Professional Documents
Culture Documents
to Confidence
The Transition to Financial
Independence
PAGE
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 1 INTRODUCTION
WHITE PAPER FOR PHYSICIANS
THE CHALLENGE . . . . . . . . . . . . . . . . . . . . . . . . 1 From Uncertainty to Confidence – The Transition to
Financial Independence
INVESTMENT TRUTHS . . . . . . . . . . . . . . . . . . . . 4
THE CHALLENGE
THE RIGHT MEASURE . . . . . . . . . . . . . . . . . . . . 7 Challenges Physicians face in planning for retirement
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INTRODUCTION
THE FINANCIAL BENEFITS OF PRACTICING MEDICINE HAVE DIMINISHED SHARPLY
OVER THE PAST DECADE. Physicians in their 40’s, 50’s and 60’s are facing
unprecedented challenges to achieving long term financial independence.
As retirement moves closer, the margin of error becomes smaller and smaller.
Today, many physicians are far less confident than in previous times about being able
to maintain their lifestyles throughout retirement. Our objective throughout this paper
is to address these very real risks unique to physicians and how they can be solved.
THE CHALLENGE
TRANSITIONING FROM THE RETIREMENT MODEL OF THE PAST TO A FRAMEWORK
KEYED OFF OF FINANCIAL INDEPENDENCE WHERE WORK IS OPTIONAL –MENTALLY,
PROFESSIONALLY AND PERSONALLY REQUIRES DEFT TIMING AND ACUMEN. Today,
many physicians are finding it necessary to work to a later age than was typically the
case even a decade ago. The combination of longer life expectancy and a more
mobile retirement create unique challenges.
More complicated family relationships (support for aging of saving within their tax qualified retirement plans but are
parents or problematic children) and professional, not as disciplined in saving/investing outside these plans.
business or investment mistakes along the way all add up In most cases, the capital accumulated within the
to additional pitfalls. Many physicians retiring today in retirement plans will not provide a sufficient income
their mid 60’s will live beyond age 90. Financially stream for the 25-35 years of retirement that may be
speaking, planning for a 25-35 year retirement is needed. Physicians as a group are skilled at working and
challenging. earning income. Transitioning to a period of not working
and not earning income (but rather withdrawing) can
Over the past decade, many physicians have seen their prove daunting.
personal incomes decline by significant percentages.
Cardiologists, gastroenterologists, anesthesiologists and It is our experience (25+ years working primarily with
others have been particularly hard hit. A physician who physicians nearing retirement) that most physicians over
has enjoyed a $500k/per year income for many years age 55 are entrepreneurial and independent. These are
generally finds it very difficult to adjust his lifestyle enough not qualities particularly revered in the large corporate
to accommodate a new income of $300k /per year or so. medical practices of today. The rapidly changing
Of course, this leaves less to save which impacts the professional landscape has led to an increasing likelihood
future. Most physicians have historically done a good job of serious and long lasting mistakes. Changing practices
While Wall Street is indeed a physical place, in lower “efficient market hypothesis”. Using U.S. market data, Fama
Manhattan, the term really applies to a marketing found that there was very little useful information about
philosophy aimed at creating needs and solving these via future stock prices in charts or graphs. The market
packaged or structured products. Regardless of what reasonably well reflects the fair value.
stockbrokers are called, (Financial Consultants,
Investment Managers, etc…) they are really just Traditional investment managers who strive to “out-
salespeople peddling products. These products have select” the market by exploiting perceived pricing
varying degrees of remuneration to the broker ranging mistakes are in essence trying to forecast the future.
from a few dollars to several percentage points. The For the large majority, this exercise proves futile with
entirety of the Wall Street edifice – brokers, fund their customers or clients bearing the expense. When
managers, stock analysts and investment bankers – are all you take your money to the brokerage firm or bank, this is
presented as experts having unique knowledge. This, of precisely what they are giving you in most cases. They all
course, is largely untrue but this message is foisted upon proffer that they have “selected” the best managers or
the investing public in heaping mounds, day after day. mutual fund. It is mostly meaningless. The “timing and
selection” mindset is perhaps the primary fallacy that must
Don’t be fooled by the “fee based” accounts that brokers be “unlearned” in order to accomplish your financial goals.
have designed to “eliminate” their built in conflicts of
interest. These “fee based” accounts essentially lock you in In many respects the investment markets come down to
to a high enough overall commission/fee to virtually what you believe. You either believe in the ability to select
guarantee below market level performance. With a quarter superior investments or you don’t. Additionally, you
century of advising physician clients, we have seen just believe in the ability to time markets or you don’t. The
about everything in terms of investment products and Wall Street marketing message revolves around believing
structures. We often see new clients who come here that indeed you can out select and time markets. A half-
thinking that they have adequate diversification. They may century of market research refutes this but human nature
have their retirement accounts in a combination of and the emotions of fear and greed keep this notion alive.
individual stocks (selected by the stock-picking brokerage
firms) and mutual funds that in theory at least have The financial markets provide differing levels of return for
differing objectives. What we often find once we analyze differing levels of risk. The return on a five year bond is
the various holdings is a serious lack of real diversification usually lower than the return on a stock investment
except by way of product name. Many if not most of the because the risk is lower on the bond. Stock market
stocks typically fall into the “large growth“ category and returns are dependent upon this higher level of risk (and
the same usually applies for the mutual funds despite commensurate return over the long run); the dividend and
names and stated objectives that may suggest otherwise. earnings growth; and what is sometimes called
speculative risk. The speculative risk applies to the
As people of science, it seems reasonable to expect multiple of earning that the stock sells for in the market.
physicians might indeed follow the science of the markets. Historically most stocks have sold for 16-18 times their
Starting with the thesis by French graduate student, Louis earnings. Stocks that sell for lower earnings multiples are
Bachelier in 1900, there has been a steady flow of sometimes referred to as value stocks while those with
scientific literature dealing with modern markets. higher than average earnings multiples are called growth
Bachelier’s thesis, “Theory of Speculation”, postulated that stocks. Over time the higher investor returns are derived
no amount of information about past performance from the value side of the market because the risk is
enabled traders to predict future ones. In the 1960’s higher and you purchased them at a lower price.
Eugene Fama at the University of Chicago coined the term,
Source: US bills and inflation data©, Stock, Bonds, Bills, and Inflation YearbookTM, Ibbotson Associates, Chicago. The S&P data are provided by
Standard & Poor’s Index Services Group
By “right measure”, we refer to the point when based on In this example, you have failed to recognize (until it was
current resources and additional savings, the retirement too late) that you must engineer withdrawals to an
income equation will be solved. This concept is totally amount that is sustainable across multi year timeframes
foreign to most of our clients until we walk them through and differing market circumstances. There have been
the thought process. More often than not they arrive here several academic studies that address this topic and
saying that their goal is to “maximize their investment conclude that withdrawal rates of 4-6% per year are
return” a concept that is both illusive and potentially probably the sustainable withdrawal rates for normal
damaging to their overall objective. We usually utilize the portfolios (portfolios with 60-80% equities).
dual concepts know as Monte Carlo simulation and
Sustainable Withdrawal to assist in calculating the A physician who retires in his mid 60’s with a $350,000
probability of “success” in funding a particular financial per year pre-retirement income will likely need $250,000
independence equation. These take into account a wide -$350,000 per year on average in retirement over a 25 -
range of possible scenarios, which in essence make 35 year timeframe (adjusted for inflation). Our experience
uncertainty part of the forecast. The goal is to derive a tells us that assuming good health of both the physician
level of return/ risk needed to obtain a reasonably high and spouse (if applicable), the retirement income need
probability of success (perhaps 80-90%) with all the will likely mimic or perhaps exceed the pre-retirement
inflation, savings, and life expectancy variables included. spending for a period of several years and then decline.
Therefore, without consideration of Social Security or
This concept of “Sustainable Withdrawal” provides us with other pension type income sources, the typical
a broad framework for looking at the sufficiency of a physician likely will need investments somewhere in
client’s overall pool of assets reflected as a regular the range of $5-7 million in current dollar terms to
withdrawal amount. The key is to consider what achieve financial independence.
withdrawal rate is sustainable across both good times
and bad times. At first this seems to be another difficult
leap for many clients to understand. A historic example
might prove helpful. Let’s assume that you retired in 1970
with a $1million investment portfolio and desired
$80,000 per year of income from that portfolio in
retirement. The investments are structured such that an
average return of 8% per year is projected. You expect to
withdraw this average return each and every year and
then leave the untouched principal to your heirs at death.
You start taking withdrawals without much concern for
principal erosion. 1970 is a barely positive year while
1971 and 1972 are double-digit positive return years. So
far so good…right? Well, the bad luck scenario starts in
1973 when the S&P 500 declines by about 15% and 1974
is even worse with almost a 27% decline. So, where are
we after the first 5 years? Well, the average return has
been about -5% per year and all the while you have
been withdrawing 8% per year. You now have less than
one-half of the portfolio value that you started with 5
years prior, all attributable to “bad luck”.
This “setup” period is where you begin to think about your generations. Intellectual stimulation and interests can
vision of retirement (and the vision of your spouse). This contribute significantly to a happy and healthy retirement.
should include the “where” or “place” that you will live
during at least the first phase of retirement. It is not Of course, in addition to becoming prepared mentally for the
uncommon for parents/ grandparents to move to be next 30 years or so we have to be prepared financially. We
closer to the kids/grandkids. This discussion of “place” are after all trying to protect dignity and independence both
can often be tension filled and has numerous financial of which have a cost. Our substantial experience in this
implications (such as selling one house and buying another). realm suggests that retirement can be divided into two or
three phases with distinctly different financial implications.
During this transition timeframe it is important to Assuming good health of both spouses, the first few years of
realistically establish a vision of what retirement means to retirement usually see an increase in spending versus the
you (and yours). Again, our experience tells us that period immediately preceding retirement. Spending
spouses often have mutually exclusive visions of sometimes can be in the range of 20% per year more for a
retirement. There may be no right or wrong but clearly it is few years before leveling off. The reason can be traced
paramount that both agree on the fundamental outline of primarily to availability of time and travel.
what this period might look like.
If during this set up to retirement you discover that your
This should also be a period where the physician needs to resources do not match your lifestyle then you have time
be certain to develop (if they don’t already exist) outside to save more and prioritize between competing financial
interests so that both mentally and physically they will be commitments. You may not be able to afford the house at
prepared for the after work phase of their lives. As we the coast or the mountain cottage if traveling is of
have said throughout this piece, for the most part, greater importance. This is the time to explore the options
retirement years today are far more active than in previous and prepare. O
1. Understand the “new longevity” that makes the retirement period about 30 years for the average retiree.
2. Remember that the most important component in retirement is income and protection of purchasing power.
3. You have but one rational goal – to offset the increases in costs.
4. You have but 2 investment choices – fixed income and rising income (equities) investments.
5. Above all else – understand the distinction between an advisor and a pretender (stock broker, insurance sales
person, banker, etc…)
A financially independent retirement is dependent on establishing a wise and sustainable financial structure that can
withstand many different possibilities. Armed with over a quarter century of advising retirement age physicians, our firm
has created a unique wealth management approach that we call Wealth Rx®.
ABOUT US
J.E. Wilson Advisors, LLC is the oldest South Carolina fee-only financial planning firm after being founded in 1982.
Since then, our mission has always been to provide independent and unbiased financial solutions through long term,
trusted advisory relationships.
Our comprehensive approach to wealth management combines nearly three decades of experience with the most up-
to-date and relevant academic and empirical evidence available today. We provide a holistic approach to the overall
financial well-being of our clients, inspiring confidence in their ability to maintain their lifestyle for many years to come.
With more than two-thirds of our clients being physicians, we developed a proprietary process, Wealth Rx®, to focus on
the challenges specific to successful physicians today.
We are one of a select group of fee-only independent financial advisors that have access to funds through Dimensional
Fund Advisors (DFA). We can provide our clients with these structured, low-cost mutual funds that can not be
purchased in the retail market. Together, J.E. Wilson Advisors and Dimensional Fund Advisors help our clients develop
and maintain a disciplined, scientific approach to investing.
Mr. Wilson has been active in serving the financial planning needs to physicians for over 25 years and has been a
pioneer in the field of fee-only financial planning. He is uniquely experienced to offer unmatched wisdom to
medical professionals.
Wealth Rx® is our unique wealth management process, designed specifically with successful Physicians in mind. This
proprietary planning process provides the strategy, structure and solutions that create a framework for helping our
clients ensure they have the ability to sustain their lifestyle, now and into retirement.
Perhaps the most important thing to understand about Wealth Rx® is that it is a systematic, disciplined process that
helps you design and implement the structure that will enable you to create and maintain your financial independence,
now and over time. The structural components of Wealth Rx® work in concert with one another, with each element
interlinked to achieve the desired result…uncommon confidence.
Successful individuals and families turn to us to help them understand their situation, address their questions and
concerns, determine what options are available, and design plans that support their ability to feel truly confident about
their financial futures. And it is for these reasons that we work so hard each day - to help transform uncertainty into
confidence.
Not everyone has the comfort of achieving financial success, and those that do often face uncertainty and challenges
that make it difficult to feel confident in their long-term financial independence. Unfortunately, for physicians in this day
and age, financial confidence is not common. Wealth Rx® is a holistic and disciplined regimen that provides a new level
of confidence in your wealth, and your life.