When it comes to retirement income, what you receive is less important than what you keep. So it’s a good idea to understand the tax treatment for each of your retirement strategies and know whether and how distributions are taxed. And while you’re reviewing your choices, consider whether your retirement funds are going to the right places. If you’re still working, it may be best to put more assets into accounts that enable you to defer income and capital gains on their assets until actual retirement.
“Lots of things affect taxes—how long you work, the income base you choose in retirement, any legacy accounts you might want to set up, and more,” says Gabe Ward, a retirement consultant with eight years of industry experience as a senior retirement counselor. “Not considering all of the tax implications may hurt the ability to maximize returns, set up income streams, and keep up with inflation.”
And if you’re nearing retirement or already retired, consider which sources of retirement income to keep in taxable accounts and which should be in tax-sheltered accounts. For example, The New York Times reported a comparison by the Vanguard Mutual Fund Company in which one investor split $1 million evenly between taxable bonds in sheltered accounts and index equity funds in taxable accounts over 10 years. That investor earned $1,694,671. However, an investor who might have done the exact opposite would have earned $1,531,413—or 9.6 percent less.1
If you continue working past retirement age, it may help to keep in mind that Social Security benefits may be reduced or taxable. You may also want to think about the next steps for your account with your employer’s retirement plan.
“If you’re leaving an employer, don’t assume that you have to take an action step with that organization’s retirement plan,” says Diane Texin, who has 16 years of experience working with physicians and individual on their retirement financial needs. “Many physicians have the misconception that they have to cash out or roll their funds over to an IRA or to their next employer’s retirement plan. Depending on your employer, you may be able to continue those plans through your existing provider.
Taking advantage of product innovations
“There’s no absolute right answer when it comes to the best retirement product choice or portfolio mix,” says Ward. “It varies by an individual’s needs and current assets. But as you make choices, stay tuned to recent changes and increased flexibility in retirement vehicles.”
For example, as of 2010, the option to convert a traditional IRA or rollover from an employer-retirement plan to a Roth IRA will be open to anyone. (Conversion was previously limited to those with an adjusted gross household income of $100,000 or less.) Unlike a traditional IRA, where your money is taxed-deferred until you withdraw it, the money going into the Roth IRA is not tax-deferred. Instead, it is taxed at your current marginal tax rate. If you expect your future tax rate to be higher than your current rate, this could work in your favor, especially if you’re a younger physician with more years before retirement.
For physicians closer to retirement, a new generation of annuities may offer tax benefits, flexibility, and market protection. An annuity is a contract with an insurance company. Accumulated funds are put into an annuity and a time is selected to start receiving payments, usually at retirement—a set amount is paid every year, for a set number of years.
This used to mean giving up control of the savings once you set the annuity in motion or “annuitized” the contract to start receiving payments. But new features like Guaranteed Lifetime Withdrawal Riders let you receive a guaranteed payment for life—whether you live another 10 years or 40—and still keep control of the assets for other purposes, if you wish. At the same time, the payment doesn’t change even if the market is doing poorly and the value of your stock portfolio plummets.
Putting time and expertise on your side
One good way for physicians to ensure they’re making the right choices with their retirement savings is to get help in making them—and an advisor needn’t add a lot to your expenses.
“A lot of physicians equate the amount of their retirement savings with what a financial advisor may charge them in fees,” says Ward. “But it can be a simple, cost-effective process. Use the same analysis you would as a physician—ask questions, get second opinions, make sure the advisor understands your situation. A little scrutiny goes a long way.”
Retirement experts also recommend establishing relationships with estate planners and certified accountants. Physicians can also leverage the expertise of retirement-product providers as well as professional medical associations. It’s important to reach out to these professionals early, and often.
“Start reviewing your retirement choices as early as possible—before what we call ‘the retirement red zone’—ages 45 to 50,” says Texin. “And check in with these advisors a few times a year to be sure that your asset allocation is meeting your goals.”
With changes in individual needs, tax laws, and products—not to mention a retirement age that’s shifting—Ward and Texin suggest looking at retirement decisions as “works in progress” and not as a one-time planning event.
Keeping up with your portfolio and modifying your choices as needed will help ensure that your golden years are filled with well-deserved comfort and fulfillment.
1. “Every Investment in Its Place,” Julie Connelly, The New York Times, August 25, 2009, www.nytimes.com.
