Top 5 Financial Mistakes of a Retired or Soon-to-Be Retired Physician

You have survived your 20-, 30-, or 40-year career in medicine and now have enough money to retire. Congratulations! Obviously, you have done some important financial planning along the way including consistent saving and savvy investing.

But now, is your work finished? Not at all! Retirement isn’t the finish line for your finances. It is the starting line for the rest of your life and is fraught with all kinds of financial traps. If something goes wrong, you can no longer just go out and bring in another paycheck. It requires a good strategy to ensure that what you have saved will last you for another several decades while still giving your loved ones the security that you have always hoped to provide.

Here are five common mistakes made by retired or soon-to-be retired physicians that can be avoided by a little bit of careful planning.

1. Underestimating Retirement Spending Needs

Many physicians can’t wait to retire--burnout rates in medicine are currently almost 50%. You might have done some quick back-of-the-napkin calculations, maybe using the 4% rule of needing 25x your expenses in your nest egg to safely retire. And that is a fine way to estimate, but it all hinges on what number you use for estimate expenses. What if you guess wrong?

Most of us assume that our expenses will drop significantly during retirement. And they might. Hopefully you have paid off all your loans, including your mortgage. You won’t be paying your disability insurance premiums. You can probably drop your term life insurance coverage. You are likely no longer saving for college expenses for your children. You don’t need to keep saving for retirement. Add that all up and retirement should be way less expensive than pre-retirement living, right? Not so fast, my friend!

There is a reasonable chance that, depending on your situation, your lifestyle expenses may actually go up at first. If you are still healthy and active, now is the time you have looked forward to living a little, maybe a lot. It’s time to explore all those hobbies that you have been putting off. Depending on the hobby, that could cost you a pretty penny. You now have the freedom to travel as often as you want. But travelling is usually quite expensive. You might cook less and eat out more. That adds up too.

Spending all day at work gives you less time to spend money. Now that you don’t have to work anymore, you might fill your time eating away at that nest egg faster than you expected.

Plus, there may be expenses that you didn’t anticipate. For example, although you might be done paying for college for your kids, what about your grandkids? Maybe you want to help them out. Or your adult children might be struggling financially and may turn to you for support. Maybe your health takes a turn for the worse and your medical bills start to go up. These are all things that could weigh on your finances and weren’t part of the plan.

It is true that as most people age, they tend to spend less money as their ability to get out and about declines. But if you are thinking about retirement as the “golden years” where you get to reward yourself for decades of hard work, be prepared to spend more than you think you might need, especially in the early years of retirement when you’re most active. The last thing that you want is to outlive your money.

2. Lack of a Tax-Efficient Withdrawal Strategy

When you retire, your money will be sitting in one of three buckets: taxable accounts like an individual brokerage account or a bank account; tax-deferred accounts like your 401(k)s, 403(b)s, 457(b)s, and traditional IRAs; and tax-free accounts like a Roth IRA or Roth 401(k). How you pull your money from each of those buckets can make a huge difference in the amount of taxes that you or your beneficiaries pay over a lifetime.

If you retire before age 59 ½, you cannot access your tax-advantaged retirement accounts without paying an extra 10% penalty by doing so. (There are exceptions to this rule, including circumstances where the penalty is waived or by using a series of equal periodic payments defined by section 72t of the tax code). So, having money in a taxable account is often the most flexible option for early retirement spending.

The great advantages of a tax-deferred account are the tax break at the time of investing and the tax-free growth of your assets. You might as well take advantage of that growth for as long as possible. However, you can’t leave the money in this bucket forever. Starting at age 73 (goes up to age 75 in 2033), you are required to take a percentage out each year and claim it as income. And the IRS taxes you on that income at ordinary income rates. This mandatory withdrawal is called a Required Minimum Distribution, or RMD. This will be your logical source of income during your mid-retirement years.

Finally, if you have planned well, you should have money in a tax-free bucket in the form of a Roth. The advantage of a Roth account is that you already paid taxes on that money when you contributed it. You are no longer required to pay taxes on that money, ever again. That means tax-free growth and tax-free distributions. Plus, there is no RMD for Roth accounts. You can leave it in there as long as you want. Unlike your tax-deferred money, if your children inherit a Roth account, they also are not required to pay taxes on it. So, it is a great place to park all the money that you don’t think that you will need yourself during retirement.

The strategy of using taxable money first, tax-deferred money second, and tax-free money last almost always wins. There are exceptions though, so it is best to speak to your financial advisor when planning the source of your retirement income.

3. Missing the Opportunity for Roth Conversions

We just talked about the advantages of Roth money over tax-deferred money. The decision to save for retirement in a regular tax-deferred account versus a Roth account usually depends on your tax bracket at the time that you are originally investing the money. If you are in mid-career with a high income and consequently are in a high tax bracket, it makes more sense to use the tax break by deferring taxes on that money until you are retired, and your tax bracket is lower.

But for most, there is a window of opportunity to logically increase the amount of money in that tax-free bucket. It happens right after you retire and before your RMDs and Social Security income kicks in. You are not making any money (except dividends on your taxable accounts), so you are most likely in a significantly lower tax bracket than during your working years, and it is lower than it will be once your RMDs kick in at age 73 or 75.

This is when you can take advantage of something called a Roth conversion. Here, you can designate an amount from your tax-deferred accounts, pay taxes on that amount (at your now lower tax rate), and roll it over to your Roth account.

Not only did you pay taxes at a lower rate than you would have during your working years, you actually lower your future tax bill because now your tax-deferred account is smaller—which means your RMD amount will be lower. It is a win-win. You can still use the Roth money if you need it, but you don’t have to—and when you use it, you won’t pay taxes again.

This can lead to substantial tax savings over time!

4. Being Too Conservative (or Too Aggressive) with Investments

Risk management principles teach that if you have a long time (decades) before you need the money, it works in your favor to be more aggressive with your investment choices. So, now that you are approaching or are in retirement, you should become much more conservative, right?

Yes, and no. Becoming more conservative in the years before and shortly after you retire is a smart idea. It helps you avoid something called Sequence of Return Risk, which means that if a market downturn hits early in your retirement, your nest egg will be significantly negatively impacted. Having more money in less volatile market investments, like bonds or cash equivalents, helps to lessen that impact.

But keep in mind that you may be retired for 30 years. That is still a long time for your money to last. And inflation is constantly eating away at the purchasing power of your assets. If you are too conservative, you might not have as much as you think you did.

It still makes sense to have a reasonably high percentage of your assets invested in stocks so that you can take advantage of the higher returns. How much of a percentage? That depends on circumstances and is something you should discuss with your financial planner.

What about the money that you plan to leave to your heirs? You might as well invest that aggressively and let it grow.

5. Failing to Plan for Legacy and Estate Goals

You have worked hard for decades and now you have enough to retire, but if you are like most of us, it’s not like you are bathing in gold coins just because you can. Estate planning is for the ultra-rich, right? Wrong. It is for everyone.

After spending so much effort working, saving, investing, why would you leave the decisions over what happens to your assets after you die to a probate judge? That doesn’t make any sense.

Even if you don’t anticipate having enough money to worry about estate taxes, you want to be sure that your assets are distributed how and to whom you choose. This can be accomplished by the right combination of estate planning tools including a will, perhaps a trust, and definitely correct beneficiary designations.

All that money in your 401(k)? It might go to your ex-spouse if you forget to change the designation after your divorce. That would surely make you roll over in your grave. Don’t let outdated paperwork undo your intentions.

Do you have children from a previous marriage, but you are leaving all your money to your current spouse? Unless you set it up correctly, you might be funding the lifestyle of her children and not your own.

What if you become incapacitated before you die? A stroke? Dementia? A fall with a subdural hematoma? It can happen to anybody. Be sure that you have written documentation for how you want your health and finances to be managed. This includes a living will, a healthcare proxy, and a durable power of attorney. And make sure these are accessible and understood by your loved ones.

Finally, what about charitable giving? There are many ways that you can use your assets to improve the world around you. Talk with your financial advisor about how to best maximize the benefit of that charitable contribution and minimize taxes to you or your estate.

Conclusion

Retirement should be a time of freedom, fulfillment, and peace of mind—but achieving that vision takes intentional, ongoing planning. By avoiding these common financial missteps, you can help ensure that your money supports your lifestyle, protects your legacy, and adapts to whatever comes next.

Whether you're already retired or preparing to make the leap, it’s never too late to take control of your financial future. If you'd like guidance tailored to your unique journey as a physician, we're here to help. Visit www.targetedwealthsolutions.com to learn more or schedule a consultation.

Looking for advice at the start of your career instead? Don’t miss our companion post: Top 5 Financial Mistakes to Avoid as a New Attending Physician.