Excerpted from the March/April 2021 edition of AOA Focus.
When it comes to retirement planning, it’s never too early to start saving—and COVID-19 has taught us that planning ahead may be more critical now than ever. Nathanael Kelley, senior retirement program specialist for Equitable Financial, an AOAExcel®-endorsed business partner, shares key things to keep in mind.
If a doctor has not yet started to save for retirement, why is it important to begin now?
The more doctors invest, and the earlier they start, the more time and potential their retirement savings will have to grow. By investing early and staying invested, they may be able to take advantage of compound earnings and successfully pursue their retirement goals and be prepared if they may need to retire earlier than planned.
For example, assume that a doctor’s investments earn 8% annually. If the doctor invests $2,000 a year from age 25 to 35 ($20,000 in all) and then stops completely, the doctor could accumulate $315,000 by age 65. But if the doctor waits until age 35 and invests $2,000 a year for 30 years ($60,000 in all), they would accumulate just $245,000 by age 65.
In addition to starting early, an essential component in helping doctors reach their retirement goals is increasing the savings rate over time. Saving for retirement at the start of their career may be intimidating for a new doctor, but they can start at an affordable savings rate and work their way up to contributing the maximum. Increasing even 1% per year can create a dramatic impact over time.
What are some small, manageable steps doctors can take to get started saving for retirement?
The key to successful retirement savings is getting started: the earlier, the better. The longer you have to take advantage of tax-deferred compounding, the better chance you have to meet your retirement goals. If you are self-employed in the early years of your career, there are several options, like SIMPLE (Savings Incentive Match Plan for Employees) and Safe Harbor 401(k), which allow you to start at a lower contribution level until you get your practice going with a steady cash flow and have more resources available to dedicate to retirement savings. You can get started with whatever contribution level meets your budget, and with the options mentioned above, keep your costs down if you have eligible employees. Suppose you are working as an employee in a practice and your employer offers a retirement plan. In that case, you can get started at a contribution level that fits within your financial constraints and plan to increase your rate as your circumstances and goals change. If you are working as an employee in a practice that does not offer a retirement plan, you should consider contributing to an Individual Retirement Account.
Regardless of your particular employment situation, there are many options to start taking small manageable steps toward meeting your retirement goals.
What impact has the COVID-19 pandemic had on retirement savings plans in general?
The uncertainty surrounding COVID-19 has led to a lot of apprehension surrounding retirement savings, which is reflected in contribution amounts, willingness to start a plan, and risk tolerance. During these periods of uncertainty, it’s important to keep a long-term perspective while investing in your retirement plan because it may be years before the true impact of the pandemic and subsequent shutdowns are fully reflected in the markets and the economy.
What are some key considerations doctors should keep in mind when evaluating retirement strategy considering COVID-19?
It’s essential to look at the big picture. Depending on age, retirement plan investing is more of a marathon than a sprint. First, doctors should make sure that they know what their risk tolerances and investment timelines are. These are essential in determining the proper allocation of funds. If a doctor is younger and has a higher risk tolerance, then a monthly or even yearly fluctuation will not be as impactful as it would be to someone nearing retirement. Doctors closer to retirement may prefer to protect their gains due to a shorter time horizon before withdrawals will begin. AOA members can receive complimentary reviews with Equitable’s retirement program specialists, who can help members evaluate and adjust their retirement savings strategies.
While the AOA, and others, urge HHS to rethink implementation of this No Surprises Act provision, an upcoming #AskAOA webinar will help doctors meet the requirements that took effect Jan. 1, 2022.