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    Prepare your portfolio for retirement

    Making the switch from accumulating to decumulating assets requires careful planning



    In addition to portfolio changes, the transition away from being a working physician generally means your tax situation will be in flux. Income tax projections are an integral part of a financial plan. Generally, physicians who elect to retire will see a final high income year, then several low income years, followed by higher income levels once again when required minimum distributions from IRAs begin at age 70˝. Your portfolio might need to be adjusted to accommodate this potential change in marginal income tax rates, the interplay with the alternative minimum tax, and Social Security benefit taxation.


    During your final high-income year, think about ways to accelerate deductions if you expect your marginal tax rate to drop in subsequent years. Obviously, a tax deduction is more valuable when your rate is higher. For example, consider setting up a donor-advised fund, which allows you to make several years' worth of charitable contributions and receive the related tax deduction in the year the contribution is made. Donor-advised funds are available through mutual fund companies and many local community foundations. National independent donor-advised funds include the National Christian Foundation or the American Endowment Foundation.

    From a portfolio perspective, your final high-income year might be an opportune time to add direct-participation energy investments. These feature initial deductions for drilling costs and equipment purchase, often approaching 98% of the amount invested. In future years, payments of oil and natural gas net revenue are partly sheltered by natural resource depletion tax deductions. Use extreme caution; this area is rife with overpriced, poorly structured programs and shady promoters. Proper due diligence is essential to make sure you're working with a reputable and experienced operator.

    Before you begin taking required minimum distributions from your IRA, you might see a drop in taxable income and marginal tax rates as you replace employment income with proceeds from selling investment assets, producing non-taxed recovery of principal and lightly taxed long-term capital gains. The resulting window offers an opportunity to accelerate taxable income into a year in which it will be taxed at a lower marginal rate than it will be in future years.

    You can accomplish this objective by realizing long-term capital gains, Roth IRA conversions, and even variable annuity or IRA withdrawals. Being in a low tax bracket may mean that tax-free investments no longer make sense, and you can obtain higher after-tax yields in taxable investments.


    Your portfolio also will be affected by another important decision you'll be making: when to take your Social Security benefits. Taking Social Security benefits earlier results in a lower amount per month but reduces the initial cash outflows from your portfolio. Delaying benefits means more portfolio withdrawals initially but substantially higher Social Security payments later.

    Often it can be advantageous for the higher-earning spouse to defer taking his or her individual benefit until age 70. The lower-earning spouse can begin taking benefits at full retirement age (currently age 66 but gradually increasing to age 67 by 2022), and the higher-earning spouse can begin receiving a Social Security spousal benefit at that time. Deciding which benefit scenario works best for you requires a careful analysis based on individual Social Security records, cash flow needs, and longevity assumptions.


    As you can see, the process of switching from accumulation to decumulation mode is multifaceted, involving cash flow, investment, tax, and Social Security planning. Although some physicians prefer to handle their own financial affairs—and are adept at doing so—professional advisers can help you navigate the complex terrain of decumulation planning.

    Before you withdraw from your practice, consider having an attorney look over the employment agreement you probably haven't read in years. If your accountant only prepares your tax returns and offers no proactive advice, it may be time for a change. If your financial adviser seems focused only on your investments or your insurance and doesn't provide any significant planning services, that too is reason to consider a change. The best financial planners or wealth managers address these issues in a coordinated fashion in the context of your personal financial plan.

    Ultimately, however, the final evaluation is up to you. Begin the process now—so you'll be prepared if you are struck by the "I'm outta here" moment.


    How much money will you need to support yourself in retirement? Often, the answer will depend on how many years you live. Start with an estimate, or for a detailed analysis of your life expectancy, go to http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html. You may be surprised to learn the chances of making it into your 90s.

    Next, use the Web to find tools that will help you estimate how much savings you will need to support yourself and your family in retirement. In recent years, a technique known as the Monte Carlo simulation has come to be widely used by financial planners for projecting investment returns.

    A Monte Carlo simulation will "stress test" a retirement scenario by running thousands of simulations using various rates of return with standard deviation assumptions. The result is a detailed financial picture that is more accurate than those provided by using only one, or a few, rates of return.

    For retirement forecasting tools that incorporate the Monte Carlo simulation, visit:

    The author is a financial adviser with Matrix Wealth Advisors in Charlotte, North Carolina. Send your feedback to

    Also engage at http://www.twitter.com/MedEconomics/ and http://www.facebook.com/MedicalEconomics/.


    Giles K. Almond, CPA/PFS, CFP
    Financial adviser with Matrix Wealth Advisors in Charlotte, NC.

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