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From Uncertaintyto Confidence

The Transition to FinancialIndependence

A Special White Paper for Physicians

By James E. Wilson, CFP

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CONTENTS

PAGE

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 1

THE CHALLENGE . . . . . . . . . . . . . . . . . . . . . . . . 1

INVESTMENT TRUTHS . . . . . . . . . . . . . . . . . . . . 4

THE RIGHT MEASURE . . . . . . . . . . . . . . . . . . . . 7

THE SET-UP TO RETIREMENT . . . . . . . . . . . . . 10

THE MOST IMPORTANT . . . . . . . . . . . . . . . . . . 11

ELEMENTS

ABOUT US . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

ABOUT WEALTH RX . . . . . . . . . . . . . . . . . . . . 13

INTRODUCTION

WHITE PAPER FOR PHYSICIANSFrom Uncertainty to Confidence The Transition to

Financial Independence

THE CHALLENGEChallenges Physicians face in planning for retirement

INVESTMENT TRUTHSScience and Saving

THE RIGHT MEASUREHow much risk is enough to reach your financialindependence goal?

THE SET-UP TO RETIREMENTThe setup period needed before the first phase of

retirement commences

THE MOST IMPORTANT ELEMENTSHere are 5 final keys to retirement planning and financialdecision making.

From Uncertainty to Confidence The Transition to Financial IndependenceBy James E. Wilson, CFP

Copyright 2008 J.E. Wilson Advisors, LLC. All rights reserved.

No part of this publication may be reproduced or retransmitted in any form or by any means, including but not limited to, electronic, mechanical,photocopying, recording or any information storage retrieval system, without the prior written permission of the publisher. Unauthorized copying maysubject violators to criminal penalties as well as liabilities for substantial monetary damages up to $100,000 per infringement, costs and attorneys fees.

The information contained herein is accurate to the best of the publishers knowledge; however, the publisher can accept no responsibility for theaccuracy or completeness of such information or for loss or damage caused by any use thereof.

2431 Devine Street, Columbia, SC 29205 w Phone: (803) 799-9203 w Fax (803) 254-4474www.jewilson.com

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INTRODUCTION

THE FINANCIAL BENEFITS OF PRACTICING MEDICINE HAVE DIMINISHED SHARPLY

OVER THE PAST DECADE. Physicians in their 40s, 50s and 60s are facing

unprecedented challenges to achieving long term financial independence.

As retirement moves closer, the margin of error becomes smaller and smaller.

Today, many physicians are far less confident than in previous times about being able

to maintain their lifestyles throughout retirement. Our objective throughout this paper

is to address these very real risks unique to physicians and how they can be solved.

THE CHALLENG E

TRANSITIONING FROM THE RETIREMENT MODEL OF THE PAST TO A FRAMEWORK

KEYED OFF OF FINANCIAL INDEPENDENCE WHERE WORK IS OPTIONAL MENTALLY,

PROFESSIONALLY AND PERSONALLY REQUIRES DEFT TIMING AND ACUMEN. Today,

many physicians are finding it necessary to work to a later age than was typically the

case even a decade ago. The combination of longer life expectancy and a more

mobile retirement create unique challenges.

More complicated family relationships (support for agingparents or problematic children) and professional,business or investment mistakes along the way all add upto additional pitfalls. Many physicians retiring today intheir mid 60s will live beyond age 90. Financiallyspeaking, planning for a 25-35 year retirement ischallenging.

Over the past decade, many physicians have seen theirpersonal incomes decline by significant percentages.Cardiologists, gastroenterologists, anesthesiologists andothers have been particularly hard hit. A physician whohas enjoyed a $500k/per year income for many yearsgenerally finds it very difficult to adjust his lifestyle enoughto accommodate a new income of $300k /per year or so.Of course, this leaves less to save which impacts thefuture. Most physicians have historically done a good job

of saving within their tax qualified retirement plans but arenot as disciplined in saving/investing outside these plans.In most cases, the capital accumulated within the

retirement plans will not provide a sufficient incomestream for the 25-35 years of retirement that may beneeded. Physicians as a group are skilled at working andearning income. Transitioning to a period of not workingand not earning income (but rather withdrawing) canprove daunting.

It is our experience (25+ years working primarily withphysicians nearing retirement) that most physicians overage 55 are entrepreneurial and independent. These arenot qualities particularly revered in the large corporatemedical practices of today. The rapidly changingprofessional landscape has led to an increasing likelihoodof serious and long lasting mistakes. Changing practices

F R O M U N C E R T A I N T Y T O C O N F I D E N C E T H E T R A N S I T I O N T O F I N A N C I A L I N D E P E N D E N C E

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late in a career can often be problematic. Divorce late in acareer can have an equally troubling outcome but both ofthese are trends that we see within the physician agegroup nearing retirement. Avoiding professional, personaland investment mistakes, particularly in the last 10 yearsof a career, is critical to financial independence.

From a financial planning perspective, the transitionto full retirement is a time where clear and rational

strategies should prevail. We tell our clients thatfinancial planning is contingency planning and theprimary contingency is whether we will be alive for daysor decades. Since we dont possess this particularknowledge, we must plan on the longer timeframe whichfor most of our planning purposes is age 95 as anassumed life expectancy. It is interesting to note that

when we first started using age 95 in our planninganalysis many clients scoffed at the notion and laughed.

Today, while some clients dont really think this is likely,they understand that it is a possibility.

The primary question that we seek to answer for ourretirement age physicians concerns the level ofconfidence in retirement. Specifically, we explore thedegree of confidence that their existing lifestyle can besustained throughout a 25 - 35 year timeframe. Themajor challenge is maintaining purchasing power sinceevery year, everything you buy costs more. We all knowthis intuitively but it is difficult to grasp. In 1980 a FirstClass stamp cost 15 cents. Today, a First Class stamp costs42 cents almost a three-fold increase within atimeframe similar to the retirement period we areplanning. This has occurred with an average inflation rate

of about 3% per year. Some physicians are employees ofhospitals or other large corporate entities. In this instance,which is increasingly likely in many communities, thephysician is not much different that an upper levelmanagement employee of a typical American corporation.Unfortunately, the normal 401(k) (or even the 401(k)

with a 457 or 403(b) plan will likely prove insufficient toprovide the capital pool needed to fund a 30 yearretirement timeframe. The necessity of outside retirementplan savings and investments is particularly important forphysicians in corporate or hospital owned practices. Westress to all of our physicians that this outside retirement

plan savings could spell the difference between financialindependence and something less.

OPENNESS TO ADVICE

Lets face itsome physicians can have difficultyaccepting advice in the financial realm (as well as otherareas). We have turned down many potential clients overthe years based on our assessment of their willingness toaccept advice.

We are not talking about mindless acceptance of anythingwe happen to say, rather a genuine willingness and

openness to experienced and educated counsel.Advisability may indeed prove to be the mostimportant ability for many physicians and perhapsthe most difficult to develop.This is one reason wehave typically seen new physician clients in their mid 50sor even later. They have often been bouncing aroundfrom one place to the next looking for the perfect advisoror most popular advice or strategy, etcuntil it is almosttoo late before they realize a different approach may be

warranted.

As the saying goes you can only help those who want to

be helped and we think this adage has equal applicationin the financial and healthcare fields. Physicians see thisall too often in patients and it is an obstacle to progresstowards good health just as it is an encumbrance towardsfinancial independence. Luckily, some of us who arehard wired to be poor receptors of advice are fortunateenough to have spouses who are not quite as difficult.Oftentimes they can take the lead in receiving and actingupon advice even though we may acquiesce with somereluctance.

In addition to being open to advice, being ready for

advice operates along the same plane. When we arereferred younger physicians we oftentimes end up findingthat they simply arent ready for advice. When most of usare in our 30s or 40s we think that we are bulletproofto almost everything.

We have seen young physicians (for our purposes herewe would consider those under mid 40s as young) whoare absolutely convinced that whatever they are currentlydoing is working and preparing them for their future. We

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have had young physicians say that they invest only inreal estate because it always goes up. Others chase last

years best mutual fund seeking the ever elusive abovemarket gain. These approaches are dangerous at leastand entirely wrong in most cases. Only after the approachis shown to be detrimental will these younger docsconsider listening to and acting upon advice. Usually thisis simply a matter of time. It is like a cardiologist seeing a400-pound patient that is a chain smoker. Until the

patient is actually ready to acknowledge someresponsibility and amend his ways, whatever thephysician does will likely be in vain.

We have come to the conclusion in our firm that age isusually a major determinant of our success with a client.

There are exceptions including two-physician couples thattend to start serious planning much earlier and generallytake advice well. These exceptions, however, do notchange the essence of the age/advice conundrum.

While on this topic, we should have an understanding of

advice vs. sales.The financial services industry has likelycontributed to this age/advice problem by posturing somany people and firms as advisorswhen they areactuallysalespeople. We know that many physicianshave been burned by the wolf in sheeps clothing typeadvisor and that makes them all the more suspicious oftrue advisors . We often tell our new clients that(_______) fill in the blank brokerage firm/insurancecompany/bank/etc. has no clients - they only havecustomers. A customer is one that you owe a duty not todefraud but a clientis one that you have a duty to

protect. Those are hugely different relationships but the

financial services firms have done a masterful job ofobfuscating this truth through marketing messages thatuse the word client over and over. Want a quickie testto determine if someone is or isnt acting in a fiduciary(client) capacity? Ask them to acknowledgein writingtheir fiduciary duty to you. If they will congratulations,

you likely have yourself an advisor. In most cases theywont which allows you to reach the opposite conclusion.This is an unfortunate, yet inescapable conclusion whendealing with the financial services industry.

LOCKED IN

As stated earlier, it is altogether too easy to becomelocked in to one approach or idea to your owndetriment. We can recall seeing clients in the internettrading craze during the late 1990s where they insistedthat it was different this time around and that the neweconomy would obviate all the sound financial andinvestment principles that we followed. We even lost afew clients during this timeframe over our seemingly out

of touch approach and discipline. Well, as we now know,this time wasnt different after all and most of the daytrading speculators were relegated to the junk heap ofthe investment world for buying into a philosophy thathad little or no financial underpinnings.

Toward the latter days of the 1990s we met with aprospective client couple interested in retiring early. Afterreviewing their current resources, we noticed that

perhaps two-thirds of their financial worth was in a singlestock that had appreciated rapidly over the two-three

years prior. We asked them how much of this stock theywere willing to dispose of in order to free up funds fordiversification as they moved closer to retirement. Theyanswered in unison none and whipped out a brokeragefirm research report that proffered that this stock stillhad substantial upside. We ended up not taking thiscouple as a client because they clearly believed in astrategy that we thought would prove detrimental to their

wealth. Less than 2 months after we met with them thestock fell about 50% and now several years later it is still

not at the inflated share price they were locked in onwhen we met. In essence this couple was not ready totake advice and anything we might have done wouldhave paled in comparison to the harm they were inflictingupon themselves. You can sometimes get richundiversified but you cant stay rich undiversified.Lack of diversification the narrowing of a portfolio to asingle idea can be financially fatal.

BEGINNING THE TRANSITION

Now that we have outlined some of the personal andfinancial challenges, lets turn to how these might besolved. We have shown why a very different, very longterm oriented financial posture is needed. This requiresboth openness to advice and self-discipline. As we willcover in the next section on Investment Truths, selfinflicted bad behavior by physician investors may be thesingle largest obstacle standing between where you arenow and financial independence.

As with all large problems, we only solve them by firstacknowledging the dilemmas and then trying to

understand the choices we have along with theirconsequences. We can always do nothing and hope fora better tomorrow. Alternatively, we should learn all wecan about measuring what we will need by way offinancial resources and how these should be managed. O

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INVESTMENT TRUTHS SCIENCE & SAVINGS

TO BRIDGE THE GAP BETWEEN OUR PRESENT REALITY AND DESIRED FUTURE, WE

NEED TO HAVE SOME WORKING KNOWLEDGE of the many forces working for us or

against us.

While Wall Street is indeed a physical place, in lowerManhattan, the term really applies to a marketingphilosophy aimed at creating needs and solving these viapackaged or structured products. Regardless of what

stockbrokers are called, (Financial Consultants,Investment Managers, etc) they are really just

salespeople peddling products.These products havevarying degrees of remuneration to the broker rangingfrom a few dollars to several percentage points. The

entirety of the Wall Street edifice brokers, fundmanagers, stock analysts and investment bankers are allpresented as experts having unique knowledge. This, ofcourse, is largely untrue but this message is foisted uponthe investing public in heaping mounds, day after day.

Dont be fooled by the fee based accounts that brokershave designed to eliminate their built in conflicts ofinterest. These fee based accounts essentially lock you into a high enough overall commission/fee to virtuallyguarantee below market level performance. With a quartercentury of advising physician clients, we have seen justabout everything in terms of investment products andstructures. We often see new clients who come herethinking that they have adequate diversification. They mayhave their retirement accounts in a combination ofindividual stocks (selected by the stock-picking brokeragefirms) and mutual funds that in theory at least havediffering objectives. What we often find once we analyzethe various holdings is a serious lack of real diversificationexcept by way of product name. Many if not most of thestocks typically fall into the large growth category andthe same usually applies for the mutual funds despitenames and stated objectives that may suggest otherwise.

As people of science, it seems reasonable to expectphysicians might indeed follow the science of the markets.Starting with the thesis by French graduate student, LouisBachelier in 1900, there has been a steady flow ofscientific literature dealing with modern markets.Bacheliers thesis, Theory of Speculation, postulated thatno amount of information about past performanceenabled traders to predict future ones. In the 1960sEugene Fama at the University of Chicago coined the term,

efficient market hypothesis. Using U.S. market data, Famafound that there was very little useful information aboutfuture stock prices in charts or graphs. The marketreasonably well reflects the fair value.

Traditional investment managers who strive to out-select the market by exploiting perceived pricingmistakes are in essence trying to forecast the future.For the large majority, this exercise proves futile with

their customers or clients bearing the expense. Whenyou take your money to the brokerage firm or bank, this isprecisely what they are giving you in most cases. They allproffer that they have selected the best managers ormutual fund. It is mostly meaningless. The timing andselection mindset is perhaps the primary fallacy that mustbe unlearned in order to accomplish your financial goals

In many respects the investment markets come down towhat you believe. You either believe in the ability to selectsuperior investments or you dont. Additionally, youbelieve in the ability to time markets or you dont. TheWall Street marketing message revolves around believingthat indeed you can out select and time markets. A half-century of market research refutes this but human natureand the emotions of fear and greed keep this notion alive.

The financial markets provide differing levels of return fordiffering levels of risk. The return on a five year bond isusually lower than the return on a stock investmentbecause the risk is lower on the bond. Stock marketreturns are dependent upon this higher level of risk (andcommensurate return over the long run); the dividend andearnings growth; and what is sometimes calledspeculative risk. The speculative risk applies to the

multiple of earning that the stock sells for in the market.Historically most stocks have sold for 16-18 times theirearnings. Stocks that sell for lower earnings multiples aresometimes referred to as value stocks while those withhigher than average earnings multiples are called growthstocks. Over time the higher investor returns are derivedfrom the value side of the market because the risk ishigher and you purchased them at a lower price.


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There are a number of studies that show how poorlyinvestors fare, on a real return basis, versus the overallmarket. Studies by research firms such as Dalbar, Inc.highlight how difficult it is for investors to mimic theaverage returns of the overall market. The Dalbar, Inc.studies report a great disparity between investor returnsand market returns. In some time periods studied, therehas been as much as 8% per year spread between whatthe markets provide and what investors actually collect.

The difference is attributable to what might be termedbad behavior. A large part of what we provide asan impartial advisor is discipline to stay the course.When we are successful in implanting this discipline onbehalf of our clients the value can be substantial. In manyrespects, while brokers tend to act as an accelerator on theclients emotions, we often function as the brake tokeep them from reacting. Examples of bad behavior are:under diversification; over diversification; panic; euphoria;leverage; speculation; near term focus and many others.

Source: Quantitative Analysis of Investor Behavior, Dalbar, Inc., 2008

Our role is to help clients avoid financially destructivebehavior so that they can receive what the marketsprovide. Even more damaging than sheer under-performance is the level of expenses associated withtypical broker driven accounts. Many mutual fundsdramatically understate their true total cost due to tradingexpenses associated with portfolio turnover. Buying andselling is a necessary component of actively managed

funds. In general, they dig a deeper hole for themselvesand their investors via the trading expenses.

SIMPLICITY AND PURPOSE

Almost as damaging as being sold poor performing/poorly diversified investment products is the ad hocmanner in which many investors put together portfoliostrategies. What may have once been a suitable

investment at a certain stage in life may not be at a laterstage. We have seen new physician clients show up withliterally dozens of different brokerage and mutual fundaccounts all with a purpose at one point in time butlacking real direction in the present. One commonality ofour clients as they reach retirement is their desire tosimplify and consolidate. It is very difficult to enjoyfinancial peace of mind when you have no coherentstrategy and investments strewn all across the landscape.

One of the reasons that we advise clients to whittle downthe number of open accounts is so the level of financialnoise is decreased. All of these statements with theirenclosures, comparisons, and suggestions do little morethan clog up the thinking process. We always want to

make strategic financial decisions on purpose and notby reaction. For a coherent long-term strategy to prevail,the day-to-day, month-to-month and quarter-to-quarterfinancial noise must be reduced to a minimum. Investing

for the long term should meanjust that. There is little reason to

adjust long-term investmentpositions every month or quarter.Shorter term investing is reallynot investing at all but ratherspeculation. Sometimes clientsask if they should continue toinvest given the currentenvironment. We really dontknow exactly what this meansbut the markets are alwaysuncertain and there are alwaysproblems. Over time the

problems are solved regardless ofhow serious they appear in themoment. For retirement age individuals born today theoverall stock market has increased in value one hundredtimes during their lifetimes. That is the message we needto focus on rather than the problems of today. Want more?Suppose your affluent grandparents gave you $1Millionupon your birth in 1925. Say your parents decided to takethe safe route and invest entirely in U.S. Treasury Bills. Yourincome today would be about $48,000/year versus theoriginal $33,000 in 1926. The problem is inflation. The $1in interest income today purchases less than one-tenth of

what was the case in 1925.

Alternatively, lets say your folks took another route andinvested in large U.S. stocks comprising the S&P 500Index. The $1Million would be more than $100Million even if you spent all of the dividends along the way. Yourdividend income alone would be over $2Million per year!From the perspective of a physician nearing retirement, itis crucial to understand this distinction between investingfor current income (yield) versus total return.


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DIFFERENT BUCKETS

Our experience with physicians tells us that in general,physicians do a good job of saving in their retirementplan accounts but are not as apt to save elsewhere. Thisis typically the starting point for discussion about the

wisdom of having more than a single account or singlesource to rely upon for retirement resources. Changinghabits and re-directing current income to another

savings/investment bucket can be extremely difficult.We have found that it is best to simply initiate the regularinvestment program in relatively small amounts and thenmove those savings increments higher once the habit isestablished.

As we indicated earlier in this paper, even saving themaximum allowable under a typical definedcontribution/401(k) retirement plan will not likely provide

sufficient resources for retirement. The willingness toestablish outside retirement plan investments/savings

may hold the key to a pleasant or not so pleasantretirement. Also, in our increasingly hungry taxationframework it is not implausible that at some pointretirement plan withdrawals beyond a set amount maytrigger an additional tax. Having investment assets outsidethe retirement plan will provide much needed flexibility.

Okay we now understand the problems (too littlesavings outside retirement plans, advisability, Wall Streetmarketing plans) and some of what we need to do inorder to combat these concerns (save more outside, seekadvice, avoid our own bad behavior, turn down the WallStreet noise). Assuming we are still on board, the nextstep in the solution protocol is to determine how much

we will need to sustain our lifestyle for 25-35 years inretirement. O

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Source: US bills and inflation data, Stock, Bonds, Bills, and Inflation YearbookTM, Ibbotson Associates, Chicago. The S&P data are provided byStandard & Poors Index Services Group

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THE RIGHT MEASURE HOW MUCH IS ENOUGH

WE ADVISE OUR CLIENTS THAT YOU TAKE RISKS IN PORTFOLIOS BECAUSE YOU NEED

THE RETURN TO SOLVE THE RETIREMENT INDEPENDENCE EQUATION. We only want

to take the right measure of risk to accomplish the job, not more than enough.

By right measure, we refer to the point when based oncurrent resources and additional savings, the retirementincome equation will be solved. This concept is totallyforeign to most of our clients until we walk them throughthe thought process. More often than not they arrive heresaying that their goal is to maximize their investmentreturn a concept that is both illusive and potentiallydamaging to their overall objective. We usually utilize thedual concepts know as Monte Carlo simulation andSustainable Withdrawal to assist in calculating theprobability of success in funding a particular financialindependence equation. These take into account a widerange of possible scenarios, which in essence makeuncertainty part of the forecast. The goal is to derive alevel of return/risk needed to obtain a reasonably highprobability of success (perhaps 80-90%) with all theinflation, savings, and life expectancy variables included.

This concept of Sustainable Withdrawal provides us witha broad framework for looking at the sufficiency of aclients overall pool of assets reflected as a regular

withdrawal amount. The key is to consider whatwithdrawal rate is sustainable across both good timesand bad times. At first this seems to be another difficultleap for many clients to understand. A historic examplemight prove helpful. Lets assume that you retired in 1970

with a $1million investment portfolio and desired$80,000 per year of income from that portfolio inretirement. The investments are structured such that anaverage return of 8% per year is projected. You expect to

withdraw this average return each and every year andthen leave the untouched principal to your heirs at death.

You start taking withdrawals without much concern forprincipal erosion. 1970 is a barely positive year while

1971 and 1972 are double-digit positive return years. Sofar so goodright? Well, the bad luck scenario starts in1973 when the S&P 500 declines by about 15% and 1974is even worse with almost a 27% decline. So, where are

we after the first 5 years? Well, the average return hasbeen about -5% per year and all the while you havebeen withdrawing 8% per year.You now have less thanone-half of the portfolio value that you started with 5

years prior, all attributable to bad luck.

In this example, you have failed to recognize (until it wastoo late) that you must engineer withdrawals to anamount that is sustainable across multi year timeframesand differing market circumstances. There have beenseveral academic studies that address this topic andconclude that withdrawal rates of 4-6% per year areprobably the sustainable withdrawal rates for normalportfolios (portfolios with 60-80% equities).

A physician who retires in his mid 60s with a $350,000per year pre-retirement income will likely need $250,000-$350,000 per year on average in retirement over a 25 -35 year timeframe (adjusted for inflation). Our experiencetells us that assuming good health of both the physicianand spouse (if applicable), the retirement income need

will likely mimic or perhaps exceed the pre-retirementspending for a period of several years and then decline.

Therefore, without consideration of Social Security orother pension type income sources, the typical

physician likely will need investments somewhere inthe range of $5-7 million in current dollar terms toachieve financial independence.


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I suspect a distinct minority of physicians on the earlierend of the age spectrum we have been addressing (50sand 60s) are on track to accumulate sums close to whatmay be needed. The success rates tend to rise as theages get older so that a small majority of those in their60s might be nearing the desired target.My impressionsare that these success rates will decline sharply overthe coming years as many physicians at the precipiceof the retirement planning age are woefully

unprepared. Absent sizeable inheritances or winning thelottery, many of these physicians will simply not have aretirement that matches their mental construct.

PLANNING VERSUS REACTING

The reasons that physicians and many other high-incomeindividuals have difficulty staying on tract can be summedup in a single word reacting. The over-whelmingmajority of new clients that we have seen over the yearscome in with a virtual cornucopia of investment, realestate and personal assets that make little or no sense

when viewed as a whole. For our purposes here letsagree that we have both reactive and rational braincomponents. Our reactive brain does not fully utilize ourintellectual capacities, but instead resorts to stimulus andoften contradicts the rational side of the brain. Perhaps itis the long training of physicians, perhaps somethingrandom, but we tend to see overly developed reactiveimpulses in some physicians that can do serious harm totheir longer terms plans as a result. Our approach is tocreate a long term planning framework and makedynamic shifts along the way as circumstances changebut avoid reacting. As we tell our clients- you achieve and

maintain financial independence by actionnot reaction.

We have had the opportunity to speak to groups ofgraduating medical students and even at that early stageit is apparent that certain reactive tendencies exist. Armed

with bits and pieces of disparate information from friendsand classmates juxtaposed against very little free timeleads many of these individuals to make poor choices.

This scenario will often be repeated time after timethroughout their careers since the framework wasestablished at such an impressionable time. Oftentimes

when we see new physician clients in their 50s we have

to undo and revamp this decision making framework tomore closely fit their particular objectives. For some thiscan be a very challenging ordeal as they try to break long-standing habits and focus instead on creating a decisionmaking system that is rational instead of reactive.

EBB AND FLOWS

When we first started our firm more than 25 years ago,income tax rates on unearned income (income frominvestments) was as high as 76%. In those early yearsmany clients were over-focused on reducing income taxesto the point that many unproductive investment schemesand practices littered the landscape. For the past 15 yearsor so income tax rates have been lower and more stable

although the tax code has become increasingly complex.Top tax rates are about half of what they were previouslyalthough many deductions are now limited or completelyphased out for upper income investors. The lesson here isthat it is generally not wise to make long term financialdecisions based on a particular tax structure that may notexist several years into the future.

We already mentioned the issues surrounding becominglocked in to one particular type of investment orstrategy to the absolute exclusion of anything else.Somewhat related to this is over-complicating your

financial affairs unnecessarily. An example may help here.In South Carolina and most of the states where we haveclients probate is not an expensive venture. All thisnotwithstanding, the grand majority of the estateplanning documents we see contain Revocable Trusts(Intervivos Trusts) even when most of the clients assetsare not now nor will they ever reside with the trusts. Wehave asked several estate tax lawyers about this and haveconsistently been told that they agree that Revocable

Trusts may not be needed but that clients expect themand think they (the estate lawyer) arent cutting edge ifthey dont use them. This really does not constitute a

reason for creating a structure that has no tax savings andfor most just adds a layer of complication.

EXTRAPOLATION

It seems that most of us like to take a short series ofevents and extrapolate these well into the future.Whatever the frame of reference may be, it is importantto understand that most of the world is nonlinear ratherthan linear. Nicholas Nassim Taleb in his book The BlackSwan has a particularly good term for this the illusionof the regular. This illusion can cloud our thinking and

decision-making and generally causes us to dramaticallyunderestimate risks.

Most of the retirement planning calculationsperformed and presented every day are based mostlyon linear outcomes when that is in reality only one ofthe possibilities.The difficulty in grasping the real risks iscompounded by the fact that because of the irregularityof possible outcomes, engineered precision is not


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possible. The retirement projections that show a 91.2%success rate are wildly oversimplifying the possibleoutcomes toward an exact calculation that is at best aguess. To again refer to Taleb, in The Black Swan he saysit is better to be broadly right than precisely wrong.We agree.

CHANGES AND CHALLENGES

Most physicians are high functioning individuals both bydisposition and training. In many respects physicians aretrained to search for the best answer in all aspects oflife. This can oftentimes lead to a mismatched ormisaligned financial life since the best mutualfund or best stock or best manager may not on a stand-alone basis create a cohesive strategy. As we statedearlier, it is important to look beyond the precise financialindependence calculations to what constitutes real risksand challenges. Younger physicians tend to be looking forthe home run investment strategy that will allow themto reach their broadly conceived goals without any

sacrifice or savings. We often tell these physicians thatthere is little that we can do as an advisor until they haveestablished a wise and sustainable savings strategy.

Middle career physicians often struggle with burnout andre-assessment of their working timeframe and where theyare on the path towards financial independence. Thisperiod may in fact be the most critical timeframe whereminor mistakes can still be absorbed without criticallydamaging the prospects for reaching financialindependence. As physicians move towards mellowmaturity in their professional lives they to some extent

become more and more locked in. Late career coursecorrections can be enormously painful in financial and

emotional terms oftentimes without possibility of fullrecovery. Changing practice groups, locations and spousesduring this period can simply be devastating.

REAL RISKS

Within this paper we have tried, in a variety of ways, toelaborate on the real risks in planning for financialindependence. In many instances the large potentially

significant risks are social versus financial (of course thesocial risks can and often do lead to negative financialconsequences). Busy physicians are often too involved inthe details of day-to-day movement in their 401(k) orstock market investments but much less so in the areasof their life. Yes, having a well diversified and structuredapproach to ones financial life is important but a balanceneeds to be achieved for financial independence to beattained and maintained.

The retirement question of today is really oneconcerned mostly about income. Growing the income

year over year for 25-35 years or more so that yourpre-retirement lifestyle can be maintained. It is okay to

have concerns and even fears about the investmentlandscape but it is not okay to act upon these fears.Doing so can sabotage your financial future and putall you have worked for in peril.

The practice of medicine today is fraught with all sorts ofrisks that were not present (or at least were not visible)20 or 30 years ago. These risks can be instructive becausethey give us hints about projecting our present course toofar into the future based solely on what we have

observed as risks when the more sizeable ones arentyet apparent. O


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THE SETUP TO RETIREMENT

THE TIMEFRAME 5-15 YEARS PRIOR TO THE FIRST PHASE OF RETIREMENT

(REFERRED TO SOMETIMES AS THE LEISURE PHASE) SHOULD BE SEEN AS A SETUP

PERIOD FOR THE ENSUING RETIREMENT. Many elements of ones life that exist today

were put into place over years if not decades and unraveling some of these oftencannot be done quickly.

This setup period is where you begin to think about yourvision of retirement (and the vision of your spouse). Thisshould include the where or place that you will liveduring at least the first phase of retirement. It is notuncommon for parents/grandparents to move to becloser to the kids/grandkids. This discussion of place

can often be tension filled and has numerous financialimplications (such as selling one house and buying another).

During this transition timeframe it is important torealistically establish a vision of what retirement means to

you (and yours). Again, our experience tells us thatspouses often have mutually exclusive visions ofretirement. There may be no right or wrong but clearly it isparamount that both agree on the fundamental outline of

what this period might look like.

This should also be a period where the physician needs to

be certain to develop (if they dont already exist) outsideinterests so that both mentally and physically they will beprepared for the after work phase of their lives. As wehave said throughout this piece, for the most part,retirement years today are far more active than in previous

generations. Intellectual stimulation and interests cancontribute significantly to a happy and healthy retirement.

Of course, in addition to becoming prepared mentally for thenext 30 years or so we have to be prepared financially. Weare after all trying to protect dignity and independence both

of which have a cost. Our substantial experience in thisrealm suggests that retirement can be divided into two orthree phases with distinctly different financial implications.Assuming good health of both spouses, the first few years ofretirement usually see an increase in spending versus theperiod immediately preceding retirement. Spendingsometimes can be in the range of 20% per year more for afew years before leveling off. The reason can be tracedprimarily to availability of time and travel.

If during this set up to retirement you discover that yourresources do not match your lifestyle then you have time

to save more and prioritize between competing financialcommitments. You may not be able to afford the house atthe coast or the mountain cottage if traveling is ofgreater importance. This is the time to explore the optionsand prepare. O


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THE MOST I MPORTANT E LEM ENTS

WE HAVE DISCUSSED A RATIONAL FRAMEWORK FOR APPROACHING RETIREMENT

AND ONGOING FINANCIAL DECISION-MAKING. THE THEMES AND CONCEPTS ARE

ALL INTER-RELATED AND SYSTEMATIC. IF YOU DONT REMEMBER ANY OTHER POINTS

HERE ARE 5 FINAL POINTS TO TAKE AWAY:

1. Understand the new longevity that makes the retirement period about 30 years for the average retiree.

2. Remember that the most important component in retirement is income and protection of purchasing power.

3. You have but one rational goal to offset the increases in costs.

4. You have but 2 investment choices fixed income and rising income (equities) investments.

5. Above all else understand the distinction between an advisor and a pretender (stock broker, insurance salesperson, banker, etc)

A financially independent retirement is dependent on establishing a wise and sustainable financial structure that canwithstand many different possibilities. Armed with over a quarter century of advising retirement age physicians, our firm

has created a unique wealth management approach that we callWealth Rx.

ABOUT US

J.E. Wilson Advisors, LLC is the oldest South Carolina fee-only financial planning firm after being founded in 1982.Since then, our mission has always been to provide independent and unbiased financial solutions through long term,trusted advisory relationships.

Our comprehensive approach to wealth management combines nearly three decades of experience with the most up-to-date and relevant academic and empirical evidence available today. We provide a holistic approach to the overallfinancial well-being of our clients, inspiring confidence in their ability to maintain their lifestyle for many years to come.With more than two-thirds of our clients being physicians, we developed a proprietary process, Wealth Rx, to focus onthe challenges specific to successful physicians today.

We are one of a select group of fee-only independent financial advisors that have access to funds through DimensionalFund Advisors (DFA). We can provide our clients with these structured, low-cost mutual funds that can not bepurchased in the retail market. Together, J.E. Wilson Advisors and Dimensional Fund Advisors help our clients developand maintain a disciplined, scientific approach to investing.


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James E. Wilson, founder and CEO, received his undergraduate education in Economicsat the University of South Carolina. He then completed the postgraduate study ininvestments, taxation, estate planning, insurance and retirement planning leading tothe Certified Financial Planner (CFP) professional designation. In 1982, Mr. Wilsonformed South Carolina's first comprehensive fee-only financial planning firm.

He is a past president of the National Association of Personal Financial Advisors(NAPFA), the primary professional association for fee-only financial advisors. Mr.Wilson also served for four years as a member of the Board of Governors of the

Certified Financial Planner Board of Standards. From 1990-1992, he served as amember of a Blue Ribbon Committee for the South Carolina SecuritiesCommissioner to review South Carolina securities laws. He also served as Presidentof the Consumer Financial Education Foundation. Since 1994 he has been a memberof the Board of Advisors of Priestly Fraternity of St. Peter and chairs the FinancialManagement Group of the Board. He was selected as one of the top 60 financialadvisors in the United States byWorth magazine in 1994 and again in 1996, 1997and 1998 byWorth as one of the top 200 financial advisors. He also was named by

Medical Economics as one of the top financial advisors for doctors in 1998, 2000,2002, 2004, 2006 and 2008.

Mr. Wilson has been active in serving the financial planning needs to physicians for over 25 years and has been a

pioneer in the field of fee-only financial planning. He is uniquely experienced to offer unmatched wisdom tomedical professionals.

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WHAT IS WEALTH RX ?

Wealth Rx is our unique wealth management process, designed specifically with successful Physicians in mind. Thisproprietary planning process provides the strategy, structure and solutions that create a framework for helping ourclients ensure they have the ability to sustain their lifestyle, now and into retirement.

Perhaps the most important thing to understand about Wealth Rx is that it is a systematic, disciplined process thathelps you design and implement the structure that will enable you to create and maintain your financial independence,now and over time. The structural components of Wealth Rxwork in concert with one another, with each elementinterlinked to achieve the desired resultuncommon confidence.

Successful individuals and families turn to us to help them understand their situation, address their questions andconcerns, determine what options are available, and design plans that support their ability to feel truly confident abouttheir financial futures. And it is for these reasons that we work so hard each day - to help transform uncertainty intoconfidence.

Not everyone has the comfort of achieving financial success, and those that do often face uncertainty and challengesthat make it difficult to feel confident in their long-term financial independence. Unfortunately, for physicians in this day

and age, financial confidence is not common. Wealth Rx is a holistic and disciplined regimen that provides a new levelof confidence in your wealth, and your life.


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J.E. WILSON ADVISORS, LLC

2431 Devine Street

Columbia, SC 29205

Phone: (803) 799-9203

Toll Free: (888) 799-9203

www.jewilson.com

[email protected]

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