[Editor's Note: This is a guest post from an endowment fund investment manager and a blogger who blogs at Our Family Fortune. We have no financial relationship. Today he walks us through the various decades of our lives and where we should be focusing. He wanted to run this disclaimer with it, which you can also apply to every other blog post on this site: The article below discusses certain investment strategies, some of which I am currently using in my personal portfolio and some of which I am not. Do your own due diligence before making an investment decision. It’s your money; you’re the best person to judge what is best to do with it.]
Few of us are handed a large chunk of cash early in our career to invest for our future. Instead, we have to build our wealth slowly. Like many of you, I started my professional life with student loan debt, a near-empty checking account, and a savings account with a few hundred dollars. For most of my college years, I worked full-time to pay for tuition and living expenses. Working full-time through college allowed me to start my professional life with a close to zero financial balance; something not as easily accomplished today.
Building wealth is intimidating. The basics are straightforward: live like a college student for as long after college as possible, sign up for your retirement benefits at work, focus on increasing your earnings potential, minimize fixed expenses, and save like crazy. It’s acceptable to live in a dumpy apartment when you’re 25; it’s not so acceptable to live in a dumpy apartment with a spouse and kids in your 30s. While the basics are easy to know, doing the actual work is another story. Beyond that, what do you do after you’ve done the basics?
What specific steps can you take to build out your investment portfolio and your family fortune through time? Most advice starts and stops at signing up for your retirement plan at work, allocating to a target dated mutual fund, and hoping for the best. Instead, I’ll walk through the work needed and what I consider to be the best way to allocate amongst asset types and account types at different stages of your career. This advice will be tailored for “normal” market environments, where there is a reasonable expectation that stocks will perform within their historic distribution, bonds will have a positive real expected return, and other asset classes have a reasonable return expectation relative to risk. That time is not necessarily now (2nd half of 2017), as the stock market is historically expensive, bond yields are low, and any moderately interesting alternative investment is priced at high levels. However, this time will pass; it always does. Expensive stocks and low yields are part of any market cycle.
Building Wealth in Your 20's
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Your 20s: bad clothes, 9/11, Remember the Titans, Britney Spears and Eminem. Okay, those were my 20s; yours were probably different. Your 20s are a time when you are just starting out in your career, earning the smallest paycheck you’ll ever receive (hopefully), and have some debt and few assets. How do you begin to build wealth and invest your money for the future?
# 1 Focus on Skills, Contacts, and Getting in the Right Company and Industry
The amount of wealth generated by a good career in a growing industry cannot and should not be underestimated. Frugality only gets you so far, but high earnings make saving and investing while still enjoying life possible. Your 20's is the time to take a lower paying job if there is a greater upside for your earning prospects. Your career path should be on the revenue generating side of the business, not the expense side. If you’re an engineer, work in an engineering firm. If you’re a marketer, work in an advertising firm. If you’re an accountant, work in an accounting firm. Picking the right company and the right industry will put you on a path to above average earnings potential. Scratch, claw, and fight to get those positions.
# 2 Build the Foundation of Your Financial Fortress
Build the processes needed to save a good size chunk of your paycheck. Begin to eliminate debt. Low balance debt should be the first priority, even if you have higher interest debt elsewhere. It’s better to build momentum and eliminate a monthly bill than to worry about which debt has a higher interest rate. Sign up for your company’s 401k plan, especially if they have a match. Start building an emergency fund.
# 3 Find Something Entrepreneurial or Focus Hard on Your Career
I’m always a bit torn about whether there is greater wealth potential in starting a new business or becoming a higher-up in your chosen profession. On the one hand, wealth is generated by owning equity in a growing company. Even better if you founded it and most of the equity is yours. On the other hand, most people don’t have the natural inclination to be an entrepreneur and most start-ups fail. If you have a great idea and want to start something new, do it! If you’re like most people and don’t, then focus like crazy on getting better and better in your career. Follow Steve Martin’s advice and “Be so good, they can’t ignore you.”
# 4 Contribute to Roth Accounts Over Traditional, if Available
Roth accounts (401ks and IRAs) have both advantages and disadvantages. Roth accounts allow for the contribution of after-tax dollars, with tax-free growth and tax-free distributions later. Traditional accounts contribute pre-tax dollars, thereby reducing your current tax bill. They also allow for tax-free growth, but with taxable distributions later. When you choose Roth over Traditional, you give up a known tax break now for an unknown tax break later. There is always a possibility of Congress changing the tax code. If you expect that your tax rate is lower today than it will be in the future, invest through a Roth. If not, invest through a Traditional account. Since young professionals tend to be in the lower marginal tax brackets, investing in a Roth now makes sense.
# 5 Favor Equities and Equity-Like Investments
With the caveat that the market environment matters a lot, I would still recommend that young professionals favor equity and equity-like investments across the board. While time is of course on their side, time on your side can be deceiving. Life tends to get in the way of well-laid plans. However, what young professionals do have is the expectation for higher pay and more working years. This is a huge benefit. A 28 year old has the ability to lose 80% of their portfolio and not be too severely impacted. The portfolio was likely small to begin with and they also have decades to make it up with both new contributions and better market returns.
Your 30's
Your 30's are a time of substantial transition. This is the stage where I find myself. While in your 30's, you likely have a healthy amount of capital, although probably not huge, as well as a healthy number of growing responsibilities. You may be married with children, find yourself moving up the food chain at work (along with the stress that brings), have a mortgage, and a lot less time than in the past. Also, you’ll (hopefully) be making a much larger income that puts you in a higher tax bracket and allows you to both maximize your retirement contributions and begin building capital outside of retirement accounts. This changes the math on where to allocate and what assets to buy in what account.
Your 20's set a strong foundation for your financial fortress, but now is the time to switch to building up the walls and growing your kingdom.
# 1 Funnel New Retirement Contributions into Traditional Retirement Plans
First, you should be at a stage where you can fully max out your retirement accounts. Do this, but due to a higher tax bracket, funnel new contributions to a traditional 401k instead of a Roth (keep the Roth IRA/401k that you started in your 20s). If your expected tax bracket in retirement is lower than your current marginal tax bracket, a traditional 401k is the way to go.
The below example illustrates this well. It assumes a 28% marginal tax rate while working, a 15% tax rate while in retirement, a real rate of return (after inflation) on investments of 4%, an increase in contribution and income growth of real 2%, and a tax-free vs. taxable equivalent contribution during work and distribution during retirement (max out contributions pre-retirement and distribute an after-tax $50,000 per year in today’s dollars during retirement). Note that traditional 401k contributions and distributions are larger in both cases due to taxes.
As you can see, the Roth runs out while the Traditional account still has over $300,000 (again, in real terms or today’s dollars). The difference is due to the difference in tax rates (28% while working vs. 15% in retirement). As long as your retirement tax rate is lower, you’re better off in the traditional. Plus, you can at least take the tax break today knowing that Congress can’t screw that up later!
# 2 Network, Get Promoted, and Put Your Career into Overdrive
Very few people make a name for themselves in their 20's. Those that do, we are sure to hear about because they are so rare. Instead, your 30's is the time to really begin to leave your mark on your chosen profession. Build your network, be so good at your job that you get promoted, and turn up your earnings power. Given the level of transition in your life and the added expenses that come with it, now is the best time to start earning well into six figures. Higher incomes lead to a larger safety net when life inevitably goes wrong.
# 3 Build up Assets in Taxable Accounts
Your 30's are a chance to begin to build real wealth outside of retirement accounts. Even if you’ve been contributing before, you can really turn your F-You account into something with size. Focus on equity and equity-like investments, including option-like strategies, in this account. The tax code strongly favors equity and dividend investments as opposed to interest-bearing investments. Which means:
# 4 Begin to Add Interest-Bearing Investments to Your Retirement Accounts
Now that you’ve actually got some money, downside protection becomes more important. It’s tough, both from a mental well-being and a financial well-being standpoint, to lose a big chunk of your wealth in a bear market. Begin to gather some downside protection and diversify out of equity-like risk. If you purchase interest-bearing investments (e.g. bonds), put these in your retirement accounts. You’ll both protect some level of your future consumption, as well as minimize your tax bill as much as you can.
# 5 Build the Foundation of a Great Family
Your kids will probably still be young when you’re in your 30's, but now is the time to start teaching them how to build character, how to find answers for themselves, the value of social capital, and the benefits of spiritual strength. Teaching basic cash flow management and introducing early saving and investing lessons can begin around this time as well.
Your 40's & 50's
By the time you’re into your 40s and 50s, you’ve been through some tough transition years, and hopefully have generated, grown, and preserved a decent level of wealth. A net worth of $2-10 million is a reasonable goal in your 40s for anyone making six figures in their 30s. Along with generating more wealth, you now have a second, part-time job managing that wealth. Managing your wealth well starts to have a large impact; the difference between a 6% and 10% annual return on a $4 million portfolio is $160,000.
You built the walls of your fortress in your 30's. Now focus on digging the moat and training your army to protect your empire.
# 1 Hit Your F-You N
A conservative F-You goal is $2.5million with no debt. This amount will safely, and for the long term, distribute ~$65,000 per year in income and should cover anyone’s reasonable expenses (assuming you are not living in NYC or SF!). With your career paying you the highest amounts you’ve ever made, saving generously gets easier. You’ll be able to loosen the purse strings and enjoy a few of life’s luxuries as well.
# 2 Start Investing in Your “Get Rich” Account
Recall that the proper distribution of savings should be the basics first (get out of debt, maximize retirement savings, have an emergency fund), fully funding your F-You account second, and then put money in investments with the possibility of generating large returns third. These are the investments that return three times, five times, ten times, or more of your initial investment. Plant those seeds and begin to take some risk. Most will fail; that is the nature of high risk, high reward investments. But given your solid base, you can handle the losses and hold on for the gains.
# 3 Begin “Annuitizing” Part of Your Retirement Funds
I’m a big fan of ensuring that your basic expenses are covered, and taking large risks from there. Unfortunately, your 40's and 50's is a time to do some heavy math. Figure out what your basic expenses will be in retirement, and then add a 25% fudge factor to account for what you’ve missed. Determine how much your social security check will be, and subtract that from your expense number. The difference is what you need to generate from your investment portfolio. As you move through your 40's and 50's, slowly begin transferring retirement assets from risky assets to those that have low to no real growth potential but keep up with inflation and have low to no drawdown risk. Think US Treasury Inflation Protected Securities (TIPS) or short duration, investment grade corporate bonds. These are assets that should be bullet proof. As you move through your 40's and into your 50's, you should have enough of these assets that you’ll be able to purchase, at retirement, an immediate, lifetime annuity that’s inflation adjusted from an insurance company to cover what’s needed from your portfolio. You will not buy said annuity until retirement (if ever), but you should have the capital to do so. Immediate annuities, while expensive, are a fine choice for new retirees, as it takes the risk of running out of money off the table. And if you never purchase an annuity, ensuring that you have enough to do so will ensure that you have enough to last for the rest of your life.
# 4 Focus on Teaching Your Kids Hard Work and Smart Work
You began teaching your children about the basics of building wealth, character, and human capital in your 30's. Now is the time to get specific and prepare them for making it on their own. Teach them to work hard: get educated, continue to grow and to learn, network, and work their butt off so that they get paid well. Then teach them to work smartly: invest wisely, find a way to be an equity owner, build a business from scratch, and prepare their kids for the future. These are crucial times, but if done well, you can give your children a leg up over their peers.
Your 60's and Beyond
Now that you’ve made it to your 60's and beyond, you’ve done the hard work of life and can begin to enjoy the fruits of your labor. There’s still plenty to do, of course, but those tasks relate to educating your (now grown) family, covering your basics for the long term, and enjoying life.
You’ve built your fortress, dug your moat, and trained your army. Now is the time to hold off the barbarian hordes and prepare to hand over the keys of the castle.
# 1 Annuitize Your Basics
Now that you’re at or near traditional retirement age, you may be looking to wind down your full-time career. If so, now is the time to fully annuitize life’s basics. Follow the same math as above, but be more conservative, and consider buying an annuity. You can buy an annuity from a single insurer, or buy it from multiple insurers to spread the risk. If you do the latter, work to minimize fees (you can get to around 1-2% if you shop around and put insurance companies in competition) and find financially strong insurers. If you do not want to buy an annuity, develop a plan to invest in rock-solid assets that pay off through time. A US TIPS ladder strategy, where you have inflation-protected bonds maturing regularly, can provide a solid base. Beyond that, balancing out income growth with downside protection will be your primary concern.
# 2 Get Your Estate Plan in Order
If you’ve done well in your career, and believe in building a Great Family, then preserving assets for many generations will be a goal at this stage. Find ways to transfer money between generations while you’re alive if you have the financial wherewithal to do so. Multi-member LLCs, limited partnership investment vehicles, and equity ownership structures with earn-out structures (to be discussed in a later post) are all possibilities. Beyond that, setting up various types of trusts and ensuring the proper titling of assets will be part of the process. Consult a good lawyer, as the laws and requirements continually change.
# 3 Communicate With Your Family
Do not surprise your heirs when you die! Ensure that your family understands your estate plan, and practice radical transparency by giving them a look into your personal balance sheet. Let your family know how your assets are titled and structured, and what you plan to pass on and what you plan to give away. Have regular updates with the whole family, and don’t be afraid to have those awkward money conversations.
# 4 Plan Your Next Chapter
You’ve put in your time. Now it’s your turn to unwind and relax. Or maybe not. Start planning your next chapter. Maybe you want to fully retire and travel the world. If you’ve built up the assets, then go for it! On the other hand, maybe you still want to be impactful to those around you. Perhaps mentoring or working with a number of charities is in your future. Or perhaps you want to get right back to it and start a brand new company or switch careers. Try it, so long as you do it from a position of strength and don’t endanger your financial future.
# 5 Enjoy Life to the Fullest
Loosen the purse strings and enjoy life to its fullest. Hang out with your grandchildren and teach them like you taught your own children. Go to Tuscany for a month just because you read that book years ago. Plan for your future and your family’s future, but don’t forget to live life to the fullest.
The Path to Financial Freedom is Straight Forward but Difficult
Following the path outlined above is straightforward in concept, but incredibly difficult in practice. Life has a way of messing up the most carefully considered plans. Following these guidelines should allow you to build substantial wealth to be enjoyed in retirement as well as to be passed on to future generations. Only you can ensure that it happens, so get to it!
Keep building my friends.
What do you think? Agree? Disagree? What would you add to this advice? Comment below!
Good stuff.
I usually don’t like chronologically based plans because everybody is a little different, but this isn’t a bad one. For doctors, their thirties needs to include a get-out-of-debt plan as well. It is good to see I’m well past the F-U stage although my reward isn’t enjoying more luxury goods but rather working less.
Working less is a huge luxury! I would much rather “spend” money so I can work less. The rewards and upside can’t be beat.
The timing on some of these should be fluid, but they’re great tips regardless. And the earlier you get started, the better your setup for future success. Far too many people wait until they can almost taste the disappointment of missed goals – then it can be so hard to recover from those delays.
Well, that pretty much sums it up.
Great article!
Great summation. I am 60 but have not bought an annuity. Maybe I should?
Maybe, maybe not. We’ll probably buy some but it looks like it’ll be with a pretty small % of the portfolio. The smaller your portfolio, especially relative to your spending, the more sense it can make to give up some likely upside in order to put a floor under your income.
Annuities? Do the math I did one for a SPIA age 67 THE MATH DOES NOT ADD UP Avoid them
Most docs will need and want about 150k in income before taxes in full retirement unless they really lower their lifestyle
Hi Ken,
Agreed that annuities are not for everyone, and I’m definitely not recommending them. The idea is to always live life from a position of strength, which means always having your basics covered, no matter what. Let’s say the $150k per year doctor has basic living expenses (bare bones, but comfortable) of $80k per year. The other $70k is travel, expensive hobbies, gifts for the grandkids, etc. Social Security has a max payout of $3500 per month, or $42k per year if you wait until age 70. Buying an annuity to cover the other $3200 would only cost ~$700k, and that’s including an inflation adjustment. You could also do the same thing using a TIPS ladder, or similar “annuitization” programs in your own portfolio.
The best thing an annuity or an annuitization program does is take away the uncertainty of outliving your money, including the risk of inflation if you buy an inflation rider – there’s value in that. The worst things are giving up your principal and paying the associated costs. So it’s a trade-off: is the reduction in uncertainty worth the costs? I think it is most of the time, but not always.
What I find most appealing about an annuity for basic needs is that it will make me more cormfortable keeping an aggressive allocation for the remainder of my portfolio.
There is so much dogma in that comment it’s hard to now where to start.
First, the math adds up fine. You’re giving up likely upside in order to provide guaranteed income. If you want to claim the math doesn’t add up, let’s see your work. Here’s mine: An immediate annuity bought for a health male at age 70 today through Vanguard/Income Solutions pays 7.66% guaranteed until the day you die. That allows one to spend a much higher percentage of their income than a 4% rule. Especially if you’re so conservative you’re thinking about a 3% spend. Yes, that costs you the inheritance to your heirs on that money, but there’s nothing that says you have to do it with all of your money. If you don’t have a pension or similar, a SPIA makes a lot of sense.
https://www.whitecoatinvestor.com/spia-the-good-annuity/
Second, docs have all kinds of needs and desires about post tax income. PoF, for instance, spends about $80K a year. My family of six spends about $150K a year after tax. I’m sure there are plenty of docs who will want $150K in spending but only have a portfolio that will support $80K. And I’m sure there are lots of plan to spend $200-300K or more.
I think you need to avoid extrapolating your experience to those of others.
SPIA age 67 $2240/month guaranteed 20yrs JOINT ANNUITANTS $550 is taxable
30yr Munis 4%
DO THE MATH even if a spouse lives till 95 which has a chance of 1.8%!!!!!!!!!!
As stated many times Annuities are SOLD, not BOUGHT!!
Buyer Beware-too many Negatives regarding annuities and their complexities
I’m not going to go the mat for annuities, but think they should be in the universe. I work in the investment field, so I much prefer to keep my money in my own account and do my own investing, as opposed to an insurance company’s account. Most people probably don’t have the time or inclination to do the hard work of investing, and in particular, turning the investment account into a stream of income. For these people, an annuity is certainly a viable, albeit expensive, option (so are many of the alternatives, such as a likely average at best financial adviser!).
The only reasonable choice is a single premium immediate annuity that is inflation adjusted – and these are actually pretty simple contracts. They are less available than fixed payouts without inflation, but plenty of companies still offer. Variable and deferred annuities are horrible options and should be avoided.
For a joint survivor couple at age 67 for life, they payout is around 4.5%, with inflation adjustments – perfectly reasonable. Can you do better? Possibly, but who knows. The Barclays Long Muni Bond index (27yr average maturity) is yielding 3% currently – I’m sure there are individual muni bonds that offer over 4%, but those have high trade costs (in markups, as opposed to commissions) and more risks. They’re also NOT inflation adjusted – which is a primary risk once you stop bringing in income.
Anyway, we can agree to disagree. A lot of people hate annuities because of the high costs and pushy sales tactics. That is totally understandable. Hopefully you enjoyed the rest of the article. Best of luck!
A bond and an annuity are very different things. Comparing their yields is apples and oranges, but as demonstrated, a good SPIA at that age pays out a lot more income than a muni bond. And the guarantee is worth something.
I’m not a fan of annuities in general, but I am definitely strongly considering a SPDA for retirement. It’s not an investment. It’s insurance. You have to think of the two differently. The point is to remove as much risk as possible from the income equation so that your basic needs are always covered, should you or your spouse live not just 25 years, but 50 or more!
It’s not difficult to choose an investment with a better expected return than an annuity. The difference in cost/return between an investment and an SPIA/SPDA is the cost of security/insurance. It’s worth knowing how much that is so you can make a considered choice. The right choice will be different for everyone depending on your risk tolerance, life expectancy, net worth, desire to leave a legacy to heirs, and many other considerations.
Very few Annuities today offer annuities indexed to inflation
Not suited for most every doc
I agree they’re better with an inflation rider and those are becoming more and more rare. Disagree that they’re not suited for most every doc. You’re a particularly wealthy retired doc spending a relatively small part of your nest egg, so I can see why you prefer munis to SPIAs. But imagine if instead of a $5M portfolio, you had a $1M portfolio, like 1/3 of physicians in their 60s or less than $1M, like another 1/3. All of a sudden putting a floor under your income starts looking a lot better.
Thanks for the post Jim. Very nice graph on the traditional vs Roth 401k account comparison. Is there a link I can use to run on my scenario?
My question is this:
We have the Roth 401k at my company and they also allow in plan Roth conversions from after tax 401 accounts. They do not have matching contributions to the pretax 401, except for a variable year end bonus.
They provide a annuity pension up to 50% of my salary upon retirement. So I figured I wouldn’t really land in a much lower tax bracket upon retirement.
Long story short, should I actually use the Roth over traditional 401k in my case?
Do they match in the Roth 401K but not the pretax, or just no match to either in favor of the pension?
Assuming you’re in the exact same effective tax rate at retirement, then a Roth will be modestly better, although they’re nearly the same. One important thing to remember is the concept of marginal versus effective tax rates. When you contribute to a traditional retirement account, you get the a tax break off of the marginal tax rate. Remember that your effective tax rate is always lower than your marginal rate (ignoring any weird effects from tax credits phasing out at certain points).
Personally, if they’re nearly identical, I would still stick with the traditional. It’s a known tax reduction now versus an unknown tax reduction in the future. Tax rates could be lower or higher in 20 years, so you have to discount the future tax break due to the uncertainty.
Complicated question and you didn’t provide enough details. Sounds like you have a potential mega backdoor Roth option, so be sure to learn about that. These two posts may help:
https://www.whitecoatinvestor.com/the-mega-backdoor-roth-ira/
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
Yes we have the mega backdoor Roth option available so that’s why I asked.
I currently make about 220K a year. Company doesn’t provide any match to any 401K contributions, be it pre-tax or post-tax. They provide a year end bonus if the company makes money, and that is variable, which would go into the pre-tax 401K.
At retirement company provides yearly pension 50% of salary. So by the time I retire I would presume it’s at least 120K a year in current day dollars.
I’m early in my career, and want to see if I should prioritize my retirement account contributions with the mega backdoor Roth conversion (up to $54000 all converted into Roth money) and not do any pre-tax 401K as my income tax bracket would likely not be much lower compared to now. I’ve already maxed the backdoor IRA and HSA accounts.
thanks
Yes, sounds like you are a good candidate for Roth 401(k) contributions, both regular and via the mega Backdoor Roth option. That pension really affects the calculation.
Thank you for a well written article. Perhaps this info/timeline probably applies to my office staff, but it really misses doctors. For example, you do realize that most docs have a significant negative net worth at 30? This was about the age that I got a paycheck for more than minimum wage.
Maybe, maybe not. You’re in the same position as a lot of MBA grads. High debt, but huge earning potential. Especially when you’re net worth is small or negative, the high income really has an impact. Might start out behind, but also more likely to catch up fairly quickly.
Great read. The advice on kicking your career into overdrive in your 30’s is the best piece here to me. Your earning potential in life is so important, and your 30’s is indeed the sweet spot to put it on steroids. You’re no longer a rookie at your profession, but still so young. That’s the time to work hard, make yourself stand out, and then reap the benefits later.
One part of the article that I felt odd about was waiting till 60 to enjoy (or maybe even work then). I want to enjoy now and have fun. I have already spent my life working my career ladder and missing friends. I want to have fun with kids while they are young and travel now rather than in my 60s.
500k annuity today JOINT is 2300/month
30 yrs=828000 LESS SOME TAX if held personally!
odds of living to 97 is 1.8%!!!
4% 30yr Muni =600k(a bit more compounded) plus 500k principal=1,100,000 at death
WHY AM I WRONG?
You’re comparing apples to oranges. That’s why. Your munis provide not only a lower annual payout but no guarantees to maintain their value or their yield as they’re rolled over. That guarantee is worth something. You could even calculate out how much that guarantee costs. Then you compare whether the guarantee is worth it to you or not. I suspect it would not be to you. But imagine all you had for retirement was $300K plus Social Security. If you do the muni thing, you get $12K a year to live on. If you buy the annuity, you get (using your rate which seems a little crummy given the ones I looked up earlier) you get $16,800 a year to live on, plus the guarantees. Now you can see why someone would consider the SPIA. I hope.
AGE 67 PREVIOUS POST MALE
Rates today 67 yr old=5.6%
you could buy a 30yr muni
over 30yrs stocks always beat bonds so if you put the money into an index fund you are almost guaranteed a decent return 5-7% perhaps
You’re ignoring sequence of returns risk. If your goal is maximum expected return, then just invest in 100% stocks. In fact, go take out a home equity loan and buy even more than 100%.
look up rates at immediateannuities.com
OK at age 70 you will get about 30k/yr(some taxable outside of IRA-about $600 monthly) on 500k spia
life expectancy?????
with a 20yr guarantee-600k plus compounded interest less income taxes yearly=?
the 500k is GONE FOREVER
Sounds like you understand the downside of a SPIA. If that is unacceptable, you probably shouldn’t buy one.
In your 40s to aim for net worth of $2 -10 million is great, but statistically most doctors do not have over 4 million dollar net worth in their 40s based on surveys I have seen. Unless I am mistaken?
Most doctors don’t start earning 6 figures until they are 30+, so having $4 million at age 40 is difficult, though not impossible depending on your income and frugality level.
Most doctors never have $4 Million based on surveys I have seen. 1 out of 8 has a net worth under $500K in his or her 60s.
That’s pretty sad, and totally unnecessary. Thanks for doing the good work of getting the knowledge out there!
I like the Roth simply for the fact that most of the money I n your 401k will be from growth not contributions. Imagine having 1mil plus tax free. Please tell me how this doesn’t make sense. Great article.
Very few people have a $4M portfolio at any age. You must run with a very elite crowd if this is a believable statement: “A net worth of $2-10 million is a reasonable goal in your 40s for anyone making six figures in their 30s”. As usual, the difference between plugging theoretical numbers into an investment calculator and actual portfolio balance is significant.
It would be interesting to see how much the bull market has effected physician net worth in general.
A lot or the investors among us. Not so much for the debtors among us.
I’m in my mid-30s and just finishing residency in a decent-paying specialty. By doctoring alone I could probably stash $5M by age 50 if I work my butt off and my job prospects stay rosy (a big if). But I’m not sure what I’d do with that much money. I’ve never made more than $50K/y in my life. I’d probably be like one of those crusty old dudes who dies and they find $2M uselessly stashed in his walls!
$3M including free and clear house seems more my speed… ~$50K/y at 2% real not including SS.
You may find that number grows on you. Mine when we came out of residency was $2M ($2.7M in today’s dollars.) Obviously it’s grown.
Also, a sub 2% withdrawal rate (i.e. $50K from $3M) is insanely conservative.
I agree, it is conservative. I’m a FIRE guy and so many things could go wrong with my plan in the next 10–15 years that I need a good margin of error.
I have $1M of the $3M budgeted for a nice piece of land, leaving $2M for expenses. $50K/$2M = 2.5%. Assuming 2% inflation I’ll need 4.5% returns to keep the $2M in perpetuity.
Hi,
Nice writing on Building Wealth in Your 20’s…
Nice article, but I found it unrealistic for most Docs. We begin our career in our late 20’s or early 30’s and usually with high debt. Most of us are at that point saving for a home, starting decent savings programs, savings for kids, paying off debt etc.. And as stated above $2-10 M net worth in your 40’s , when starting with a large negative net worth at age 30 is also unrealistic for most.
Again, just doesn’t seem like the author knows physicians and their finances that well. You can’t compare us to 2 yr MBA students, that doesn’t make sense. Med school is 4 yrs, then residency is usually 3 to 6 yrs and I’ll bet the majority of residents don’t save too much.
As far as annuities go, yes they are a potential tool for some. There are other options of course.
Good summary of financial progression, even for MDs. I disagree that it is different for MBAs. My late 20s were in residency, funneling money into Roth when I could but also learning how to make a reasonable budget.
Graduated a PGY-6 fellowship at 31. Now at 33 paying off loans (to be completed at 35.5), but first hitting the 53k max and starting a (small) taxable account. 20% into a 15 year mortgage below my yearly gross. And teaching my 4 year old simple money lessons like “why Dad works”.
the ?is what % of docs can retire at 65 comfortably
I like the Roth simply for the fact that most of the money I n your 401k will be from growth not contributions. Imagine having 1mil plus tax free. Please tell me how this doesn’t make sense. Great article.
It doesn’t make sense if you could save 39.6% on contributions and pull that money out to fill the 0, 10, 15, 25% etc brackets.
What a helpful and comprehensive post! My husband and I are in our 30s (well he is for another month…), and we have followed this prescribed path pretty closely. My mom just retired and turned 60 and has asked me to help her with a financial plan, so I appreciate the detail for later decades too.
After looking into SPIAs though, I don’t think she really would benefit from an annuity. She doesn’t have much guaranteed income (small pension and some SS), but she’s comfortable spending less than 3% of her $5MM portfolio value (nearly all of which is in taxable accts). I’m struggling with my usual advice to simply dump everything in a handful of index funds though and had thought annuitizing some of her assets would be ideal.
One benefit that is overlooked is that the annuity payments keep rolling in as planned even if/when your ability to manage your own withdrawal strategy has faded. You can’t get that principal back, but you also can’t lend it to your housekeeper or buy huge amounts of gold off a 1-800 number or build a bomb shelter or stash it in safety deposit boxes all over town without good records so none of your heirs can find it. I’ve witnessed all these situations BTW. Even most of the brightest minds start to dim and/or brim with paranoia if you live long enough. If you don’t have kids you can trust to manage your affairs for you, or if you aren’t wealthy enough to have money to burn on corporate trustees who will, having enough of a guaranteed income stream to keep you in a relatively nice nursing home in your 80s is worth more than you might imagine in your 60s.
You’re probably right that she’ll do fine without a SPIA.
I agree that there are other benefits of a SPIA like those you note.