3 big questions every dentist should answer before retirement

Continuing his series on financial matters for dentists, Dr. Doug Carlsen now focuses on what dentists should think about before retirement.

Question 1:  What will my living expenses be in retirement?

Fixed expenses include groceries, utilities with cable and Internet, auto payments, possibly a mortgage, property taxes, and medical premiums.

Fixed expenses average between $3,000 and $7,000 per month.

Variable expenses include vacations, donations, clothing, hobbies, dining out, theater, sporting events, home cleaning, maintenance, yard work, and the biggest expense ... home upgrades.

Variable expenses average between $4,000 and $6,000 per month.

Add these together and the early retiree has a budget of between $7,000 and $13,000 per month. Note that taxes are not included. They are an issue, as Social Security will be taxed as well as any tax deferred funds.

VIDEO: The dentist's retirement number in 7 minutes

Question 2: Where are you in the market cycle?

Let’s visit a couple that retired in 2007, right before the market crash of 2008. They had $2M saved. Using the 4% rule, they planned to take out $80,000 per year from their investments and index up for inflation every year.  Social Security for most dental couples at full retirement is normally at least $48,000. Our couple will have $50,000 from Social Security and take out $80,000 from savings each year for a total of $130,000 income. 

The market crashed in 2008 and the couple’s 50/50 mix of stocks and bonds tumbled 20% to $1,600,000. Note that no prudent couple would have had 100% of funds in stocks and suffer a 40% to 50% loss.

Could they take out another $80,000 plus inflation after the debacle of 2008?  According to Christine Fallon of T. Rowe Price, they could continue to safely take out the $80,000 plus inflation increases each year hence, even after the Great Recession.

Dr. Carlsen then provides two more options for retirement distributions that are super-safe. 

Question 3:  What should your sequence of withdrawals be? 

The normal sequence is taxable funds, and then tax-deferred, then tax-free, yet complicated portfolios and RMDs often change the order.

More from Dr. Carlsen:

20 steps to building wealth, part 1

20 steps to building wealth, part 2