“I really hate the thought of losing money,” Ryan said as we sat down in their living room. “But what we’re really concerned about is what would happen if we had another bad market drop.”
Emily added, “We think it’s safer to just keep working, but we’d like to be able to slow down a bit and start to enjoy more time on our own schedules.”
If this sounds like you, you’re not alone. The majority of doctors I meet who are considering retirement feel the same way.
“Trust me, I get it.” I answered as I gently blocked their cat from settling down onto my papers (I love cats, but it’s a little hard to write when one’s snoozing on you). “Let me give you an example of one of the truths I’ve found after so many years helping doctors like you.”
“If you have $100 and you go down 10%, how much do you have left?” I asked.
“$90” Emily quickly replied.
I continued….“Right. Now if the markets were to go back up 10%, now how much money do you have?”
Now they paused for a moment. Not because they couldn’t do the easy math in their head. They paused because in that moment they realized the retirement truth they didn’t know they already knew.
Average rates of return do not matter in retirement, it’s the sequence of returns that’s key
“We’d only have $99,” Ryan said. Emily and Ryan looked at each with clenched faces.
They both knew where I was going with this.
“So, despite having an average return of zero, you still lost 1%. In fact, you’d have needed a little over 11% rate of return just to break even. But what if when the markets were down, you needed to pull funds for your retirement income? That money spent isn’t around to get a return, regardless of how well the markets do later.”
Both shifted uncomfortably. It’s something I deal with frequently – the fear of running out of money even when clients have been diligent in saving and their spending.
Guaranteed Investment Certificates are cheap insurance against market drops
This same unspoken fear has kept many doctors working longer than necessary. Yes, there are many reasons doctors keep working. You may simply enjoy the work you do, the team you work with, or even the research and academia. Whatever your reasons for continuing to work, the unspoken fear of not having the lifestyle you want in retirement or worse, running out of money, can keep you working also.
“Have you ever thought of using guaranteed investment certificates as a kind of cheap insurance against drops in the market?” I asked.
“What do you mean?” Emily asked. Ryan scooted up a little closer to the table. He wanted to be sure he heard me correctly.
“A little diversification can act as an umbrella during uncertain times, ” I said.
“What if we created a secure pot of retirement income, enough to cover 3 years of market volatility, and the only cost to you would be smaller but guaranteed returns on a small portion of your savings, and this strategy allowed the rest of your money to ride out the market storms?”
They immediately caught on.
“So, when the markets are down, we’d use one of the GICs for our needed income and leave the rest alone. And if the markets are strong, we’d just roll out the one year into a three year GIC and so on. I love it!” Ryan grinned.
“What if we created a secure pot of retirement income, enough to cover 3 years of market volatility, and the only cost to you would be smaller but guaranteed returns on a small portion of your savings and this strategy allowed the rest of your money to ride out the market storms?”
We spent the next hour shopping for the highest rate GICs we could find. It was probably the happiest time anyone has had shopping for them!
And their cat? Curled up beside me. I don’t think he cared too much about rates, but he seemed happy and content with our solution.
Enjoyed this article? I’d love to hear from you! I’m always interested in hearing about the unique financial situations doctors have. Send me a note!
