers for Medicare and Medicaid Services project that national health expenditures will grow 1.1 percentage points faster than GDP per year on average from 2019-2028. In 2019, HealthSystemTracker.org estimated that the average person in the US spends nearly $11,000 on healthcare each year. If CMS projections for demand prove true, and healthcare technology continues to become increasingly sophisticated and complex, then one can assume the costs will also increase. Luckily, physicians have options for covering age-related healthcare costs in retirement. As previously mentioned, the sale of your home is one way. Another is to use a Healthcare Savings Account (HSA). HSAs offer tax savings in three ways: You can lower your taxable income by making contributions. You pay no taxes on account earnings. You can withdraw money at any time–including retirement–for qualified medical expenses. You’re eligible for an HSA if you have a qualifying health plan offered through work or the private marketplace. Unlike a Flexible Spending Account (FSA), you do not have to spend the balance each year. This means that if you can cover your healthcare expenses out of pocket while you’re working, you could cover what you need later in retirement with your HSA. Current IRS contribution limits for HSAs are $3,600 per year for individuals, and $7,200 for families. Future generations You can’t take it with you. But you can leave it to your family, friends, or charities that you believe in. You can expect to pay somewhere between $150-350 per hour for an attorney’s estate-planning services, depending on where you live. In a perfect world, estate planning is something you would square away well before retirement. Many physicians will prepare a will or power of attorney early in their careers–say when they start having children–then forget about it. As your life changes, so does your financial situation. It pays to periodically revisit your estate planning, even throughout retirement. Furthermore, this may save some trouble for your family after you go. Your grieving loved ones don’t need the added stress of fighting over who gets your prized Hummel figurine collection (hands off, Aunt Mildred). TL;DR In retirement, you can expect the following expenses: Inflation: Your saved dollars will lose their buying power. Taxes: They tend to go up. The right combination of tax-deferred and tax-exempt retirement savings may help. Housing: It’s volatile out there. As a result, it pays to have no mortgage when you retire. Healthcare: You’ll need more of it, and it’s getting more expensive. An HSA may be a good option for funding your healthcare needs in retirement. Future generations: Estate planning isn’t fun, but it’s necessary. You’ll likely want to update your plan throughout retirement. Source
