In the March 2012 edition of Dentaltown Magazine I looked in
detail at the portfolio of Dr. Will Guess who saw his $1 million in
2000 erode to $300,000 by 2012. A summary of Guess’ adventure:
In 2000 Dr. Will Guess, age 45, was on course to retire easily by
2010 at age 55 with $1,000,000 saved. In the late 1990s, a “genius”
Lehman Brothers broker sold Dr. Guess on hot “tech” and “dot com”
stocks. By 2002 Will’s portfolio was down to $300,000. He and his
broker retreated entirely from the market. Dr. Guess stayed on the
sidelines until 2006, missing one of the best bull markets of all time.
He got back in with small cap stocks, the darlings of the mid-2000s,
in 2007. Of course, those stocks crashed in 2008. In 2011, after missing
the next market run-up, Guess purchased $250,000 of gold. As of
March 2012, Dr. Guess had $300,000 saved, all in a gold bullion
exchange traded fund (GLD).
With an allocation of 100 percent gold and his current yearly savings
of $25,000, it was calculated Dr. Guess would need to work
until at least age 73.
Dr. Guess made big changes in 2012 and is back in the game
with a plan to reach retirement before his seventies.
Let’s uncover the most powerful weapons a doctor may use to
bolster savings.
Find the Lowest Overall Investment Costs
John Bogle, founder of Vanguard and popular author,
recently related, “After the insanely high costs of management
fees, marketing costs, and turnover costs…over an investment
lifetime one often receives only 30 percent of the market’s longterm
return.”
Thirty percent? This is a travesty! Bogle assumed an investment
lifetime of 60 years (age 30 to age 90) and common adviser
fees of 2 precent per year.1
Over a dentist’s working career of 35 years, how much is
lost due to all adviser or broker costs? See my video at
https://www.youtube.com/watch?v=i-ZCAS6Zceo for full detail.
A synopsis:
Assume a dentist saves $2,000 per month with a 60/40 mix of
stocks and bonds with a real, inflation-adjusted return of 5 percent.
After a 35-year career, that dentist would save $2.27M dollars.
With a traditional financial adviser, costs of 1 percent for individual
fund expenses and 1 percent assets under management (AUM)
or “wrap” fees are normal. The 2 percent total load reduces the 35-year
return to $1.48M or only 65 percent of $2.27M. That’s a loss of 35
percent! Insurance and commission-based brokers may have fee totals
of over 3 percent with returns reduced to less than 50 percent.
Investing on one’s own with Vanguard funds, there are no management
fees and fund fees are only about 0.2 percent. The 0.2 percent
total load reduces the return to $2.17M or to 96% of $2.27M.
I know many 60-year-old dentists using traditional brokers or
fee-based advisers that have only half of what they would have had
with a discount broker using index funds.
Where does the prudent doctor go for the lowest costs? Use a
flat-fee or hourly-rate financial professional or invest on your own
using buy-and-hold strategy with diversely allocated index funds.
Any AUM fee is normally deleterious to your financial health.
Dr. Guess is invested now in very conservative target retirement
funds with fees totaling 0.16 percent. He’ll keep 97 percent
of his investment.
Work Longer, Control Spending and Watch
Asset Allocation
A seminal study by the Center for Retirement Research at
Boston College released in April 2012 provides interesting findings
for 51-64 year-old pre-retirees and further guidance for dentists
who have seen savings wither since 2008.2
The Center for Retirement Research (CRR) considered the
following:
- Working longer
- Taking out a reverse home mortgage
- Controlling spending
- Shifting assets to an aggressive all equity (stock) portfolio with
an average long-term historic gain of 6.5 percent per year
For this paper, the reverse mortgage will not be treated. Yes, it
would make a significant difference for a retiree, yet most dentists
wish to keep a paid-off home for legacy purposes.
I used Financial Engines (FE) software, found at www.financialengines.com to study different retirement variables. All figures
used in this article are in 2014, or real dollars.
Work longer: In 2012, Dr. Guess wished to retire at age 66.
With his asset total allocated in 100 percent gold with $25,000
annual savings placed into the gold account, Dr. Guess would
need to work until age 73 to have a 90 percent chance of having
his savings last to age 95.
Control spending, thereby saving more per year: Dr. Guess
spent high amounts on dining out and home improvements. He
and his wife dined fashionably at least three times per week,
which averaged $1,200 per month. He could easily spend $500
less. Also, in looking at home records, he’d spent $120,000 on
kitchen, bath, roof and landscape
upgrades from 2000 to 2012. He could
easily cut back to $6,000 per year, saving
another $500 per month.
If Guess spent $1,000 less per month,
his $25,000 annual retirement saving could increase to $37,000.
An added benefit is that with the new lifestyle, he would need
$12,000 less in his retirement budget. His after-tax spending
budget in retirement could fall from $105,000 to $93,000; therefore,
his pre-tax income need would tumble to $124,000, significantly
lower than his previous $140,000.
By spending $12,000 less, thereby increasing savings and lowering
retirement income need, we found that Dr. Guess could
retire at age 71,3 two years earlier while still investing in gold.
Shifting assets to an all-equity portfolio: Note that Dr.
Guess had an extremely high-risk portfolio in 2012. Can a change
in the portfolio make a difference?
Keeping Dr. Guess’s spending and savings at the original level,
yet changing the original all-gold allocation to a 100 percent S&P
500 fund for future savings, we found that Dr. Guess could retire
two years earlier. With an allocation into all asset classes using a
very conservative, low risk Vanguard Target Retirement Fund of
40 percent stocks and 60 percent bonds, Dr. Guess could retire
three years earlier than investing only in gold.
There go another three years to age 68.
Combining it all
We knew Dr. Guess would need to work longer to afford
his desired lifestyle. But 73? That’s forever! By spending less, Dr.
Guess could both save more and lower his income in retirement.
We also saw that placing all assets into one high-risk fund was
counter-productive.
With the above changes, Dr. Guess now has a 95 percent certainty
of having his savings last until age 95 with retirement at age
68 using a Vanguard Target Retirement 2010 Fund of a conservative 40 percent U.S. and international stock and 60 percent U.S.
and international bonds.4 This is within two years of his original
goal of 66. So much for those that preach the prudence of large
holdings of “safe” commodities.
Many dentists feel they have to “catch up” with high-risk
investing after bailing out of the market in troubled times. Our Dr.
Guess, who had an extremely high-risk portfolio, found taking
lower risk made a huge difference!
After age 50, investing aggressively may not be prudent. In fact,
as pointed out via Financial Engines, and as I’ve found with many
boomer clients, a conservative mix of bond and stock funds often
works best with less mental stress for the over-50 dentist.
How’s Dr. Guess doing in 2014? His portfolio is up 60 percent
since March 2012 with little reason to panic over market ups and downs. He’s 59 and is on solid track to be financially free by age 68.
References
- John Bogle: How much do investors lose in charges and management fees? Video at https://www.youtube.com/watch?v=0aegXd0Q1CI
- Alicia H. Munnell, Natalia Segeyevna Orlova, and Anthony Webb, “How Important is Asset Allocation to Financial Security in Retirement?” CRR WP 2012-2013.
- with 95% chance of having savings last to age 95.
- According to Financial Engines software on Dec. 2, 2013.
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