“I have no idea how much I would need for retirement.”
Fear of Being Poor in Retirement
That is the frustration expressed to me recently over brunch. This friend of mine is a highly accomplished academic physician. He is well-traveled, well-educated and makes a great income. He had read articles and tried calculators and talked to an adviser. It was all complicated and yielded differing results. After working on the problem he was even more confused and anxious.
In subsequent discussions with other colleagues, I realized he is not alone. Many physicians truly don’t have enough set aside for retirement. The majority of physicians have less than a million dollars. Half of all physicians have less than 500K. A minority in their 50’s and 60’s have several million in retirement savings.
Others have plenty but are not certain and are therefore too afraid to retire. They see no hope of retirement while they are young, healthy, and active. Either scenario is sad and avoidable.
Measure Your Wealth in Time
Back to my physician friend who asked me for advice. I recommended he keep it very simple. One measure of your wealth is how many days forward you could live at your current standard of living without working. That measures wealth in time rather than money. I learned this from Rob Kiyosaki who in turn learned it from Bucky Fuller.
If you have $250K and spend 50K per year you could live just fine without working for five years.
How can you apply this concept? Simple. Keep all your figuring in today’s dollars. This assumes that factors like inflation and investing cancel each other out which actually is a pretty reasonable assumption (e.g. inflation and returns both 3-4%). That makes the math super easy.
The formula then becomes:
The amount I need for a complete retirement = my annual expenses x # years in retirement.
How easy is that?
How Would This Actually Work?
Here are a couple of examples:
Let’s say I spend $100K/year. I expect to retire at 70 and live until 90. I need 20 x $100K or 2M.
If I spend $120K/year and want to retire at 60 I will need 30 x $120K or 3.6M.
One final example closer to my actual world:
Let’s say I’m 51 and spend $90K/year. To retire now and live until age 90 I would need 39 x $90K or $3.5M.
Interestingly, $3.5M is the amount I would need according to much more complicated computer analyses using conservative assumptions, historical data, and Monte Carlo scenarios.
If you are worried this is too simple to actually be reasonable you should know that it is endorsed not just by “yours truly” but by Ashvin B. Chhabra.
Dr. Chhabra was Chief Investment Officer for Merrill Lynch Wealth Management and chair of the Board of Regents for the Financial Analysts Seminar of CFA Institute. He is a brilliant investor and has also written a great book on this subject: The Aspirational Investor.
What do you think? Have you ever been overwhelmed with not knowing how much money you need? Dizzy from online retirement calculator projection scenarios? Maybe this simpler approach can get you in the right ballpark.
Am I leaving the first comment on your new site? If so I feel honored.
This is a brilliant post. Lots of calculators are too complex. Lots of inputs are unknowable therefore garbage. Your method or the 4% rule are easy ways to establish a number to work toward. Both require knowing your spending and not your income.
Almost, hatton1
You left the first comment on my second post! We’ll give you partial credit for that one.
Thanks for your kind comment. It means a lot coming from you especially.
You are right that knowing your spending is key. Unfortunately. It can be hard to nail that down or predict its future rise, but it is worth the effort.
It is an nice back of envelope calculation, however, 100k/yr now in 10-15 years is more towards 180k/yr at least.
Like the new site, keep up the great articles.
Thanks for the comment and encouragement, Doc Bhattacharya.
Yes, I agree that 100K/yr now may be 180K in the future. That is the genius behind the simplicity. The 100K you saved will be 180K, but what you would have bought for 100K you will then need 180K. Inflation and real investment returns cancel each other out. It seems like a ridiculous assumption on the face of it but inflation rates and projected real investment returns may actually be in the same ballpark.
Thanks for keeping it simple
Dr. Cory S. Fawcett
Prescription for Financial Success
My pleasure Cory,
Too many physicians are drawn to complexity – even where it isn’t needed or helpful. Or they get so paralyzed by fear since they feel they don’t know enough to even get started. Making things simple and easy will at least get those folks heading in the right direction.
I certainly agree with this observation. Because many physicians believe the principles of investing for retirement are complicated and beyond their grasp, they are easy prey for investment advisors who do not necessarily have their best interests in mind. In fact, all one needs is an understanding of a few very basic concepts, and developing and sticking to a simple plan.
Dr. Elkins,
Yes having a basic plan and following it consistently are difficult for physicians. We tend to like complicated intellectual challenges and doing better than everyone else. As we learn more ideas we tend to change our plan. Our performance suffers because of these.
WD. I like your new site. It’s very clean and easy to navigate.
I agree that this rule of thumb works quite well. KISS. If you want to be more conservative or have more to pass on to your heirs, just save more.
Millionaire Doc,
Thanks for the comment and kind words.
Yes, I live by the KISS motto. We need to pay attention to details during financial transactions but the big ideas of saving, investing, debt etc really don’t need to be complex.
I’m glad you like the new site. My old one was fine back “in the day” but is an antique that can’t keep up with up-and-coming folks like you!
This is much better and simpler than those retirement calculators that base it on a % of your current income.
I assume that the # you arrive based on this calculation has to only pertain to your consumable assets (i.e. if you have 1/2 your net worth tided up in your home and don’t plan on moving, that should be taken out of the final number calculation).
I am a big fan of the K.I.S.S. principal of retirement calculations
Correct Xrayvsn,
I think these calculations should be on your investable assets. There may be people who know they will sell their large house in California and move to a small house in the Midwest or live on a boat or RV. Those people could use all of their assets in this calculation. I don’t count my house when I add up my portfolio since I don’t see it as an investment (even though using strict accounting it is an asset).
That is a simple way to estimate a retirement number. It’s a little more conservative than the 4% rule and a solid way to calculate your anticipated needs in retirement. So, this way of calculating your investment numbet could be slightly inflated. But when it comes to retirement, I would rather be a little high than a little low in my estimations.
Thanks for sharing another relatively simple way to estimate a retirement number.
Good point PawPawFI,
As far as a quick-in-the-head figure it should be pretty close. If inflation and real returns are both 3% the number comes out perfectly. Either could be higher or lower but your guess is as good as mine (or better).
I also agree with your conservative approach. I recommend the 4% rule to get people in the right ballpark but for my own future, I’m not counting on more than a 3% annual withdrawal rate.
Simple even for a Louisiana redneck!
The bottom line seems to be knowing what your annual budget is (most don’t). Once you have control and knowledge of it, you can then realize that many of us can retire MUCH earlier than we originally thought.
Hmmm yes, Debt Free Dr.
You must be a pretty sharp “redneck!”
You nailed it. All the calculators in the world are useless if you don’t know how much you spend.
Also, early retirement also comes with the option of spending less in a given rough year or working some. Many who work hard, make a lot, and invest are also the people who end up developing additional income streams or part-time work later despite their best efforts to not make money.
What about social security benefits?
Vince,
Yes, social security is one of the many benefits that can affect the details. It will likely give your income a boost – later in life. To get the most benefit I recommend taking it at age 70. That $30K or so will help, but not make or break a good retirement.
I retired at 68 after 40 years practice and my wife and I get $45,000 plus Medicare Which is worth $10,000-15,000.
My stock s have doubled in the last 8 years.
Bonds have done poorly.
My mortgage is paid too.
Wow Andrew Mitchell,
It sounds like you are on a solid financial ground.
I have never used any retirement calculator since it’s usually garbage in- garbage out. Fear of not having enough money can never be assuaged with any excel spreadsheet. I agree, your simple calculation is enough to get to a ballpark since it asks the most important variable. How much do you need to spend each year! So simple but so difficult since the needle gets moved all the time.
Dr. MB
I agree that the calculator outcomes are highly dependent on the data entered and the assumptions build into the calculations. I still think they serve some value though. I know middle-aged doctors who have several million in retirement but aren’t sure they can pull the plug on a stressful career. They need some kind of guidance even though it isn’t perfect. Spending is the key and yes mine has crept up more than I would like over the last few decades.
Wonder how you account for the unexpected expenses? Medical being the potential big one. Any number you recommend to set aside?
Kenneth,
For the more routine “unexpected expenses” I recommend setting additional periodic amounts in savings or emergency accounts. For medical expenses, it is all about capping any catastrophic costs. Predicting health care expenses when retiring early is one of the biggest issues we have in the U.S. I don’t see any easy, solid solutions right now. That is part of the reason I still work (although part-time).
Excellent simple calculation, but I agree with the comment above that most physicians truly have no idea as to how much they are spending/saving annually. Calculate that number carefully, and don’t include your homes value in your liquid assets
Brett,
Yes, knowing your expenses is key. There is no Monte Carlo sophisticated simulator that could overcome one’s ignorance to their own costs. I hate tracking expenses and budgeting so I can relate to those who don’t know. I just picked one month and kept track of everything. I did it manually. It could also be done with Mint. I then looked at annual or semi-annual expenses like disability insurance or property insurance and figured out how much that would be if I paid monthly. It gave me a ballpark for my monthly expenses. I wouldn’t base my whole future on that calculation but it was surprisingly close.
This calculation is great if you are going to retire right now but we have averaged about 3% inflation yearly over the last century. Consequently, the value of your money will be about half in 25 years. Therefore, if you are going to retire in 25 years you would actually need twice the amount calculated. A lot of money!
Yes, Ralph,
That is exactly the thought that I had when I first heard of this idea from Dr. Chhabra. Then I realized that this brilliant investment manager must have thought through this. Indeed if there were 3% inflation and 0% investment returns then that scenario would be true. But what if you invest the money? Couldn’t you get 3% or more in returns? That is the genius behind this apparently too simple method. Investment returns can be assumed to cancel inflationary decline. This leaves only years of life and annual expenses left to consider.
Retired 2,years ago. My goal when practicing was to develop an income stream dedicated to my non working years. Anuities worked for me. Add in social security at 62 y.o. and hopefully you will not have to touch bundle #2 which is the nonanuity investments. A paid off house is a must in my opinion. I find I am spending much less in retirement than my working years without child expenses and sans larger more costly house .
Just my 2 cents
And if possible keep 20 cents of each dollar made in your working years.
Randall,
Thanks for that. It was more than “2 cents” worth for sure! It is always valuable for me and my readers to hear from those who have actually done it. You are ahead of many of us on this journey and I appreciate your sharing. The 20% gross income savings rate you suggest would put most physicians on a very solid track to retire very well and possibly a bit early if they choose. I agree about the paid off house as well. I became debt-free early and never looked back. I don’t count the house in my portfolio. Annuities (especially SPIA) can be a great way to produce a high stable income from a cash reserve. We have to learn to produce our own pensions these days since our employers no longer do that for us. It is good to hear that spending can be less. I would think I will spend less with lower taxes, childcare, retirement savings, etc but it is good to hear from someone on the “other side” reporting that observation.
Great simple concept. I would only add one thing then I think you are right on. Don’t forget about taxes on qualified investments. If the money you are counting on hasn’t been taxed yet, you better reduce the amount you think you have by 25 or 30% before you make your “back of the envelope” calculation.
For sure, Matthew
That is something that is often overlooked. Especially when people use the 4% rule and think they have enough income to cover all of their expenses. Taxes can take 25% of that leaving you with a 3% after-tax withdrawal rate. Likewise with AUM financial advisors who take “only 1%” That would bring you down to 2% which likely isn’t enough to cover expenses. When we work we enjoy all the tax benefits of IRAs and 401Ks and forget that tax-deferred is not at all the same as tax-free. Uncle Sam wants his share. And he wants is soon, which is why RMD (required minimum distributions) are required.
I put as much as I can in Roth IRA and Roth 401K. It does make my calculations easier.
1. Very nice article.- Investment and Inflation cancelling each other out is perfect concept of simplicity.
2. We all become victims of human tendencies of insecurities and fear…Its human nature to feel insecure no matter how much money one has in retirement. if it is not spending on one’s own self it will be on one’s children or grandchildren or charity etc..the list is never ending which guzzles up the money.
3. The key is in setting the limits and being satisfied with what one has. No comparisons here with anybody else! The wants and needs have to justify the end.
4. Most physicians by their 60s have a few millions, which if the rules of inflation and investment are applied will be enough!! but yet we see so much hype of the financial powerhouses capitalizing on the insecurities of human psyche!!
5. So if one has a decent amount as per the above paradigm, fear, insecurity and want of more should not be there and that will come from reflective thinking and mindfful in sightedness.
Dr. Izar,
Yes, the older I get the more I see psychology in every aspect of life. I have read about physicians online who have $5M, $8M, $12M or more and are posting that they aren’t sure they have enough to be able to retire. Clearly, they have gone well beyond any physical or financial need and have moved into the realm of fears and unrestrained wants. Knowing when “enough” is enough is tough. Not comparing to high-spending peers can be even tougher. And you are right there is a whole industry out there that profits from those irrational fears. It is all quite a potent combination that continues to drive physicians into feeling trapped on an endless treadmill of exhaustion and frustration. My hope is that this blog and great comments like yours can begin to give some of those folks some insight, knowledge, and hope.
It seems like everything is about saving, stock and investing. I have never bought into stocks and bonds. It is unlikely you can buy enough stock to live on dividends and to get cash from gains you have to sell stocks and that’s a one timer.
I tell younger docs that a first residence should be a duplex not a house. Later you buy a house and keep the duplex as a rental. Even one duplex and you will never starve, live in one and income from the other unit. Buy more rentals whenever you can, start early and this income will continue your work level of income when you are ready to retire. Excess cash from rentals, you can ladder into bonds or CDs and buy property when it accumulates. Those of you with appreciated stock…take your profit and buy rentals, stock can drop but physical property is still there, this is income for life and your future generations as well.
I don’t disagree with you Dr. R.
I’m actually very nervous about current stock valuations. I’m doing exactly what you suggest. I’m buying more rental real estate.
Had never heard of this before. Makes sense. Love it! Also, really enjoying the comments.
Congrats on the new website!
Thanks, Venture Doc,
A lot of doctors stress about how much they need for retirement. It forced me to do some digging. Sometimes when you dig through the complexity you find simplicity on the other side. Glad you like the site.
Thank you for the simple calculator- I like it.
It seems that one of the items that is not addressed by some advisors I have spoken with is the question of Long Term Care insurance. For someone 55-60 now if LTC were needed in your mid 80,s or 90,s (average of 2-4 years of care with certain diagnosis) the projected cost in todays dollars could end up being 15,000K + per month starting in mid 80,s.
That could wipe out a lot of accumulated wealth quickly. On top of it, unlike the LTC policy care policies of 10-15 years ago, the current policies are expensive and the benefits are very constricted comparable (b/c the older policies did not make sense for the insurance
companies–too expensive for them). I think this is potentially the $800K gorilla in the room that may not be getting enough attention when most of us do our calculations.
SD USN Ret,
I agree that LTC is very costly and often ignored. It is around 90K a year typically in my area. There is a range of payment options though. Some are free (Medicaid) like my grandmother and father took advantage of. Others have enough money to get home health or private-pay housing and then transition from independent to dependent care. I reviewed the costs and decided not to purchase LTC insurance. The poor can go with Medicaid. The rich can “self-insure.” It gets murky in the middle.
I would call this a 200-pound gorilla. The 800-pound gorilla may be health insurance costs, at least for early retirees.
I have looked into long-term care insurance for a while. Unfortunately, I do not believe that isolated long-term care coverage is a good investment. That is where whole life insurance policy I found to be most effective. I know, it is not the sexiest investment tool, However many policies will allow you to withdraw a portion of your death benefit and use it toward long-term care. And if you don’t use it, it is still passed as a regular whole life policy to your kids. I would not keep Over 25 or 30% off your total assets In a whole life policy.
In regard to the real estate, triple net properties to the national tenant can help offset taxes with significant paper depreciation. With current returns on such properties as Walgreens, McDonald’s, etc at 5 Percent or more, it is not a bad way to retire.
I have met with a lot of advisers and for me the formula is simple: 25 to 30 percent whole life, 30-35 percent in NNN properties rented to BBB plus tenants with no landlord responsibilities and 30 percent in Conservative dividend paying stocks and or bonds. 10 percent to invest in crazy stuff to keep things interesting and to talk about at the dinner table.
It sounds like you are set up well Boris. I think most doctors can find better and cheaper solutions than whole-life insurance policies but I know I won’t change the minds of those who like them. I know people who have done well with NNN leases. I like that they are so hands-off and predictable.
Thanks for the great post!
What about different investment options, as whole life insurance, which have been promoted a lot to MDs?
Nick,
IMHO we should be keeping our insurance and our investments separate. It is simpler and cheaper that way. That likely means insurance policies against catastrophic loss: term life, disability, auto, umbrella, flood insurance, health insurance, homeowners/renters insurance. That’s about it. Then invest in low-cost broad-based index funds. Max out tax-advantaged accounts, pay off debt, save more if you can and you will be set. More complex insurances are sold to physicians and provide a nice commission to those who promote them, but it doesn’t mean that is what is best.
I don’t believe that 50% of physicians have less than 500K. Just a ploy to get someone to buy his book.
Arlington,
I’m confused by this comment. I think it was supposed to be regarding the post on Financial Preparedness? And who is selling a book? Me? I wish. So far, I have only written one book, Wealthy Doc’s Guide to Financial Freedom and I give it away for free.
The fact quoted may be hard to believe if you are a big saver and investor and so are the people you know. If that is the case, congratulations to you. You likely don’t reflect the state of the average physician though.
The fact you mentioned is directly from the AMA’s report on Physician Financial Preparedness. Here is the quote
Here is the full report.
You will spend about the same amount of mo bet each year that you are averaging in the last 5 years of work and use this number fir how much you will need to be realistic .
Ed,
I think that is a great idea. The best predictor of the future is the past. People don’t change all that much over time. We still like to spend as we get older – just on different things.
Did I miss it or did you forget Social Security yearly payment. Often $45000 per year for two and decreases investment needed significantly.
Stanley,
You are right that it is important. For this general guideline, it isn’t in there. To get the most money per month I recommend people take it at age 70. This is a general rule and there may be exceptions. So we need a model that works even prior to social security- especially for the early retiree. Also, many physicians will actually be getting closer to $30K per year and that may not change much. It is a nice icing on the cake, but not enough for many.
thank you for the nice article on keeping retirement planning simple.
It’s not that hard to know what you are spending now. Get out your checkbook, your credit card statements, and any other ways you spend money. Go through all the expenses for a calendar year, putting them in broad categories. Write them down. Food, travel, utilities, vehicles, insurance, medical, etc. Add them up. You will be surprised at how much you spend if you have never done this before. You will see opportunities to save by reducing expenses. But most importantly you will know how much you spend in a year. I suggest doing this for 2 calendar years in your recent past.
In retirement you will likely continue to spend close to that amount per year. So once you know how much you spend in a year, then and only then can you start to know if you have enough for the big R.
You are welcome, Dr. Stevens
I’m glad you found it helpful. I agree with you that knowing your spending is key. A lot of doctors don’t want to take the time to track expenses or work on budgeting. Still, it must be done at least periodically. You outlined a step-by-step method that people can use.
And yes, I think it is best to prepare to spend the same amount. It could end up being lower and that would be a great surprise. That is a much better situation than the opposite.
How do I know how long I will live?
I’m told to plan for at least 30 years. After that a nest egg sort of continues on if only dividends taken out.
With this calculation I’m intuiting that we would plan spending, add 25 % for taxes, subtract annuity and social security payments , plan for 30 years and that gives a pretty decent guess of the nest egg needed to find the gap?
Mom MD,
Wow, your answer is well thought out. I was just going to answer, “Oh maybe plan on living to 90 or 95.”
Great Question. Great minds think alike Chi Tsang. I had the same thought. Here is what I came up with: How Long Will I Live?
Thank you for the information on calculations for money needed to retire .
Did you look into money needed for health insurance and costs for early retirees ? That seems to be a limiting factor for many . I don’t know why physicians in work places don’t have the option of working for 20 hrs a week and getting insurance like other health care related employees who get insurance as part time workers.
Rama,
Yes for early retirees in the U.S. health care costs is a big question mark. A strategy for paying that is needed. Some form of health insurance will be a cost. That may get cheaper when turning 65 and going onto Medicare. Our political climate is in turmoil and the future of the single payer options is not clear to me. So yes, health care insurance gets most expensive between the last day of employment and when Medicare kicks in. On the other hand, after retiring many expenses typically go down. These may include taxes, child care, work commute and clothing, unreimbursed work expenses, retirement savings, licensing fees, etc. At that time the mortgage may be paid off and disability and life insurance can be dropped if you are “self-insured.” That leaves money to pay for health care. Those two likely cancel out and you will keep spending as you do now. Again there is genius in this apparently too simple way of thinking.
Thanks.
But your next article should be about a simple way to figure out what I am/will be spending.
Hey, that’s a great idea. As soon as I figure out mine …
See comment from Dr. Scott Stevens in the meantime. He had some great ideas.
There are two challenging assumptions in this simple calculation. One, no inheretsnce behind you. If you are lucky you live to 90 and die broke. Second, no room for emergencies. You get sick in America can be costly. And if you want to help your kids or relatives? Good luck!. You just give them some years of yours. The best retirement is passive income dependent.
Al Barqawi,
You raise some good points. I read the book Die Broke long ago and was influenced by it. I have no need for an inheritance myself and I hope my children will be in the same position when I’m in my nineties. I just don’t see the need. On the other hand, most will have some money to pass on. We don’t want to cut it that close and risk running out of money. Also, this model assumes our investment return is minimal to none and in reality, we will do better than that. Especially if we build our passive income streams as you suggest.
Excellent! Really nice to see a simple way of looking at this, thanks so much for sharing!
You are welcome Cynthia,
It is great to hear that something I shared was helpful. That’s why I maintain this blog. It is more work than you might think, but comments like yours keep me going!
Interesting idea. My wife and I just tracked our expenses for last year fairly simply, using the method of Dr. Phil–a bright OB at my hospital. We just looked at the monthly deposits and withdraws from our checking account for the past year. For us, everything runs through this one account. One thought, however. One big expense was quarterly estimated tax payments; this large expense will be much less upon retirement. How does one figure this into the equation?? Thanks for sharing your thoughts and ideas.
Hey likewise Eyedoc Tom. Thank you for sharing!
For periodic payments like disability insurance, property taxes etc. I either add them into my annual expense or I figure out what the monthly cost would be if I paid it every month. (e.g. $600 disability policy payment twice a year becomes and $100 /month added expense). Some of these drop off in retirement but other costs like travel and health care may go up, so they cancel each other to some extent.
How to you calculate a fixed pension (no COLA)? Wondering about effect of inflation.
The devil is in the details there, Bill. But in general, a fixed pension will decline in value over time depending on the inflation rate. I would project that out as if it declines in value by 2-3% per year.
This amount needs to be after tax and not in retirement funds- 5 million in retirement accounts is only 2.5 million! and like others have said, this doesn’t account for inflation or a potential investment nightmare, like a stock market crash.
JL: My thoughts exactly when reading this. If you live on $100K after tax you need to base your savings on after tax. $2M in after tax dollars saved up is more than $2M in an IRA that will be taxed when withdrawn.
When I got divorced I negotiated a settlement where my ex took 75% of our IRA money instead of 50%. I got a disproportionate share of the after tax money and neither she nor her lawyer picked up on what I had done.
JL,
Although I do agree taxes need to be accounted for I don’t agree that it is 50%. Who pays 50% tax? Nobody. There are ways of minimizing that effective tax rate also. And when you take the money out you will be in a lower tax bracket most likely. The marginal and effective tax rate will likely be much lower. If you don’t think so then you could always convert that all to ROTH. Most of my retirement money is in ROTH IRA or ROTH 401K or rental real estate – all of which are either tax-free or tax-advantaged.
Inflation is built into this. Your investing should offset it. There are many ways to do this from inflation-indexed annuities to stocks to federal inflation-protected securities.
I do worry about a stock crash. My current asset allocation is 30-40% stocks. I still have great growth in my portfolio. If they decline I don’t plan to sell so I think it will be okay.
With all due respect, I think this is all pretty silly. There is no way you can reasonably predict what your income needs are going to be in retirement, and how long you are going to live. And I would fire the financial advisor who said that inflation will cancel out any investment returns.
Instead it is entirely reasonable to construct a portfolio which pays 5-6% a year (3-4% after inflation) and go with that: If I have a 2million dollar nest egg – which is my goal – that pays me 100,000 -120,000 per year. Add social security for a married couple and that comes close to or slightly exceeds 150k/yr. I submit that i can live pretty well and in perpetuity on 150k/yr. YMMV depending on size of egg and spending
If you have a plan in place that works, that is great. A lot of others I know have absolutely no idea even where to start figuring out how much they need. Although this may appear too simple and silly, I assure you Dr. Chhabra is a pretty smart guy. Maybe I oversimplified his idea and so reading his book would be helpful to those who want to understand it more.
I don’t agree with pulling $120K out of a $2M portfolio. That is a 6% withdrawal and is likely too aggressive and doomed to fail. To generate $10K/ month I would double your goal and shoot for $4M personally (3% withdrawal rate).
I’ve been asking this same question to everybody I know and nobody could give me an answer until I put the question to a medical school classmate over golf this summer. Without hesitating , “It’s six million dollars.”
Really? I asked.
Yeah, six million.
I was both blown away by how sure my classmate was and relieved that there is an actual number.
Now of course the next question is how was that number arrived at? I didn’t want to spoil a good round of golf talking about money but I have a feeling my classmate’s spouse figures into the calculation somewhere. I’m just sayin….
It really depends on your spending. If you spend $75K per year now, you don’t need $6M. Here is my general guideline though:
$1M sounds great. Not enough.
$2-3M ok with planning & frugally
$4-5M in good shape
$6-7M you are set
$8-10M you are rich. Stop reading this.
Most people have a sizable portion of their investments in a 401K or IRA which is taxable. You may calculate that you need $2 million to retire but that is in after tax money. In a high tax state a 401K may need 3.5 million to yield that. After age 70 1/2 there is a mandatory yearly IRA withdrawal which is taxable income and it doubles or triples your Medicare Part B and D premiums for you and your spouse. So the $134 part B premium can become $800 for two.
Therefore tax deferred investments both lower your real income and raise your expenses.
Yes, Jonathan, I agree. But the overall amount is much larger because of all the tax-advantage you received along with your career. If you don’t like that approach, go ROTH. There is no tax and no RMD.
Tax advantaged extra growth is a sham. If the tax rate is 50% and you have $2,000,000, you will have exactly the same amount of money if you pay the taxes first and invest the $1,000,000 at 5% than if you invest the whole $2,000,000 and pay 50% at the end. Paying the taxes early avoids the taxable income when you are over 65 and keeps Medicare premiums lower. Also, high taxable income might make you ineligible for government programs. I have heard proposals to keep the rich from Medicare eligibility.The only reasons for tax advantaged plans are 1) taxes might be lower when you withdraw the money in retirement than if you took the hit in high earning years and 2) corporate pland are usually tax deferred. But deficit spending seems to make taxes increase in time so who knows how high they will be in 20 years when the Democratic Socialists are in power. Tax advantaged plans are pushed by financial advisers because their 1% cut is higher on a $2,000,000 investment than a $1,000,000 one.
Jonathan Savell,
I’m not sure I agree with some of that, but if you feel there isn’t a benefit of a tax deduction now, you can always just stick with Roth IRA and Roth 401K and then invest outside of retirement accounts.
I have never paid anywhere near 50% as an effective tax rate. More like half that. Even if your marginal rate is 39.6% your effective rate may be closer to 30%. Getting the tax deduction during high-earning years, allowing tax-free growth and then removing the money at a lower blended marginal tax rate makes a lot of sense for most doctors. I don’t recommend them because of a “financial adviser” fee?
Tax deferred retirement plans may be the only ones offered by employers, and financial planners prefer them to Roths because they get their 1% on double the investment, but there is no advantage to them.
$2,000,000 on which you pay 50% tax yielding $1,000,000 invested at 5% yields exactly the same after tax money as $2,000,000 invested with the 50% tax taken at withdrawal. Perhaps you think that the tax rate will be lower if you take the distributions in smaller amounts but who knows what the tax rates will be in 20 years if we become more like European countries with more social programs.
Jonathan,
I share some of your concerns. Marginal tax rates may increase in the future. Even in our country (without having to look a Europe) there have been rates in the 70% – 90% range. That is why a big chunk of my money is in Roth accounts. Still, I never have and likely never will pay anywhere near the 50% you quote. I’m not sure the only reason people recommend them are the “1%” with “no advantage.” I recommend them but it isn’t because of some payment I receive. And although I can speculate about future tax rates, it is by no means certain enough to justify a “no advantage” declaration. The opposite seems to be true for now at least.
There clearly is an advantage for most physicians to use traditional tax-deferred accounts. Doctors can reduce their taxes sometimes by $20-$30K per year by contributing to these accounts. They get the deduction and they still keep the money. It isn’t a bad deal at all. Also, my employer offers a match to 6% which is truly “free money.” During their peak earning years there, taxes get reduces. The money going into the account would otherwise be at the highest marginal rate. When they take it out their marginal rate (or effective rate) will likely still be lower.
Best calculations can be for not. We graduated 82 . 26 have died so 90 years old could be a dream. Our 50 year reunion is this week. Best advice,do not divorce. Enjoy your life hopefully with good health.Do everything with balance. Spread you investments and cash is always King.Invest as much as you can while young and let time be on your side.Get a hobby,I play golf. Educate your children but you do not have to leave them rich or make them Trust babies. Many expenses will disappear with retirement including many types of insurance as well as taxes.
Bill Tidmore M.D.
U of Arkansas School of Medicine,class of 1968
The good Dr. Tidmore dropped a lot of wisdom in a small passage.
Read it, folks. When you get to the end, read it again. Words to live by, for sure!
Working part time with plan to really in 8 months. Issues above are a simple solution but a lttile too simple. I have planned successfully to replace dollar for dollar my preretirement income. Self employment cs employee status creates differences as to deferred income. Inflation is a range. Rule I was given: one spouse, one house! With larger deferred incomes, RMD will lead to a larger portion of income after 80 or so. Other considerations: continue saving after retiring, saved and deferred $ should continue to make money. Stay on top of your investments even when someone is your advisor. We never know what calamities are around the corner with health, family, the economic cycle etc. Plan to enjoy your retirement with purposes and sense of personal gratification. Money doesn’t bring happiness. Plan for tomorrow but live for today.
Yes, I agree completely Be Happy MD.
Sounds like you have a solid plan and a great attitude!
All retirement calculators are based on assumptions, the most important and most uncertain of which is health and its corollary, life expectancy. If one were to live forever, the retirement account must be self-sustaining and consistent. Social Security would be the baseline income stream, plus whatever accumulated wealth could be converted to an annuity, Conversely, if one had a year to live (it is distressinly common for physicians to delay retirement until their health fails) it makes sense to spend profligately, refinance one’s home to take out a year’s income, spend it all, and die in debt.
During our working years, we plan for a retirement somewhere between these extremes. Almost any simplistic approach ignores this major uncertainty by assuming a certain number of working years and a certain number of retirement years.
I propose instead that one live a financial life prepared for both extremes. Save 25% of income regardless of what it is. Avoid any debt not supported by hard assets. Teach your children how to be happy if they have little money—or if they have a lot. Get married and stay that way. Diversify investments among asset classes; shift away from assets which require active capital inputs (time, money, risk) as one grows older or sicker. Insure against known committments (e.g., children’s education) with term life insurance—until those committments are met. Invest for the long term; trade seldom and thoughtfully.
These seemingly boring platitudes are ignored by 90% of physicians I know.
Walter Millar,
I don’t disagree with this solid advice you offer. Since so many doctors have asked me this “How much will I need to retire?” question, I needed to come up with a workable guideline for them. I think you may be beyond needing that level of advice. 25% is probably a solid savings percent. I never had a fixed percent. I spend on all my needs and some of my wants and invest the rest. If my income goes from $120K to $800K and anything in between I still spend at the $120K level. My savings percentage may fluctuate but that is okay. I’m investing. And my not increasing my spending much I am in a more secure place financially going into retirement – if I ever choose to do that.
That is an interesting formula it might work if one were able to get actual inflation numbers. The government releases and estimate of inflation but it is called core inflation and does not take into account food or gasoline amongst other things. Most retirees require food and gasoline. Also the assumption of 3 to 4% investment gain would require one to be widely diversified and not dependent upon the stock market. These caveats need to be considered carefully. Remember the so-called lost decade of the stock market where there was 0% growth
Jack,
Those are all good points. It still works surprisingly well though. Investment growth tends to be significant over time and has outpaced inflation. I do remember the “lost decade” but I still made money during that period. Dividends and interest were still paid out.
I’m surprised more health professionals do not try one of the most powerful investment opportunities….REAL ESTATE. There’s management companies to make it more manageable. 1 million in real estate should get 100k/yr in rental income in most markets. 15-20 years from now, the properties should be worth 2 million conservatively and pulling 200k/yr in rental income. It’s an investment that pays dividends monthly. There’s Real Estate IRA for those that that want to transfer part of their IRAs and buy properties cash. Rent will go back into Real Estate IRA and accumulate tax free just like any IRAs. Please consider this very powerful investment potential.
I agree with you Ramon.
I have always been invested in real estate and am actually increasing that percentage now. I’m nervous about the decade-long bull market and want some diversification, income, and tax benefits that real estate can provide.
I like the simplistic approach that you are advocating. It is how I used to figure it, before finding all of the fancy calculators and such.
I like the look of the new site, too.
Congrats!
Awesome VagabondMD,
And yes a simple approach can still be a useful approach. Particularly if people are more willing to use it because it is easy. Too many are intimidated and never get started in estimating their future needs.
Great article and thanks for posting. Simplicity at its best. Curious to know, with your clients, once they retire, do they stay retired forever, or do they ever come back and rejoin the workforce?
I’m glad you liked the post-Dr. Chien.
I’m actually a clinician and just blog as a hobby in my free time. So I don’t really have clients. Based on the physicians I know that retired early, most found there way back to clinical work – at least part-time after a brief pause. Some consider that “failing retirement.” I’m not sure it is really a failure though. I think they needed a break and time to think and reshape their optimal work hours and type of work. Physicians need a productive activity of some kind, although it doesn’t have to be just clinical medicine.
I like how you talk about being able to measure your personal wealth in ‘time’ since it’s important to take note of how many days you can live in retirement without having to worry about money at all. This means that whenever someone would do calculations, it’s important to keep in mind that earned money would be a factor when it comes to figuring out how much you’d need to save when the time comes for you to retire. While I haven’t reached the retirement age yet, at least I now know to start saving up as early as possible so that when you do hit that age, you’d have a nice, fat nest egg to look forward to.