Most people would like to maintain their current standard of living throughout retirement. (Ok, wouldn't we all?)
Since you've made a career out of caring for others, chances are you're in pretty good health yourself. And since your retirement could last a couple decades (maybe longer), you’re going to need to save more than most.
Now, you're already in solid shape if you:
- Contribute the max each year to a qualified retirement plan.
- Receive an employer matching contribution.
But that's probably not enough.
That's why you should consider supplementing your retirement savings with other investments. (The IRS currently limits your annual contribution to $18,000 a year, or $24,000 if you’re 50 or older.)
The conventional wisdom for this situation is to invest in stocks, either by:
- Purchasing shares of publicly-traded companies, or...
- In mutual funds.
From there, you can incorporate a market investment strategy based on:
- Your time horizon.
- Your risk tolerance.
- The amount you can invest.
Let's take a high-level look at what new doctors need to know as first-time investors.
Over the last several years, the stock market has not been all that risky. Since bottoming out in March 2009 after the housing and financial crisis, the S&P 500, a broad stock market index, has risen nearly 350 percent.But of course, stocks can plummet in value, too.
- During the crisis, the S&P 500 lost 58 percent of its value between October 2007 and March 2009.
- Before that, a collapse in tech stocks, 9/11 and corporate scandals caused the S&P 500 to lose 40 percent of its value from 2000 to 2002.
- A recession in 1973 and 1974 led to a 42 percent cumulative loss in S&P 500 value.
- Since 1950, the S&P 500 has suffered calendar year declines of 10 percent or more 12 times. (That’s about once every five or six years.)
Even with the risks of the stock market, you can afford a loss here and there if:
You have a long-term time horizon. If you're still several years or more away from retirement, you can plan to hold onto investments for awhile. This affords you the benefit of time to make up any losses you incur from a market decline.
You have a strong handle on your overall finances. If you're in good financial health, you shouldn't suffer a major setback if a single investment loses value. In other words, you don’t need it to succeed; it's just nice to have. Depending on a market investment to pay off right now isn't investing; it's gambling.
Unfortunately, there are fewer stock market alternatives that pay an adequate return than there used to be.
Nowadays, safe alternatives like bonds and certificates of deposit (CDs) barely earn a penny on the dollar.
Perhaps you’re thinking even a small return on investment is better than taking on risk. But investment risk is only one potential hazard of investing for the future.
Another is inflation risk, which involves the rate of inflation outpacing the return on your investments.
If you do not earn at least 3 percent annually on your investments, you’re not earning enough of a return to combat annual inflation. That means the money you’re saving will buy less when you begin to use it.
A poor market investment strategy may also increase your risk of depleting your retirement savings.Once you reach retirement age, your account will no longer grow enough to absorb the impact of withdrawals.
That’s especially true given longevity risk.
According to the Social Security Administration, a man reaching age 65 today can expect to live, on average, until age 84.3. A woman turning age 65 today can expect to live, on average, until age 86.6. About one out of every four 65-year-olds today will live past age 90. One out of 10 will live past age 95.
Depending on your health, your retirement savings will likely need to last at least 20 to 30 years.
Don’t gamble, unless you can afford to lose. Everybody wants to double their money in six months, or at least earn a 25-35 percent annual return. But the only way to do so is to take on risk. A lot of risk. And when you do so, the odds will not be in your favor (regardless of the any "expert tip" you receive.)
Diversify, diversify, diversify. Do not place all of your investable assets in one company’s stock. (Ask Enron investors in the late 1990s how that worked out.)
Avoid investing in the same types of assets. For example, do not limit your portfolio to various health care stocks.
The general rule of thumb for investing in stocks is this --- having a well-diversified portfolio that you hold onto for an extended period can average an annual return of between 7 percent and 10 percent.
Don’t over-complicate it. Trying to pick individuals stocks requires a lot of research and reliance on tips that may or may not be based on knowledge and research. There are thousands of mutual funds, each with specific investment objectives, managed by professionals that contain a large portfolio of different investments.
If you want to make it even simpler, you can invest in index funds. These portfolios are designed to match the movement of a broader market index (like the S&P 500 we discussed earlier.)
Enlist professional help. It’s probably best in your situation to hire a professional (or even a team) who make a living off managing the wealth and investments of others. More often than not, they will possess the expertise you need to succeed.
Doctors have more money to play with in the stock market than most. While you may understand the basics of investing (ie: don't put all your eggs in one basket), you also need to:
- Evaluate the risk of the current stock market.
- Factor your life expectancy into your investment decisions.
- Consult the pros to develop a sound market investment strategy.
When done right, investing in the stock market can be the perfect supplementary piece to your retirement savings. That way, you can maintain your lifestyle well into your life after work.
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Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.