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Honey, I Shrunk the Retirement by Douglas Carlsen, DDS

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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
  1. John Bogle: How much do investors lose in charges and management fees? Video at https://www.youtube.com/watch?v=0aegXd0Q1CI
  2. Alicia H. Munnell, Natalia Segeyevna Orlova, and Anthony Webb, “How Important is Asset Allocation to Financial Security in Retirement?” CRR WP 2012-2013.
  3. with 95% chance of having savings last to age 95.
  4. According to Financial Engines software on Dec. 2, 2013.
  Author's Bio
Dr. Douglas Carlsen has delivered academic-based financial education since retiring from private practice in 2004 at age 53. He has no connection with any company or individual and speaks his mind freely.

Carlsen is very interested in speaking to your study club! Contact at 760-535-1621 or drcarlsen@gmail.com.

Over 25 videos available: search Dr. Doug Carlsen at You Tube site. Additional Carlsen Dentaltown articles are at: www.dentaltown.com. Search "Carlsen." Carlsen website is at www.golichcarlsen.com.
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