- Considerations for physicians looking to retire soon
- Stress-test your portfolio with worst-case scenarios
- Diversifying can help protect you from the downside risks of investing
Consider this possible scenario: In 2015 you informed your hospital that you planned to retire at the end of 2020. Hospital management agreed and you started transitioning duties and training younger physicians for the responsibilities ahead.
Fast forward to the end of 2019. The S&P 500 finished the year up 30% (+33% counting reinvested dividends). With retirement one year away, you were in great shape. Your plan looked even better through the first part of 2020, until COVID-19 happened and upended the world.
And now, the thought of retiring at the end of this year is far from certain. But it doesn’t have to be this way. While almost no one could have predicted the COVID-19 pandemic and the global devastation it has caused, these types of “Black Swan” crises events are more common than you think. There are ways to fortify your nest egg from torpedoes that strike before, during, and after retirement.
Stress Test Your Portfolio
Retirement projections that model the outcomes of best and worst-case scenarios can help you determine your future. For instance, you can test the model to see how well your nest egg would hold up when the markets are down 20%, 30%, or even 40% like we saw in March. Your financial advisor can explain how your cash flow is impacted when the stock market is down and when it is up. With a well-thought-out plan, you can worry less and focus on more important matters.
Diversifying is a Great Defense
When we look at the events of the past 25 years, reflected in the table below, we can examine how the global markets reacted 1, 3, and 5 years after the events. Managing a diversified portfolio with a mix of stocks and bonds is a great way to protect yourself from the downside risk while still participating in the growth of the global markets.
Our future has many uncertainties but we can still make smart, conservative assumptions based on historical data to give us the best odds of success. We take calculated risks every day of varying degrees, but we accept a level of risk based on our tolerance level and past experiences. That’s why we continue to drive on the highway, ride bikes, go skiing, and fly on planes. The same goes for our money. Because of the risks we take, we can enjoy life, accumulate wealth, and provide for our families.
Focus on What You Can Control
There are a few factors you can control when it comes to retirement planning. Things like, how much you save along the way, how much you plan on spending, and how much risk you are willing to take with your investments. When we model these factors out for our clients, we create projections to choose when to retire, to take an extra vacation, or to send children to private school.
The Risk/Reward Relationship
As I prepare to publish this article, we’re nearing the end of 2020. The market has recovered much of the jaw-dropping ground it lost in March and April, but there is still plenty of uncertainty about what is to come. There will likely be other events in our life that cause the stock market to drop 20%, 30%, or 40%. This is an expected outcome and a risk every investor must take. But those willing to take that risk are rewarded with higher expected returns in the long run. You should ask yourself – what would happen to my financial plan if I retired during a recession? What is the best way to create the cash flow I need to sustain my lifestyle?
Let Us Help You Retire with Confidence
If you or someone close to you has concerns about their retirement readiness or portfolio allocation, contact us at any time.
James Nevers,CFP® is a Senior Advisor at Soundmark Wealth Management, LLC. James works closely with physicians, business owners, directors and executives at Amazon, Microsoft, and Boeing, and other successful individuals to help them define their financial goals and implement an ongoing financial planning process.