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Retirement Planning: How Much Should a Medical Professional Save for Retirement?

April 20, 2015

How much should I be saving for retirement? At some point in your life, you have asked yourself this question, and while circumstances vary, a common goal is to save is 10-20 percent of your annual gross income for retirement.  The goal for doctors and dentists, however, may be a bit more aggressive. Because of the many years of schooling needed to enter the industry, these professionals get a later start on saving for retirement.

Investment professionals suggest a minimum annual contribution of 15 percent of income for doctors and dentists, but encourage more. There are many ways to achieve financial independence, including employer-sponsored retirement plans and investment options. Whatever your situation, it is never too early to start planning.

Where to Begin?
Begin the planning process by taking a detailed look at your current financial situation, including cash, investments, debt and life insurance. The next step is to make reasonable assumptions about future income, spending and investment return. With this information, you can develop suggested saving and spending parameters to help you achieve your goals.

Employer-Sponsored Retirement Plans
Whether you own your practice, or you are a member of a group practice, there are many employee-sponsored retirement plans to consider. Talk to a financial advisor to determine which option or options are best for your unique situation. Visit www.irs.gov for current contribution limits.

401(k) Plan
A 401(k) plan is a defined contribution plan and does not promise a specific amount at retirement. Employees can elect to defer a portion of their income to this investment account and often an employer will match all or a portion of that contribution. The value of the account will vary as the value of the investments change. Deferrals are excluded from the employee’s taxable income, but distributions are taxed at retirement.

Profit-Sharing Plan
A profit-sharing plan is a defined contribution plan and does not promise a specific amount at retirement. The employer determines annually how much is contributed to the plan. The plan uses a formula to allocate an equal portion of the annual contribution to all participants. A 401(k) plan is included in a profit-sharing plan.

Defined-Benefit (DB) Plan
A DB plan is a traditional pension plan, which promises a fixed monthly benefit at retirement.  The benefit can be an exact dollar amount, such as $150 per month or, more commonly, a formula is used to determine an amount. The formula considers factors such as salary and service. For example, a person may receive 1 percent of their average salary for the last five years of employment for every year of service with the employer. A DB plan is the most costly and complex plan and employer contributions (and deductions) are typically higher than other options.

Individual Retirement Account (IRA)
An IRA is a savings plan that allows employees to contribute a portion of their income to an investment account. Often an employer will match all or a portion of the contribution. Contributions are tax-deductible, but withdrawals from the account are subject to federal income tax. These plans require little administration and let the owner direct their investment.

Simplified Employee Pension (SEP) Plan
A SEP offers the flexibility of a profit-sharing plan and the simplicity of an IRA. Employees and employers can make contributions of any amount (up to a maximum) to an employee-owned IRA at any time before the tax return deadline. Maximum annual contributions are typically higher than a traditional IRA and are not fixed, which makes them ideal for industries that experience cyclical revenue.

Other Investment Options.
If you have maxed-out your annual contributions and you have additional earnings you would like to put towards retirement, work with a financial advisor to determine other investment opportunities.  Financial advisors use sophisticated simulations to answer various ‘what-if’ scenarios. These simulations help to calculate your retirement needs and determine if you are on-track to meet your goals.

Planning for retirement may seem overwhelming, but there are many tools available to help you succeed. Start by taking a comprehensive analysis of your current financial picture and make some estimates about your future needs. Take full advantage of any employer-sponsored retirement plans and talk to a professional about other investment opportunities.

Like a patient’s treatment plan, your financial plan should be reviewed on a regular basis as your circumstances change and your goals are modified. Talk to a licensed financial advisor, like the professionals at Peoples Investments and start saving for your future today.

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