Financial Planning

Investing for Retirement


Mark McNulty


February 22, 2013

February 22, 2013

The following is an excerpt from Mark’s book, The Transition Coach 2.0 . A Dentist’s Guide to a Perfect Retirement

Over the years I’ve had a number of dental professionals come into my office who were once financially independent but who had to push back their retirement date, or had to return to work, because of poorly structured portfolios. Don’t let this happen to you. Start looking at strategies for managing your retirement income now. The reason is simple: As retirement approaches you will have to convert your portfolio from a growth  oriented portfolio to a self funding pension plan that will provide you with retirement income.

Let me give you a little background information on why it’s important you start looking now at available strategies for managing your retirement income. Typically, long term market advances end with a protracted and significant decline as we saw at the end of 2000 and again in 2008. Therefore, if you’re going to be invested in equities, significant portfolio declines from time to time are inevitable. If you are still in the capital accumulation phase, broad market declines might work to your benefit because they give you an opportunity to buy equities on the cheap. However, if you are over-weighted with equities you definitely don’t want to be in the midst of a  significant market decline when you have just entered or are on the verge of retirement.

Unfortunately, too many people wait until they’ve retired before thinking about making the necessary adjustments to their portfolio. Of course if you’re lucky enough to retire in the midst of a bull market – and convert your growth oriented portfolio to a more suitable retirement income generating portfolio – your retirement will start out on the right foot.

Ideally, at your transition you will have built up an investment portfolio that will support your ongoing lifestyle needs during your retirement. In other words, when you complete your transition all those financial resources you’ve worked so hard to build up must be converted to what is, in effect, your pension.

If you were an executive in a corporation instead of a practice owner, part of your compensation package would likely include various programs designed for deferred consumption, such as a deferred profit sharing plan, stock option plan, and a pension plan. In the case of an independent practice owner, the sum total of your investment assets, including registered plans, any proceeds from the sale of your practice interests, and non-rgistered capital represent your pension. After all, these financial assets are, for the most part, meant to support you when you’re no longer earning an income.

When it comes to converting your investment portfolio into your own personal pension plan, my experience shows that a Liability Driven Investing (LDI) approach is your best option. Many institutional pension plans employ an LDI approach. As the name implies, this approach focuses your portfolio’s investment strategy and asset allocation on the underlying liability of the portfolio funding your retirement. In fact, funding your retirement becomes the portfolio’s main goal and outperforming some arbitrary market index, or some other arbitrary benchmark, becomes less important.

In essence, your portfolio’s benchmark is how well it’s doing at funding your retirement. With LDI, maximizing your portfolio’s return is of much less importance than minimizing its risk. Risk reduction is of utmost importance because your portfolio is your own personal pension plan. As we reduce the level of risk in your portfolio, the probability that it will ultimately be able to fund your retirement increases.

Keep in mind that LDI is a concept designed to focus your portfolio on its main goal, which is to fund your retirement. It’s not an actual product or investment option like those I described above. Any combination of financial products and investment tools can be used to help implement an LDI focused portfolio. PA