With retirement, its never too early to start planning
Looking ahead is key to organizing your financial future and preparing your retirement activities
From the April 1999 ACP-ASIM Observer, copyright © 1999 by the American College of Physicians-American Society of Internal Medicine.
By Bryan Walpert
Cloyd L. Dye, FACP, knew it was time to retire. He didn't handle stress as well as he once did, he tired easily and he didn't like the direction medicine was heading under managed care.
"I'd been around long enough to see doctors hang around long past the time they needed to," said Dr. Dye, an internist in New Castle, Ind. "I was determined to quit while I was still practicing with excellence."
So on Sept. 1, at the age of 65, Dr. Dye retired. And he hasn't looked back, thanks in part to what he did along the way: He saved for retirement, started recruiting a replacement early and planned ahead so he would have interesting and fulfilling activities to do when he walked away from his practice.
How Dr. Dye handled his impending retirement—as well as tips from retirement experts—will interest an increasing number of internists as members of the baby boom generation start thinking about retiring themselves. In medicine, for example, the number of physician retirees is already steadily increasing. According to the AMA, 72,510 physicians in 1996 were "inactive," most of them retired. That number is up from 52,653 in 1990 and 25,744 in1980. (The College does not track the number of its members who have retired.)
Yet when it comes to retiring, not everyone is as successful as Dr. Dye. Some physicians simply don't put away as much in savings as they should. Some wait until the last minute to start thinking about how to close or sell their practice. And others don't plan any post-retirement activities.
Planning is also critical to provide continuity of care to patients and to store medical records. That's why experts say that whether you're three or 30 years from retirement, it's never too early to start thinking about retirement. Here are a few steps to make the process easier:
- Max out your pension. This is the step every physician should take beginning on day one of working life. If you're employed, your practice probably has a 401(k) or some other type of profit-sharing plan. If you have your own practice, experts say you should start such a plan.
The advantage of these types of defined contribution retirement plans is that pretax money is put into the plan and the money grows tax-deferred. Consider the following example listed in the "Physician's Financial Sourcebook," a book that offers physicians tips on financial matters like retirement, selling a practice and working with physician recruiters. If you put $1,000 in a tax-deferred pension plan each month for 30 years at only 6%, you'll have more than $1 million when you retire. If instead you invest the after-tax amount—about $600—in an investment that is taxed, you'll have less than $650,000 when you retire. (For more information about the book, call 800-632-5528.)
Retirement plans come in a variety of flavors and include options like profit-sharing plans, 401(k) profit-sharing plans and money-purchase plans. The amount you can sock away in each depends on the plan or plans you have and on how much is put in for employees. But whatever the plan, you cannot contribute more than 25% of your salary or $30,000, whichever is less, according to Thomas M. Koch, CPA, pension services manager for Clayton L. Scroggins Associates Inc., a medical practice consulting firm in Cincinnati.
- Make other investments. While some financial planners say that contributing to your pension plan at work is sufficient, Ric Edelman, chairman of Edelman Financial Services in Fair Oaks, Va., and author of "The Truth About Money," disagrees.
"It's not enough," said Mr. Edelman, a registered financial consultant and mutual fund counselor. He said that most people—including physicians—simply aren't saving enough for retirement. "Even if you max out your pension plan, if all you're counting on are your retirement plan and Social Security, you can expect a pay cut of about 60% the day you quit work."
So what are your other options? Mr. Edelman said that physicians frequently don't qualify for an IRA deduction because of their incomes and because they already participate in company retirement plans. Even if you are eligible for an IRA, he said, you can contribute only $2,000 a year.
As a result, Mr. Edelman recommends using a variable annuity, which allows you to invest as much money as you want on a tax-deferred basis. It's not pretax money, but you won't have to pay taxes on any earnings until retirement.
Annuities work like mutual funds: You have several dozen investment options and can move the money around as you see fit. As for the investments, as long as you have more than a decade to go before retirement, your best bet is to put your money into stocks, which over the long term outperform bonds and other investments. As you move closer than 10 years, begin to diversify into government bonds and other less volatile investments. But remember, you won't use all your money the day you retire; you'll probably still have two or three decades to fund. That's why Mr. Edelman recommends keeping at least 30% in stocks even after retirement.
"Physicians, like most Americans, tend to invest too conservatively," Mr. Edelman said. "We find many physicians invest too conservatively for the bulk of their career and too aggressively as they near retirement."
- Prepare early to sell your practice. If you're a solo practitioner, don't ignore the value of your practice. Too often, physicians wait until a couple months before retirement to decide they want to sell, said Keith Borglum, vice president of Professional Management and Marketing, physician practice management consultants in Santa Rosa, Calif.
Mr. Borglum got a call in November, for example, from a physician who planned to retire Dec. 17. As he explained, that's simply not enough time. "He's probably going to lose $40,000 or $50,000 that he could have otherwise gotten," Mr. Borglum said.
Mr. Borglum recommends physicians begin planning for their retirement at least two years in advance. Even better, Mr. Edelman advised, is beginning that process much earlier, for their retirement at least a decade before retirement. He suggested finding someone young, in their early or middle 30s, who can gradually buy the practice through a reduced salary, in cash payments for a fixed number of years after you retire or a combination of the two.
Starting early not only gives the younger physician time to buy you out, but it also allows time for both of you to discover any personality differences that are not immedately apparent. "If it doesn't work out and you part ways, you have enough time to get another partner," Mr. Edelman said. "If you do it two years before retirement, you better hope it works out because you won't have time to find another partner."
Don't assume your practice is worthless. Mr. Borglum got a call from another physician near the end of last year who thought just that. By December, four or five physicians were competing to pay $180,000 for it. Had the physician gone with his intial assumption, Mr. Borglum said, "He would have lost a lot of money."
- Notify your staff a few months before you retire. Of course, some of your employees will immediately look for new jobs. Mr. Borglum recommended that physicians give staff a bonus to stick around—perhaps a week's pay for every year they've been with the practice. A 20-year employee will get a lot out of the deal, but even someone who's only been there a couple years will find it attractive.
"People don't like to walk away from free money," Mr. Borglum said. "It doesn't have to be a week's pay. It could be $500 or $1,000, whatever you think it will take."
- Give patients sufficient notice. While there are no statutory requirements for patient notification, experts suggest you give active patients at least 30 days' notice for two reasons: It gives them sufficient time to find another physician and it protects you from patient-abandonment lawsuits.
Charles Sicher, PhD, loss control officer for The St. Paul Fire and Marine Insurance Co., which provides malpractice insurance to physicians, recommends beginning the process 90 days before you retire. He suggested sending out a letter to each patient you've seen over the past 12 months. (Others say 24 months.) If you have patients you're particularly concerned about because they require more care, consider sending a certified letter to make sure they receive it.
Dr. Sicher and other experts suggest that you recommend other physicians whom you trust and who have agreed to take on your patients. Limit the list to three or four physicians, and start contacting those physicians about a year or 18 months before you intend to retire. Mr. Sicher said that you should check the requirements of your health plan contracts before doing so; you may need to refer patients to other network physicians.
- Arrange for the care of medical records. According to experts, you'll want to have records accessible to you for at least the length of your state's statute of limitations in case you get sued for malpractice.
That time frame varies by state, and in the case of minors, the statute of limitations may not kick in until they reach 18 or 21. Check with an attorney and your malpractice carrier for more details about the state in which you practice.
If you don't have partners or a buyer, your best bet is probably to find another physician who is willing to take your medical records. Colleagues will often do so for any active patients they've taken on. Mr. Sicher recommends that you do not transfer records unless a patient signs a records transfer form authorizing it. He said that you should also have a written agreement with the physician who takes them.
Mr. Borglum's group recommends transferring only copies of records and, to be on the safe side, keeping the originals in perpetuity to safeguard against malpractice claims. (An attorney with the AMA noted that a recent court case in Washington state allowed the physician to be sued even after the statute of limitations had expired.)
You can store records in your basement or an outside storage facility, but experts say that you should try to protect them from moisture and fire. Consider putting them on CD-ROM or microfilm and storing them in a fireproof area such as a safe-deposit box, Mr. Borglum said. Look in the phone book for records retention services or call your malpractice carrier for a referral.
- Plan ahead for your post-retirement lifestyle. After all the financial and business considerations are finally taken care of, there is still another important thing to plan: what you'll do with all that time off.
Charles Weed, MD, a rheumatologist who retired from his Albuquerque practice in January 1994, has plenty of interests to pursue in retirement: photography, golf, his work as a docent at the zoo, and trips to such places as Kenya, Russia and Turkey. Despite his many interests, though, he learned he needed to plan his days just as he would at the office—and he warns others to do the same. "If you don't do that, you could find yourself looking at a wall," Dr. Weed said. "For the first four or five months after I retired, I had to be careful not to let myself assume things would happen without putting any effort into it."
Dr. Dye, the internist from Indiana, began exploring his options about six years before he planned to retire. He talked to colleagues at a nearby medical center in Indianapolis about working on the wards part time when he left his practice. And though they were happy to oblige, it turned out he didn't really need the work after all.
Before retirement, Dr. Dye began working for a hospice program, and he expanded his work there when he left his practice. Though his official duties involve consulting on medical matters, he also visits hospice patients to offer support. He also teaches Sunday school, is involved in lay ministry, does some reading, builds doll houses, trains miniature horses and spends time with his grandchildren.
"No one should go into retirement without a definite plan," Dr. Dye said. "Think about why you want to retire and know what you're going to do after you retire."
For many physicians, staying active is the key. When Dr. Dye was about to leave his practice, for example, his son and his partners suggested having a retirement party. But when Dr. Dye found the definition of the word retirement in the dictionary, he decided the term didn't apply to what he had in mind.
"It said that to retire means to go away or withdraw to a private, sheltered, secluded place or withdraw from business, active service or public life, especially because of advanced age," Dr. Dye said. "I said I'm not doing any of this. So instead, they gave me a second commencement party."
Bryan Walpert is a freelance writer in Denver.
Tips for preparing to close your practice
Closing your office? Here's a check-list of things to keep in mind, courtesy of Professional Management and Marketing in Santa Rosa, Calif.:
- Have your attorney carefully review any separation agreements with your partners. For instance, you'll want to make sure that you are indemnified for any decisions the practice makes after you leave, that you have a proper promissory note and that your name is off the lease.
- Ask your accountant more than a year ahead for some advanced tax planning advice.
- You may be able to sell some drugs to colleagues, but check with your state medical society. Pharmaceutical companies may buy back unopened, unexpired stock. For instructions on more tightly controlled substances like morphine, contact the Drug Enforcement Agency. Destroy prescription pads.
- Talk to your liability insurance broker about coverage you may need to protect yourself from claims filed after you retire. If you're covered under a "claims made" policy that protects you only for claims during the coverage period, you will need to arrange for a "tail." Request a refund for premiums on policies that you cancel.
- Alert insurance carriers of your status and address so you can receive any payments that are not processed quickly.
- Notify all suppliers and request final statements. You may be able to return unopened items for credit.
- Notify professional, medical and specialty societies of your retirement to end or lower dues and stop subscriptions.
- Apply for Social Security and make sure you'll be getting what your records indicate you deserve. Ask your accountant for help.
- Keep your business checking account open for three months after closing the office to allow all bills to be paid. Deposits from patients and insurance companies may straggle in after that, but you can deposit these to your personal account so long as you keep a record. Check with your accountant.
Other useful information is found in a book from the AMA, "Closing Your Practice, 7 Steps to a Successful Transition." The book is $16.95 for members, $27.95 for nonmembers. Information: 800-621-8335.
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