Retirement Considerations for Dermatologists

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For most dermatologists, retiring on their terms with financial security is their leading wealth planning goal. On the other hand, retirement may have varying meanings to different physicians and, for many, calling it quits completely may not fit their vision.

In fact, there has been a notable shift across all medical specialties, with many doctors choosing to delay retirement or continue practicing in some capacity well beyond the traditional retirement age. Despite this change, important financial considerations for retirement remain.

Retiring Later

Dermatologists who enjoy robust health and an unwavering passion for their work are increasingly inclined to put off retirement beyond traditional retirement age. The nature of medicine as a calling, beyond a mere career, can play a prominent role in a dermatologist’s reluctance to retire. Many find satisfaction in the intellectual challenge of medicine, the opportunity to interact with patients, and the sense of fulfillment that comes from helping others. These are all influential factors for many dermatologists choosing to continue practicing well into their70s or even 80s. Dermatology, more than some other specialists, may allow for longer time horizons and lend itself for part-time practice, which can make a “semi-retirement” even more feasible.

Despite the changing nature of retirement for many dermatologists, the following 3 financial considerations remain important:

Developing a Budget

It may seem like overly simplistic advice, but budgeting can either propel a retirement plan to success or drive it to failure. While many dermatologists may believe a budget is merely an awareness of what one is spending, its actual purpose is to ensure that one lives within their means and that every dollar earned is deployed with strategic purpose. To accomplish this, one must have a written and managed budget, not just a simple mental tally of expenditures. Deciding how much to save today will depend greatly on how much one expects to spend during retirement. There is no way to determine that without attempting to project future expenses. One can accomplish this by creating budgets based on various postretirement factors including location, size of home, hobbies, frequency of vacations, and other lifestyle expectations. It may be helpful to model multiple scenarios, including an aggressive and a conservative budget.

A common mistake made by many well-meaning physicians during this exercise is assuming substantial investment returns to justify expensive lifestyle choices. Expecting massive returns on minimal savings is detrimental to a retirement plan. Investors, including dermatologists, should consult with an adviser to determine a reasonable expected return based on historical performance, portfolio components, and other factors.

Reviewing Asset Allocation

Asset allocation encompasses the types of investments within a portfolio, their various underlying industries, risk, and level of market correlation. One of the most important strategies for proper asset allocation is diversification.

Diversification is the process of varying the allocation of value in a portfolio among a variety of sectors, investment types, and risks to reduce each investment’s correlation with the others, thus ensuring some buffer against significant swings wiping out an entire portfolio. Proper diversification offers one of the most effective ways of mitigating losses. As dermatologists age, they need to reallocate their assets into increasingly conservative investments to best limit their exposure to loss as their investment time horizon shortens. Additionally, careful consideration must be made to properly limit downside risk, potentially through fixed income and alternative investments. To understand why this move is often more beneficial than seeking higher returns in later life, one needs only to be familiar with sequence of returns risk.

Sequence of returns risk is the danger that the timing of liquidation and withdrawal from a retirement account will coincide with a downturn in the market. If it does, then it effectively reduces the overall potential performance of the entire portfolio because a high number of shares will need to be liquidated to get the income expected, leaving fewer shares in the portfolio to grow. Sequence of returns risk may not be important during the accumulation phase, but during the withdrawal phase it is one of the most critical factors in the overall success of a retirement plan, making it a higher priority than chasing returns.

Designing a Withdrawal Strategy

The design of a withdrawal strategy is equally important to financial health in retirement. A fundamental pitfall in static retirement plans is setting a withdrawal rate that is fixed over a retirement period. Consider that, for many dermatologists, the retirement stage of life is likely to last 20 years or more. In that time, investment yields may vary widely and tax rates and personal spending habits could change. Because of these changing variables, it is essential that flexibility be built into retirement planning, both in initial models (high, middle, low) and when reviewing the plan each year (or more frequently). By having flexible planning models and periodically adjusting them based on real-time results, one can expect to follow a model that can endure throughout retirement, regardless of how many years or decades that retirement may last.

No one knows what tax rates will be upon or during retirement. This does not mean physicians should ignore tax planning, but that they should account for the potential costs of taxes and design a strategy to minimize them. To do this, one must understand how taxes will impact withdrawals and liquidations. Having a plan that considers which withdrawals will trigger ordinary income taxes, which will incur capital gains, and which will realize no tax is essential.

With the right strategies and a clear vision, retirement can unfold as a rewarding chapter, offering continued involvement and engagement, whether through sustained medical practice or rewarding personal pursuits. A professional adviser and a flexible long-term financial plan can e indispensable resources as physicians navigate this transition.

David Mandell, JD, MBA, is an attorney and the author of more than a dozen books for doctors. He is a partner in the wealth management firm OJM Group (www.ojmgroup.com).

Bob Peelman, CFP, is a partner and director of Wealth Advisors. They can be reached at 877-656-4362 or mandell@ojmgroup.com.

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