HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
A friend called me earlier this year. He was thinking of selling his business and wanted my opinion. The business was getting to be less and less fun and more and more work. He is a very smart, successful MBA who is very careful with his money. He has always worked hard and was having trouble accepting what it would be like to have no cash flow and just live off his investments.
I told him I retired because of call (medicine was less fun and more work) and I thought that even before the sale of his business he had more than enough to retire. Add to this the money from the sale and it was a slam-dunk; he would do fine.
He called the other day and said he did it, he sold his business. I congratulated him to be able to retire at age 52 (two years earlier than me) with a liquid net worth more towards 8 than 7-figures.
This scenario brings up many points worthy of discussion.
1) He will incur a very significant tax liability.
A) He worked with a tax account to structure the terms of the sale to be as favorable as possible to him. Many doctors would never think of this.
B) Taxes are going up next year. By selling this year he minimized the tax bite. If you have assets with significant gains you were considering selling, do it this year. Likewise, it is general teaching to accelerate losses. Considering the changes (increase) in the tax rates, you may wish to delay taking losses until next year.
C) You better not lose the money owed on the taxes. In general, you want to keep taxes owed in your possession as long as possible without incurring a penalty. But what if you parked the money in something you thought was safe but we had a financial meltdown and you found out it wasn’t so safe after all? You still owe the taxes. You could almost make an argument to take no chances and pay “The Man” what he is owed as soon as the sale goes through.
2) The next thing I would do is completely pay off any and all debt. Remember now that you are retired there is no cash flow to fall back on should something bad happen. If you are ever asked what is the best investment you can make? it is hard to fault answering paying off debt.
3) As a corollary, if his children are still in school and not yet self-supporting, he should set aside sufficient funds for their education.
4) It is standard teaching that when retired to have at least 3 years living expenses (equivalent to 10% of the value of your entire portfolio) set aside in risk-free investments, such as short-term T-Bills, CDs, money market, passbook savings, etc.. You cannot tolerate market volatility and do not want to be forced to liquidate investments at a market low, the worst possible time.
5) My friend said “So Bob, what do for income? I need to have something to live on. I am concerned about the stock market, I don’t want to buy bonds with long maturities (say longer than 5 years) because I’m concerned interest rates will eventually head up. Even 2-year CDs pay almost nothing. I think my best bet is solid dividend-paying stocks. I will get 3-4% a year return. If they go down, and are good companies, I will hold and take the dividend. I have to have some money to live on”.
RMD comment: I told you he was a smart guy. In years past, if you had $1M in CDs of maturities of 3-5 years at your local bank, staggered so something was maturing every couple of months, you could reasonably expect $40-50K per year of income. Now you will be lucky to get a third of that.
I think we are in a long-term bull market in the precious metals. In 5 years gold could be much, much higher than it is now, but in the interim, it pays no dividends, and you need cash to buy groceries and pay your bills.
This is the problem my friend now faces and those on fixed-income have faced for 10 years: What do you do for income? for money to pay the utility bills and buy the groceries?
This highlights the problem in a financial-asset bear market: There is no place to hide. Cash: in the short-term it preserves wealth, but generates no return. Real estate: may not yet have hit bottom. Bonds: discussed above. Hard assets: will do (relatively) well but produce no income (see above). Stocks: Have we hit bottom? There may yet be significant downside. The most common mistake is to “chase” a higher return but at the price of unacceptable, and often un-appreciated, risk.
Bottom line: Unfortunately, I have no good recommendation for my friend to generate solid income. Putting some money in solid-dividend stocks is a reasonable option. General teaching is that you save money for “a rainy day”. I believe it is a rainy day. On rainy days it may be better to eat into your principal than end up with a loss on risky investments.
RMD
Last Thursday it was announced that for the first time in 30 years, the Social Security benefits to 53 million retirees will exceed the taxes paid by workers this year and next.
RMD comment: The Social Security Trust Fund sends their surpluses to the Treasury. The Treasury sends an IOU to the Trust Fund and spends the money, thus “hiding” the true amount of the deficit. There’s no place to hide now.
My view of the stock market: A tough one; isn’t it?
1) Although the market has advanced on weak volume, it has advanced. Friday it was down 150 points because of the punk job report, but rallied to finish down only 21.
2) I believe we are in a primary bear market.
3) Valuations, P/E ratio and dividends, are more suggestive of a top than a bottom.
4) But here is what really concerns me: A) Interest rates continue to fall. The bond market is larger than the stock market at it says nothing but deflation. B) The US dollar (see chart just below), is being pounded.
My recommendations remain the same; pay off your debt, have some gold, have some cash, and realize that, in investing at least, if you don’t know what to do, don’t do anything.
WSJ, 8/3/10. “Hundreds of major employers in recent years have reduced or eliminated their (matching) contributions to workers’ 401(k) plans…(These) are considered crucial building blocks for retirement savings. A number of these employers said they hoped to resume the matching benefits when business improved. But so far, these benefits have been restored only sporadically”.
RMD comment: As I have said all along, do not rely on the government, or anyone else, for your retirement. It is your responsibility.
I remind you again: Estate tax laws change very significantly next year. It is mandatory you see your estate lawyer before the end of the year, the sooner the better.
I am in the process of obtaining copies of all deeds and making sure everything is titled in the name of my revocable trust. I will tell you it is a real pain, but it is this sort of attention to detail and just plain persistence that separates those who can accumulate wealth from those who can’t.
I received an email from a recent subscriber and long-time friend. His parents were two of my earliest patients. They were prominent people in the community and I always considered it an honor that they entrusted me with their care. His mother’s family had significant real estate holdings in Nebraska but lost it all in the Depression because they had debt on their land in the Columbia area.
His father’s family had significant land holdings in this area since the Civil War and when his mother and father were married in 1934 they “couldn’t have come up with $500 if they had to”. But they had no debt and he still owns and farms the land.
I saw on the Internet last week that a farm in New Hampshire that had been in the family since 1632 (378 years is a very, very long time) was going to be sold because those retiring did not wish to saddle their children with debt.
RMD comment: to quote Warren Buffett “The only thing that can make a smart person go broke is debt”. The problem is that our entire society encourages debt. The government encourages debt by providing deductions for interest payments on debt and discourages investment by taxing income, dividends and capital gains. You get what you want: our government encourages debt and that is what they get.
I worked a total of 15 months at Granite City Steel; the summers of 1970 and 1972, and after I graduated from college a semester early, 9 months in 1973. I worked with three “Rosie the riveters”. One was a cranewoman in the cold strip, one worked in the hot strip, and one broke me in as an inspector on the hot end of the blooming mill.
I never heard a sexist comment or complaint about these ladies. They did their part when it counted during the War and continued to work hard right along next to the guys for the next 3 decades.
Site by Delta Systems powered by ExpressionEngine