Investment Consult

Quit work, quit investing?

Here's a must-read if you're thinking about taking down your shingle soon.

Lewis J. Altfest, CFP

If you're like most people, you probably figure retirement brings huge changes, not only in lifestyle but also in investment strategy. After all, you won't have practice income. So should you dramatically rework your portfolio?

No. Retirement isn't life's finish line. If you leave medicine at, say, 65, your investments may have to generate income for 20 years, or longer. Let's examine some issues my older clients have raised in recent years. Some of their questions may strike a chord with you, too.

I have plenty of money for retirement. How should I manage it? You can look at this two ways. Since you don't need to generate more income, you could put your mind at ease by shifting most or all of your assets into very conservative vehicles (US Treasuries, municipal bonds, certificates of deposit, etc.). Or, you could invest with your heirs' risk tolerance in mind, knowing that at least some of your money is likely to be theirs one day.

One of my clients, a widow, dealt with these conflicting goals by splitting her money into two buckets. I've invested about half in US Treasuries for her, based on her retirement needs. The other half, targeted for her kids, is largely in equities.

Stocks have always gone up over longer periods. Shouldn't I put all of my money in them? No. It's true that stocks of large companies and small ones have had positive compounded annual returns over periods of 20 years or longer. But that doesn't mean the market will be strong when you need the cash. And when you withdraw your money has a lot to do with how long that money will last. If you start spending when the market is weak, as it is today, you'll be forced to take out more of your assets to maintain your lifestyle. When the market rebounds, you're unlikely to make up the investment dollars you liquidated.

However, you can take some steps now to lessen the blow in case you retire during a bear market. If you're older than 50 and still fully invested in stocks, slowly start shifting some of your money into bonds and other less-risky vehicles. I'd suggest roughly 15 to 20 percent every decade.

Should I put all of my money in bonds? No. This is as risky as owning nothing but stocks, particularly when inflation picks up. Although inflation is only about 2 percent these days, remember that it was as high as 12 percent as recently as 1980. The returns on bonds may be fine for your cost of living today, but they'll be insufficient to cover increases over an extended period.

What do you think of the "100 minus my age" approach for deciding what percentage of my assets should be in stocks? It's too simplistic. For example, I don't believe a healthy 70-year-old should have only 30 percent of his or her assets in stocks. Someone with multiple, chronic ailments may need to preserve a greater percentage of capital, whereas a person in good health might be fine with 40 or 50 percent in stocks and the rest in bonds, other fixed-income investments, or both. Besides your health, consider your tolerance for risk and your overall financial situation.

How can I explore different investment allocations to fund my retirement? Personal finance software such as Microsoft Money and Quicken lets you estimate your retirement assets using different allocations and assumed rates of return. The programs aren't perfect, but they consider plenty of factors (your age, retirement date, future liabilities, inflation, lifestyle, etc.) and can help you determine whether you're on the right track. If you don't want to do the calculations yourself, ask your financial planner to run them for you using different scenarios.

I'm planning to retire soon, even though I may be short some money. Should I take on more risk to increase my returns? I wouldn't recommend it. If you then get nervous during a rocky market and sell too soon, you may wind up worse off than if you'd left your portfolio alone. Stick with your current level of risk and find ways to curtail your spending in retirement. If the thought of cutting back makes you cringe, you ought to seriously consider working a few more years to pad your nest egg.

The author, a fee-only financial planner, is president of L.J. Altfest & Co. ( www.altfest.com ), a financial and investment advisory firm in New York City. This column appears every other issue. If you have a comment, or a topic you'd like to see covered here, please submit it to Investment Consult, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742. You may also send a fax to 201-722-2688 or e-mail to meinvestment@medec.com.

Lewis Altfest. Investment Consult: Quit work, quit investing?.

Medical Economics

2002;24:17.