[It's FIRE week here at WCI, where we celebrate all things Financial Independence, Retire Early! Every post this week is going to be about topics relevant to the FIRE community. Enjoy!]
By Dr. James M. Dahle, WCI Founder
How much money does a doctor need to retire? There are a lot of short answers that are reasonably accurate, such as:
- It depends.
- More than you might think.
- Less than people who just learned about the 4% rule think.
The long answer, of course, is going to take an entire blog post to explain.
First, though, let's explain the short answers.
Retirement Isn't an Age; It's a Number
The most important concept to understand is that retirement is not an age, such as 65. Retirement (aka financial independence) is a number, either expressed as income or as a gross sum of money. It really doesn't matter how you express it since those two things are fungible. You can convert income into a sum of money, and you can convert a sum of money into income. The most important number, however, is the one that determines how large that income or that lump sum must be. It's the wizard behind the curtain. That number? How much you spend. It's actually how much you will spend in retirement, but that's typically pretty closely related to what you spend just before retirement. When I say “it depends,” what it depends on is your spending. If you spend $50,000 a year, you don't need that much money to retire. There's a good chance you already have enough. On the other hand, if you spend $400,000 a year, you're going to need a much larger nest egg.
The Bad News of Retirement
Three decades ago, financial advisors would tell their clients that if their portfolio made 8%-10% a year, they could spend 8%-10% per year. It turns out that was not true. The problem is something called Sequence of Returns Risk (SORR). When your portfolio makes 8% and you spend 8%, no problem. But what happens the next year when your portfolio loses 20%? You can't spend negative 20%. Are you going to spend another 8% that year? Now, your portfolio has dropped by 28% in a single year. That's not good. If you have a bunch of these bad years early in retirement, you'll run out of money rapidly, even if the returns throughout your retirement average 8%. That's sequence of returns risk.
To counter that, you have to spend less than the average rate of return of the portfolio. How much less? Well, that's exactly the question that researchers at Trinity University wanted to answer back in the '90s. Here's the most important table from an updated version of their study:
This table is worth studying. Down the Y axis are various asset allocations from 100% stocks (US large cap) to 100% bonds (US corporate) and various lengths of retirement from 15 years to 30 years. Across the X axis are withdrawal rates. These are a percentage of the initial portfolio value adjusted up with inflation each year. The figures in the table represent the percentage of all of the rolling 30-year periods since 1927 in which the portfolio did not run out of money during retirement.
Given that it is historical data and that the history is pretty short (about four independent 30-year periods), it has some limitations. But it's still pretty useful. As you can see, a 3% withdrawal rate is bulletproof, and most people consider 4% as good enough. Five percent starts introducing some significant risk (runs out of money one-third of the time in a 30-year retirement with 50% stocks). It's a 50/50 proposition at 6%, and by 8%, you would have run out of money 90% of the time. This is why you hear about the “4% rule” (really it's more of a 4% guideline).
The 4% rule isn't really a great withdrawal/spending method in retirement, but it's pretty useful as a rule of thumb to determine how much you need to retire. You just have to reverse-engineer it. If you can spend 4% a year, then you need 25X what you spend. That's a lot of money. At least a million, and for many doctors, $5 million-$10 million dollars. This is the bad news of physician retirement.
More information here:
What Income Do You Want to Retire At?
The Good News of Retirement
If that was the first time you've ever heard that, I'm sorry. Saving for retirement is the greatest financial challenge of your life. For most people, even doctors, it will take your entire career to save up a nest egg large enough to provide your desired level of comfort in retirement. However, there are two pieces of good news. The first is that you only need to replace what you spend, not what you earned prior to retirement. Think of all those expenses that go away in retirement.
- You'll pay dramatically less in income tax
- You won't pay payroll taxes at all
- You no longer have to save for retirement
- No disability and life insurance premiums
- You no longer have to save for college
- Your child-related expenses should be much lower (if not zero)
- Your work-related expenses should go away
The bottom line for most docs is that they only need to replace 25%-50% of their pre-retirement earnings to maintain the same standard of living.
The second piece of good news is that Social Security will replace some of that income. A physician, especially one married to another high earner, is likely to receive the equivalent of $40,000-$60,000 in today's dollars from Social Security each year for the last couple of decades of their life. If they retire anywhere near traditional retirement age, that knocks $1 million or more from the amount they must save up as a retirement nest egg. Some people say:
“But Social Security is running out of money!”
What do you mean by running out of money? You mean it'll only pay 77% of promised benefits? Because that's what the government means when it says Social Security is running out of money. Besides, that's an easy thing to fix. It can be fixed by raising the Social Security age, increasing the Social Security tax rate, raising the Social Security wage limit, decreasing the inflation adjustment, means testing the benefit, or increasing the taxability of Social Security. Most likely it would be a combination of those changes. What it's NOT going to do, though, is go away. Think I'm wrong? List the names of 60 senators who will vote against it. Go ahead, I'll wait.
Did you stall out at about five? Me too. The fact remains that Social Security is perhaps the most popular of all government programs. It would be political suicide to vote against it. I think we can all agree that Social Security will pay you something, barring a complete societal collapse, in which case we're all hosed anyway.
More information here:
8 Things to Do with Financial Independence Besides Retire Early
Is Passive Income the Answer?
OK, enough with the short answer. If you've made it this far into the post, you will at least have the basics down. Now, let's head off into the weeds a bit and start talking about the long answer.
Some people—let's call them the “passive income folks” (most of whom have a large percentage of their portfolio invested in either real estate or high dividend stocks)—will tell you that once you have enough passive income to replace your earned income, you are now financially independent and you can retire. There are two problems with this philosophy. The first is that income is not definite. Rents can disappear with vacancies, and dividends can be cut. The higher the yield on an investment, the less secure it becomes. If all you're looking at is yield, you can often get into investments that aren't wise. Consider junk bonds or, worse, peer-to-peer loans. Yes, these investments offer a high yield, but in the meantime, the value of your principal is dropping. It's really not all income; some of it is really your principal. As long as you're aware of this and don't construct an outlandish portfolio, it's not too big of a deal.
The second, much more significant problem with the income philosophy is that it simply causes you to oversave/underspend. If you only ever spend the income, you're right that you'll never run out of money. It's a very, very safe withdrawal plan. So safe that I'd love to be your heir, because you're going to leave dramatically more behind than you retired with. The value of your investments, whether stocks or real estate, is going to continue to grow, and only a fraction of their return is going to come to you as income. The rest is just going to compound for the rest of your life.
You're not immortal. You will not live forever. It's OK to spend some principal. You just have to be careful how much of it you spend. That's why a plan based on a percentage of retirement assets is generally superior to one based solely on income.
People Say a 4% Withdrawal Rate Is Too Aggressive, Even Cavalier
“I read somewhere that 4% really isn't safe, that I should use 3% or even 2%. What do you think?”
You really know what I think? I think those people are bonkers. But it's important to understand their arguments. The argument is three-fold.
Part 1 basically says, “I looked at the chart for a 50/50 portfolio and 30 years, and I'm not OK with only a 96% rate of success. That means I could run out of money 1 out of 25 times. So, I'm going to cut back to 3% and get a 100% rate of historical success.” The answer to this argument is simply that the rate of the whole country (world?) going to hell in a handbasket over the next 30 years is higher than 4%. Think about all those unstable politicians with their fingers hovering over nuclear buttons. Plus, consider how long the typical world empire lasts. Maybe a few hundred years, if you're lucky. Then, it all blows up. Things can change, and they can change very quickly. Facing that sort of true risk, a 4% risk of running out of money using data from just the last 100 years seems perfectly acceptable. An even better answer is that nobody actually uses a 4% withdrawal method like the Trinity Study did. They adjust as they go. If SORR shows up, they spend less. But more on that later. The bottom line is that this argument can be dismissed off-hand.
Part 2 says, “Valuations are higher now than they have been historically, so you cannot expect as high of returns from your portfolio and, thus, must spend less.” This argument has a little more substance to it but not much. The answer is that the data in the Trinity Study included a lot of really terrible periods of market returns—the Great Depression, the Global Financial Crisis, the Stagflation of the 1970s, a World War, a Cold War, the tech meltdown. It still worked just fine through the COVID pandemic. When you make this argument, you're saying, “I need to have a plan that accounts for a time period even worse than the Great Depression.” That's awfully conservative. But if this is really a big concern for you, then sure, adjust down a bit. Maybe 3.75% or even 3.5%. If you're super nutso, you can go all the way down to 3%. But the folks adjusting down to 2% or less? They're up in the night. Think about it. Imagine your portfolio just barely kept up with inflation, and you had a long-term real return of 0% for decades. And you're spending 2% of it a year. How long will it last? Fifty years. How long are you going to live again?
Part 3 says, “I want to retire early. I could be retired for 40 or even 50 years, and the Trinity Study only looked at 30-year periods so I'll have to spend much less.” Two comments on this. First, I know very few early retirees who never make another dollar. Many of them go back to work after a while or have a side gig that pays something. It might not be anywhere near what they were making before, but even a little bit of income dramatically extends how long a nest egg can last. Second, the difference between lasting 30 years and lasting indefinitely is minimal. If you're really worried about this, then dial it back a bit to 3.75% or 3.5% (or 3% if you're really, really worried and lying awake at night worrying about it). The truth is that most people can withdraw 5% and still be fine. Six percent is 50/50 at 30 years. So, 4% is already very conservative. And you're talking about reducing it even further.
No, 4% is not “too aggressive” or “cavalier.” It's conservative, and it'll be fine. And if it isn't, you'll know long before you run out of money and you can adjust. Besides, you'll probably be dead anyway. Using the catchy phrase “Rich, Broke, or Dead,” Engagingdata.com has demonstrated that you're far more likely to be dead in your 80s or 90s than to run out of money. Check it out:
See the darker greens? That's rich. See the black? That's dead. See the red? That's broke. What are the real issues at 80 or 90 if you retire at 40 using a 4% withdrawal rate? Well, there's the issue of having so much money that you'll ruin your heirs. On average, using the 4% rule you'll die with 2.7X what you retired with. But by age 90, you've got an 85% chance of being dead. And if you think that's a big risk at 90, wait until 100.
More information here:
Doctors Aren't Special
This blog post has doctors in the title, as though doctors have some special consideration when it comes to how much is needed for retirement. There are a few unique things about doctors in personal finance. A late start. Large student loans. A high-earned income accompanied by a high marginal tax rate. Some asset protection considerations due to malpractice. Complicated retirement account situations. That's about it. The whole “how much do I need in retirement” thing is not unique for doctors—other than that most doctors spend more than the average American, so, of course, they'll need more saved for retirement to pay for that lifestyle.
Doctors Don't Save
The bigger problem is that doctors, like everyone else, don't accumulate enough money to pay for their desired retirement. Check out this survey from Medscape where doctors were asked about their net worth. Remember that this is everything they have, not just their retirement nest egg. It includes their home(s), car(s), and all of their other stuff. So, their nest egg isn't even this large.
As you can see, one-quarter of doctors in their 60s aren't even millionaires, and only about 1 in 6 have $5 million or more. Doctors might say, “I need $5 million (or $10 million) to retire,” but almost none of them have it. Which is probably fine. You can have an awfully nice retirement even if you spend a lot less than $200,000-$400,000 per year.
How Much Should You Have Saved for Retirement at Any Given Age?
But let's say you have decided you need $5 million to retire at age 65. How much should you have saved at any given age? Since you're a doctor, we'll assume you don't even start until age 35. Even if you finish training before then, you'll have other serious needs for savings in your early 30s, such as house down payments and student loans.
Note that this is adjusted for inflation. The assumption used is a 5% after-inflation (real) return, so we're talking about getting to $5 million in today's dollars. If you need $5 million and you're 45 and you have $1.4 million, you're already way ahead of schedule. If you have $600,000, you're behind.
What if you've realized that you only need $2 million to retire? We can dial it all back a bit. Same assumptions.
I hope you find those charts helpful, whether they make you feel good or make you anxious. Keep in mind that like any calculation, this one is garbage in/garbage out.
The Truth About Retirement Spending
If you hang out on retirement, early retirement, or even general investing forums such as the Bogleheads, you will notice people having long, extensive discussions about safe withdrawal rates and retirement withdrawal/spending plans. They go on for hundreds and hundreds of posts over weeks debating back and forth what to do. I find it all hilarious, especially the amount of precision that the engineer types start using. Former US Treasury Secretary William E. Simon shared a joke that has been quoted many times since:
“Q. How do you tell economists have a sense of humor?
A. They use decimal points.”
There are so many variables and assumptions in any of these equations that when someone tells you the ideal withdrawal percentage is 3.82%, feel free to roll your eyes.
That's not really why I think it's so funny, though. It's funny because if you actually ask reasonably wealthy multi-millionaire retirees what their withdrawal method is, they all tell you the same thing:
“Ad hoc. We just sell shares when we need money without regard to budgets, SORR, and whatever.”
Why is that? It's because there are three categories of retirees, and this method works great for all of them.
#1 People Who Have Far More Than They Need
When these people calculate their withdrawal percentage, it comes out to 1%-2% or even less. It's not because they're paranoid they'll run out of money. They just have a lot of it, more than they'll need. They may have estate tax problems. They certainly have decisions to make about how much to leave to heirs and how much to leave to charity. As an anxious near retiree, you can't really have a serious discussion about withdrawal rates with these folks. The truth is that MOST multi-millionaire retirees are in this category. Almost nobody retires JUST as soon as they hit their number. They get one more year syndrome and work another year or two or three and boost up that nest egg. Or they became wealthy before they were really done working and worked another five or 10 or 20 years. They might even still be earning money in retirement.
#2 People Who Have Enough to Retire
There are a few people who are careful and reasonable but who just hate their jobs. As soon as they had enough money, they punched out. They're the ones trying to have serious discussions about withdrawal rates and plans. There just aren't very many of these folks. They can also just start with a withdrawal rate of around 4% and adjust as they go.
#3 People Who Don't Have Enough
These people are essentially just trying to spend as little as possible in retirement. There are a lot of these people, but few of them are multimillionaire physicians. They basically do the best they can, and if they're still alive when the money runs out, they live off of Social Security and charity. Safe withdrawal rate and technique studies don't matter to these folks any more than they matter to those with far more than they need.
More information here:
How I Went from a Negative Net Worth in My 30s to Early Retirement
Calculating How Much You Need for Retirement
All right, with that little bit of cynicism out of the way, let's talk about how to calculate your number. The easy back of the napkin number is just multiplying your spending by 25. But let's get into the weeds a bit more.
Calculating Spending
Step 1 is to figure out what you are actually going to spend in retirement. Start by figuring out what you spend now. This is easy for those who live on a budget or otherwise track their spending. If you have never done this, this is as good a reason as any. Log in to your financial accounts—including your bank accounts, credit card accounts, Venmo, and PayPal. Add up everything you spent money on in the last three months. You can put it into categories if you want, but you don't have to for this exercise. Then divide by three. That gives you a monthly amount. You can multiply that by 12 to get an annual amount. This tells you what you're actually spending now.
Step 2 is the tricky part, which is adjusting your current spending for what your spending will look like in retirement. Many of your expenses will go away completely (who needs to save for retirement when you're already retired?) Many of your expenses will go down when you stop working (commuting costs) and get the kids through college (college savings, child-related expenses). But others might go up, such as healthcare and hobby- or travel-related expenses. You'll need a real categorized budget at this point to really get this all sorted out. Make sure you include the categories most likely to change as you move into retirement. These include:
- Payroll taxes (go away completely)
- Income taxes (usually go down dramatically)
- Disability insurance premiums (disappear)
- Life insurance premiums (disappear)
- Work expenses (disappear)
- Commuting/auto expenses (decrease)
- Retirement savings (disappear)
- College savings (disappear)
- Child-related expenses (disappear [hopefully])
- Hobbies (probably go up as you have more time to do them)
- Healthcare (may go up if your employer has been covering it but could fall at 65 as you become eligible for Medicare)
- Travel expenses (likely to go up, at least in the first few years of retirement)
Write down the amount you're spending now and an estimate of what you will spend in retirement. Once you have this amount, you're ready to move on to the next step. Keep in mind that you need to adjust for inflation. There are two ways to do this. You can simply use real (after-inflation) rates of return in your calculations, or you can adjust the end amounts. Either way is fine, just be consistent so inflation will be properly accounted for.
Choosing a Withdrawal Percentage
Once you've got a spending number, you need a withdrawal percentage to divide it by. What should you choose? If you choose 5%, you'll be done saving a lot sooner than if you choose 3%, but is it safe? Well, there are three factors to consider:
- Asset allocation
- Length of retirement
- Comfort with shortfall
The more aggressively you plan to invest in retirement, the shorter the retirement length, and the more comfortable you are with the risk of coming up short, the higher your percentage can be. Conversely, if you will have the majority of your assets in safe investments, if you expect 40-50 years in retirement (due to early retirement or a much younger spouse), or if you lie awake at night worrying about running out of money, then you'll be using a much lower percentage. If most expenses are fixed, you might need to have a lower percentage. If most expenses are optional and they can be eliminated in the event of poor investment performance, you can start with a higher percentage.
The bottom line is that if you're choosing something greater than 5%, you're probably being too cavalier, and if you're using something less than 3%, you're being ridiculously conservative. There are some resources you can use to run numbers and decide exactly how much you're comfortable withdrawing (and thus how small your nest egg can be.) These include:
Adjusting for Income
Now, you have both pieces of the equation. You simply divide your annual spending by your chosen withdrawal percentage. If you plan to spend $125,000 per year and you are comfortable with a 3.75% withdrawal rate, then you will need $125,000/3.75% = $3.33 million. But what about if there are other sources of income? It really depends on when those sources of income start and just how guaranteed they are. For example, if you are retiring at 45, I would completely ignore Social Security when it comes to making any sort of income adjustment. You're at least 17 years away from receiving it and perhaps as many as 25 years away. Plus, you won't be paying into it nearly as much as someone who works longer. You know it's out there somewhere, so perhaps you can be a little more aggressive on your retirement withdrawal percentage. But that's it. On the other hand, if I was retiring at 68, I would add the entire amount to the amount I could spend each year.
Some sources of income are more guaranteed than others. Social Security is backed by the government. I would also consider a pension to be pretty guaranteed, as long as the company standing behind it is financially strong. Single Premium Immediate Annuities (SPIAs) are also pretty guaranteed. However, there are plenty of sources of income that are not guaranteed. These include stock dividends, rents from rental properties, and income from small businesses. The safest thing to do with these sources of income is to ignore them and just include the value of the investment in the portfolio. However, if you want to hold those assets out of your portfolio and just add the income to your spending amount, then I would at least discount it in some manner (at least 25%, more for a particularly risky business).
Here's an example. Let's say you have $1.3 million in mutual funds and have a rental property that produces $30,000 a year of income, and you are comfortable with a 4.25% withdrawal rate. You plan to retire at 66 and expect $45,000 from Social Security. How much can you spend? I'd discount the rental property by 25%, take 4.25% from the mutual funds, and count all of the Social Security income.
That's $1.3 million * 4.25% + $30,000 * 75% + $45,000 = $122,750 in retirement income per year
You can reverse-engineer all of this as well. Let's say you want $225,000 in retirement income and have the same Social Security and rental property. How much do you need to save?
($225,000 – $45,000 – 75% * $30,000)/4.25% = $3.5 million
Spending in Retirement
Let's say you're now heading into retirement. How much can and should you spend? Well, it depends. Remember those three categories above? Place yourself into one of them.
#1 More Than You Need
Spend whatever you like as needed, and be sure to have a solid estate plan in place.
#2 Just Enough
Start at 4% and adjust as you go. If SORR doesn't show up in the first few years, you can adjust up a bit. If it does, you can dial it back some. Alternatively, work a little longer and get yourself into category No. 1.
#3 Nowhere Near Enough
Help your heirs to realize they won't be getting anything. Consider buying a SPIA with some of your money. Work longer if you can. Delay Social Security to 70 if at all possible. Plan on investing aggressively with everything you won't be spending in the next 2-3 years and hope for the best.
What’s your number? At what age do you think you could achieve it? Do you anticipate retiring then, or will you continue to work to leave a legacy, for the benefit or charity, or simply because you love your job?
[This updated post was originally published in 2019]
Working for a mid-sized health system, I’m one of the (apparently?) few with a fully employer-funded pension. The downside is this means no 403b matching. I like my job a lot, but so early in my career and with the modern trend of a mobile workforce, hard to know how long I will stay and how to value the pension. Back of the envelope, it starts to looks pretty darn good after 20+ years; maybe less so with the minimum five.
My ‘number’ will likely be in the $2-4m range, and that should be achievable without any exogenous money.
I guess the smart move is to count no chickens until at least five years, and try not to bemoan the lack of matching too much. It just would be nice to see the extra multiplier early on when I’m still so enthusiastic about this saving thing 😀
Know how the pension works. It may be you vest and get something after just 5 years.
Yup, if I work for the minimum five years it’d be $1,150 a month starting at 65. Ten would get me $2,300/mo, at 65, twenty is $4,600/mo.
Can take reduced payouts earlier than 65 based on actuarial tables, but I’m guessing that as a high earner with other healthy savings, it maybe makes sense to delay (assuming corporate solvency is not a concern). Anyway, point remains that this stuff gets harder for me to visualize and internalize when the time scales are so delayed. Much easier to appreciate the quick hit of a 401k/403b match.
They may offer you a payout at some point too. $200K now or $1,150 a month starting in 10 years etc.
I’ve got a similar pension and if you compare to a 401k/403b style, the pension is better when you are later in your career and the 401k is better earlier in your career. With typical contribution levels, they are designed to give about the same level of income at retirement (over a full career). Not counting inflation, the regular pension is rewarding you with a constant future value, no matter how far off that future is. The 401k-style pension is rewarding you with a constant present value. For someone early in their career, the 401k-style is better because you get the benefit of the compounded growth. Later in their career, 401k contributions are going to have less and less impact, and a regular pension would be better.
Not really. It’s really all about who is running the risk of underperformance. In a 401(k), that’s your risk. With a pension, it’s your employer’s risk. Theoretically, you ought to do better in the long run if you’re taking on more risk, but life isn’t always about theory.
You’re right that it’s about who is taking the risk. However, for someone that is not retiring early (like myself), the traditional pension in the last several years can be quite lucrative. The typical pension payout is about 2% of salary per year of service. Using the Schwab calculator, you would need about 32% of salary to fund a 2% incremental benefit (65 yo male, no inflation, just like the pension). That 32% is probably more than twice what someone’s standard 401k would contribute. At age 50-55, depending on return assumptions and annuity rates, they are going to be roughly equivalent.
It’s entirely possible the actuaries have screwed up and provided a pension that is much better than the lump sum they might offer in place of the pension or a 401(k) they might offer instead of a pension. Best to run the numbers. But in general, they try to price them so they are essentially equivalent, assuming something like a 7% return.
I was under the impression that typically the lump sum offers people get from pensions were based on a blended pool such that the lump sum is generally favorable for someone likely to die sooner, but the pension, with its longevity protection, is generally favorable to someone likely to live longer (like a woman).
That’s likely true. Certainly, a pension can be priced.
The devil is in the details and how it is priced. But obviously if you’re going to die soon you should get a lump sum for sure. The problem is most of us don’t really have any idea when we’re going to die when making those sorts of decisions. If a pension is priced exactly the same for men and women, it is a better deal for the woman on average due to longevity.
I enjoyed this article and the comments.
I was aiming for a specific level of post-retirement income that would cover our downsized budget.
The budget included $10K a year for travel and $10K for restaurants/entertainment. I also included $12K a year for health insurance. So far, we have been spending MORE than these amounts on all three of these.
I’m still working two days a week, taking two nights a week of “from home” call and some brief locums. Those three are paying the bills presently.
Our biggest expense is still taxes. They will drop substantially for 2023, from about $100K yearly down to perhaps $40K. Our retirement savings have dropped from $90K per year to $15K. No more private school or college accounts. That saves $20K. Big house mortgage versus smaller house drops out $24K a year. These add up to about $180K less in expenses just from these items.
The toughest chunk has been health insurance which went from “free” to costing $15K a year.
Most doctors are spending too much. That makes them save too little. It also increases the amount they will need if they ever plan to retire.
Only 5% have >$5M. It isn’t unreasonable to shoot for that level. Most won’t need $10M. Many could do fine at $2-4M.
But $5M isn’t a bad general target.
Does $5M seem crazy-high? Maybe.
But 3% withdrawal is $150K and 4% is $200K. And that is before taxes. How much are you spending each year? Think about it.
Not true. Of those 70+, 22% are worth $5M+ according to the latest Medscape survey. That’s obviously more than just nest egg.
The problem is 24% of those 70+ are worth < $1M.
It’s shocking to me that 24% have that low of a net worth…implying that their retirement savings are some fraction of that if they have a nice house. I think a target to shoot for in today’s dollars is 3MM by 50.
Depends on what you spend, but certainly that’s a common goal for docs.
I think that’s a reasonable goal.
Cheers!
PoF
p.s. Row the boat. Ski U Mah. Go Gophers!
I was saying only 5% of doctors have a net worth >$5M.
Understood, but a statistic that includes 30 year old docs is irrelevant to this discussion.
Arguing with an editor is like me arguing with my wife. I’m always wrong by definition and I will never have the last word. I should just apologize for my “not true” and “irrelevant” statement and drop it. But I can’t resist making one more comment.
Not all of us want to work until 70. The average retirement age in America is closer to 62-63. I’m already slowing down in my fifties and a lot of my fellow MDs want to retire early.
They will need even more money and earlier. The numbers without the “30-year-old docs” aren’t that much better.
I don’t have time to pull the most recent #s but from Medscape a few years ago (2016):
60 years to 64 years old
● More than $5 million: 11 percent
55 years to 59 years old
● More than $5 million: 8 percent
50 years to 54 years old
● More than $5 million: 5 percent
Last word. 🙂
I’ve forgotten what we’re arguing about. I agree your data is accurate. Very few docs in their 50s and early 60s have $5M.
Lol. Your wife sounds like mine. Your inability to resist one more comment, sounds like me.
While I’m 50yo and plan to work for another ~20 years (though in a reduced capacity) because I still like what I’m doing, my four younger partners have MUCH shorter horizons,. 3 out of 4 are looking at retirement by their early 50’s. So your point is well taken.
They have the advantage of having access to WCI, POF and other sources of info that can get them there. However, it is interesting how (despite my gentle nudging) some of them are resistant to financial advice and still make the mistakes that we may have done 20 years ago (buying an expensive car, home, not paying down student loans aggressively etc – right after residency).
So, that approximate ratio of ~85-90% physicians with a net worth of <$5m by age 60 will always be there because of behavior.
I don’t know whether “most” doctors spend too much. All doctors make good incomes but there are a lot more family practitioners and pediatricians than their are spine surgeons. Saving $5 M by retirement for the latter should be easy. For the former it could be a challenge.
Many docs have high educational debt. Some have been divorced. Many may be supporting parents or other family members. Not everyone has the ability to accumulate a big retirement nest egg.
Although appropriate to discuss retirement planning on a site for docs, there is nothing unique about such planning for physicians. How much anyone needs depends on planned spending and sources of income. Docs, having on average higher incomes, tend to have higher spending expectations than most people. The challenge for everyone is matching these expectations to resources.
For those whose physical and mental abilities permit, working longer solves a lot of problems. Delays the time when one starts drawing on savings and adds more money to the pile when retirement comes.
What does it take to hit $5M over 35 years at 8%? $29K a year. That’s 20% of a $145K income. Certainly reachable for even pediatricians and family docs. Sure, they’re going to have a tough time doing it by 50, but not by 65-70 if they actually have their financial ducks in a row.
“What does it take to hit $5M over 35 years at 8%? $29K a year. That’s 20% of a $145K income. Certainly reachable for even pediatricians and family docs. Sure, they’re going to have a tough time doing it by 50, but not by 65-70 if they actually have their financial ducks in a row.”
Depends on their other expenses. Did they get cleaned out in divorce? Lose a personal liability claim? Get disabled and have to live on disability insurance rather than their full income? Spend a long time digging out of educational debt that limited the time invested and total amounts in savings? Support elderly parents or other family members? Fraud victim?
Life happens and not everyone who ends up wanting for money got there through irresponsible spending.
That can be a problem but it is not the only problem.
Oh geez. That one is pretty easy to address.
1) Stay married
2) Buy an umbrella policy
3) Get enough disability insurance to actually cover your expenses and save for retirement
4) Save 20% in addition to paying off the student loans
5) Support family from the other 80%
6) Stick with index funds.
Next?
Or work more early on and frontload your investments. When you’re young you can push it a bit and dump that into retirement to let it carry you some. I’m ICU, but still a pediatrician. My calculation have me at $5 mil at age 65 … and thats assuming a 4% return (adjusted for inflation to make it $5 mil in today’s dollars)
As a side note, is there a way to register your email and link it to doing that Captcha thing once instead of every time we leave a comment? It’s kind of annoying.
I’ll forward the suggestion to the tech department.
One wife
Modest house kept for a long time
Used cars
Save
Here is a generic number as a reference!
Let’s say you are 32 years old when you are finished with residency (I used my brother age as an anesthesiologist).
You owed 200K loan (the same amount he owned).
Your take home income is 145K.
Here is your Money Play –
1. Your yearly expenditure is $101,085.71
2. Pay off your entire loan in the first 4 years
3. Starting with the 4th year, invest everything in low cost index fund
Results
You will be a millionaire at 51 years old.
You will have accumulated $2,610,151.22 passive income at the age of 60 that have the
strength to generate $101,085.71 – the same budget that you have been allocated for yearly
expenses. Effectively you are Financial Independence at the age of 60. Continue to work
in medicine if you have the passion or moving on to something else!
If you continue with the same Money Play until you are 69 years, you will have $5,361,481.76.
The calculation is used based on 4% withdrawal rate, and 7% rate of return.
If you want to be more conservative with 3% withdrawal rate and 6% rate of return, the Money Play will
take 6 additional years.
If any of you need to calculate your specific number, I will do for just one payback promise – STAY WITH MEDICINE!
Question I have is medscape should it not have asked net worth of $2-3 million $3-5 million exempt of primary house or residence to better understand this issue?
Yes, there are a lot of things Medscape should have done if it wanted to answer the questions you and I have.
While we have hit our likely retirement number, I am still working for three reasons:
1-I really want to get a pension for my prior military service (back before TSP or anything like that) so I plan on at least another few years to the 5 year vesting point for my civil service work. It’ll be small but with COLA a very valuable investment of my direct costs, plus the extra salary beyond when I could (probably) afford to quit.
2-Refuse to believe that I’m really ready to never work again.
3-Still uncertain we are set for life especially since a good part of our future income is the value of my husband’s pensions which get cut by 2/3, I think, should I be widowed. I’ll be more certain I have enough capital to live on should I be widowed when we are older.
(BTW if you want to feel really rich, do some PV calculation of your pensions if any and add that to your actual net worth. At 5% they’re worth ½ our actual net worth.)
As mentioned the most important factor is your spending. I have a hard time predicting my spending 20 years from now. Right now we spend about 120k a year but half of it is daycare and mortgage which will sunset in 5and 13 years respectfully. College savings is another significant expense right now but that will be hanging around a little longer.
I am sure there are numerous ways to spend more to eat up the money every time we see and expense go away but I am challenging myself not to do it.
Since I do not expect any significant raises in my near future that is the best chance we have of increasing our savings rate to super saver levels.
Well, home equity is an asset. Houses can be sold for money. With a lot of people ending up in retirement communities and not needing the house, this is a legitimate source of funds for retirement.
While people often downsize, the price of the new place is not always lower. Sometimes it’s smaller but nicer or in a more expensive place.
“While people often downsize, the price of the new place is not always lower. Sometimes it’s smaller but nicer or in a more expensive ”
Yes. But if the old house paid for the new house, it still functioned as an asset.
If the old house was sold and proceeds used to pay expenses at a retirement community, it still functioned as an asset. If the old house was kept until death and passed on to heirs, then it still acted as an asset. Does not matter what the heirs do with the property, it is still an asset.
In my opinion, the amount needed to retire depends on spending. I just semi retired as I hit “my number”, didn’t want to go cold turkey, but only doing about 1/10 of what I used to. Wife retired completely at the same time. Very happy spending more time with my family. Since I’m self employed, health insurance premium is still deductible. Right now planning our next summer vacation 😄
You should aim for 25x yearly expenses and a SWR of 4%
3% of dentists retire comfortably at 65
Both professionals are weak on financial literacy and overspenders(love those fancy LEASED autos) and many think they can beat the mkt by trading stocks, options, etc etc etc
For those interested Watch online ‘THE RETIREMENT GAMBLE” to see how your 401k is raping you blindly
The 401k is raping someone…blindly? Seems a matter of just keeping out of 401k’s reach if it can’t see well.
I wished the title of the article read “How Much Saving Does a Doctor Needs to Have a Passionate Life?”.
According to the data at Vanguard the median retirement account is $23,944 and $46,200 for the age groups 35 to 44 and 45 to 54 respectively.
Fact 1 – although you are making 4 to 5 times the the median incomes of the population, you are experiencing the same FINANCIAL stress.
Fact 2 – as a doctor you are more cerebral than the general population due to years of training. You should have the capacity of the understanding that money is the underlying problem, but, money does not bring passion and joy in life.
Strategy 1 – follow the suggested guideline in this article to figure out your specific number to be accumulated within 10 – 30 years time frame.
Strategy 2 – rekindle with the reason why you do want to be a doctor – if it was MONEY, move on after 10 years of planning and execution for a Financial Independence life.
I hope you find the passion in medicine and will never retire!
My baseline is 1.5M by age 55. I can get there using tax-advantage accounts only. My plan is to retire at 55 at the earliest. That’s when kids will be college aged. Whether it’s working part-time or changing careers, I’m not gung-ho about retiring asap and I am hesitant about the merits and worry about the risks of retiring too early. Consequently, I want to keep earning a steady, reliable income for good while. $1.5M is my baseline based on our spending now, excluding a mortgage, work related costs, etc. and accounting for healthcare pre and post medicare and SS at age 70. With SS estimate based on max SS contributions (~130K/yr) and 75% of the calculated benefit. Of course a lot can and will change. But for now that’s an easy achievable target that I’m confident I’ll blow right by. For now though I’ll continue to make hay. Maybe spend a little more now, save more for retirement, give some to our kids or maybe if we do really well, retiring earlier will be more palatable.
A few comments about needing 10 million to retire:
1. This is a 250k per year lifestyle in retirement, which is a super, super baller lifestyle. Just some estimates:
Taxes = 50K
Housing = 75K — this would be a very, very nice apartment in almost any city in America
Cars = 25K — this is leasing two brand new BMW X5’s
Eating Out 25K — Every dinner for a year at a real restaurant every time, with drinks.
Everything else 75K — That is a heli-skiing trip for two a few times in the winter, a safari for a week and a bunch of cheap flights on Southwest to visit the kids and grand kids. You could also pay for your total hip or CABG out of pocket with that.
No housing and no auto costs and now you can basically do anything you want and all of a sudden you only need 4 million dollars for that lifestyle. Cook at home and that makes it easier. This can be achieved with only contributing to a 401K at the max, nothing else and getting 8% for just about 35 years. Very feasible for most physicians.
2. As Michael Kitces alluded to in his podcast with Jim (perhaps the best one you have done,BTW, kudos), physicians and most other folks using a 401K to build wealth, rarely get to net worth values approaching the 10 million dollar level. Here’s the main reason: Present Value is against you. Solving for a future value of 10 million dollars:
PV Years Discount Rate
$460,000 40 8
$994,000 30 8
$972,000 40 6
$1.74 million 30 6
Most physicians are not starting in practice with a half million plus in investible assets. They’re starting with nothing and a negative net worth.
Love this post. Keep it up!
PLS
I miss 2019.
Great, insightful post. One piece of advice although we did it unintentionally: Buy cheap first house and stay there a while. We bought a nice tract house out of training at about 0.8 x income, stayed 10 years and saved a lot. Public schools for kids, cheap vacations when young, but now lavish.
Second piece of advice: own something besides a salary – surgery center, real estate, private practice. Check, check, check. Now just 60 and FI x 4. Works out.
I found this very informative, particularly the explanation of the 4% rule. However, I wanted to seek clarification on whether this rule is invariant to age when determining if one is financially independent and can retire early. Specifically, if we take 4% of our net worth and find that our annual spending is below that threshold, can we assume that we are financially independent regardless of our age?
I remember in your book as well as parts of this article you emphasize the importance of considering the sequence of returns risk (SORR), especially when retiring early. This risk highlights the potential consequences of experiencing poor investment returns early in retirement, which could significantly impact the sustainability of a retirement portfolio.
Moreover, you discuss the idea of “flexible withdrawals,” which involves adjusting the withdrawal rate based on the actual portfolio returns. This approach can help mitigate SORR and ensure that the retirement nest egg lasts throughout the entire retirement period. This concept is particularly relevant to early retirees, who may have a longer retirement horizon and are thus more exposed to market fluctuations.
Furthermore, your book provides insights into the importance of factoring in various sources of retirement income, such as Social Security benefits, pensions, and rental income, while determining financial independence. It’s crucial to consider these income streams when evaluating whether one’s net worth is sufficient for early retirement.
Given these complexities, I’m curious to know if the 4% rule should be adjusted or considered alongside other factors when assessing financial independence and early retirement for individuals of different ages. Are there any specific guidelines for younger individuals who want to retire early, or should the rule be used uniformly across different age groups?
Pretty much. The difference between a lump sum lasting 30 years and forever is almost insignificant. However, lots of conservative folks will tell you that as an early retiree you should pick something smaller than 4% (3%? 3.5%?) if you’re retiring very early.
What do you think happens to physicians, the work force, and their retirement if we have a stock market drawdown of 30-50% in the next year? What if real returns on indices or bonds are not positive, or are minimal (2-3%) for decades?
Mr. Buchy,
I get that you’re worried about how a big drop in the stock market might affect doctors, workers, and their retirement plans. It’s totally normal to worry about the ups and downs of the market and what the future might hold. But let me try to give you some reasons why the trinity rule (aka the 4% rule) might still be a good guideline even in tough times.
Mix it up: The trinity rule is all about having a mix of investments, like stocks, bonds, and other stuff. So if the stock market takes a nosedive, having a mix of investments should help protect your money better than if it was all in stocks or bonds.
Been there, done that: The trinity rule is based on how things went down in the past, and that includes times when the market was in a slump or just not doing much. Of course, what happened before doesn’t guarantee the same thing will happen in the future, but the rule’s held up pretty well so far, even during some rough patches.
Roll with the punches: The trinity rule isn’t set in stone – you can change things up depending on what’s happening in the market. Like, if things are looking really bad, you could cut back on spending for a bit or find other ways to bring in some cash so you don’t drain your savings too fast.
Playing the long game: The trinity rule is meant for long-term planning, like 30 years or so. Sure, there might be times when things aren’t going great, but history shows that the market usually bounces back and ends up doing alright in the long run.
Keep it balanced: With the trinity rule, you’ve gotta keep an eye on your investments and make adjustments now and then to keep things in balance. Doing that can help you ride out the ups and downs of the market and make sure you’re not taking on too much risk.
So, to sum it up, even if the stock market goes through a rough patch or doesn’t do much for a while, the trinity rule can still be a pretty good guide for planning your retirement. Just make sure you’ve got a mix of investments, be ready to change things up if you need to, and keep your eye on the long game.
Yo, Tom, this reply is pretty ChatGPT-ish. Intro, examples, with a summary that emphasizes moderation.
The first is an expected event. The second would stress anyone’s plan, but a typical plan as advocated here would survive it.
If there are 2-3% long term returns over 20-30 years, we can only hope people planning to take 4% or more recognize that they need to cut back spending and are in a position to do so. For someone who could easily survive on 2%, cutting back might be unpleasant but possible. For someone who is 85, quit when they just hit 25x and now is short on money and unable to produce earned income- big problem.
You don’t need returns greater than 2-3% to support a 4% withdrawal rate. Now low returns and high inflation can be a problem. With 0% inflation, you can support a 3.33% withdrawal rate for 30 years with 0% returns.
I agree with the Social Security analysis but can’t help but wonder if the “means testing” might not exclude me and much of the WCI community? For example, I am 56 and tentatively planning on retiring about age 65 and starting SS benefits at 70. My wife and I have a current net worth of about 2.8 million excluding our primary residence. If means testing for SS benefits were introduced when I am 65-70, I’m guessing I may get excluded…. depending on the terms of means testing. I would assume you are not too concerned about this risk as those who are most likely to be excluded are also less likely to notice it (SS would be a smaller portion of their income the more likely they are to be excluded). Similarly those who are counting on it being a larger portion of their income (those 25% of Dr’s with less than a million saved) would be less likely to be “means tested” out. I am also assuming that those already receiving the benefit would not likely be cut due, but rather those who have not filed for it yet. So, I am assuming that my best bet to get a “return on my investment” from SS would be to watch closely in my 60’s for talk of means testing and if it starts looking likely, consider filing early in the hope of being “grandfathered in.”
PS -WCI is great! Thank you!
The consensus seems to be that SS reform will involve removing the FICA ceiling, rather than means testing older Americans. I’m sure that both could be on the table, but politically, older Americans carry a lot of clout with politicians.
As a formerly self employed dentist, the idea of adding another 15+ percentage layer of taxes with a removal of the FICA ceiling would be hard to swallow for those yet in the working world.
Typically when they make changes like these they grandfather those of a certain age, not just those already taking benefits so I’m not sure your strategy is so great.
I just retired from dentistry this year at 62 with just over 5M between after tax profits from the sale of my practice/ building, qualified and non qualified retirement funds. 7M nw. Debt free. I started late at 34, but my healthcare based accountant pushed me hard to establish a plan and fully fund it every year. I have worked with brokers more interested in their success, than mine, and survived any number of poor years in the market, yet, given enough years, the nest egg grew and here we are. 401k x 2. Profit Sharing. Safe Harbor. Backdoor IRAs. HSA. Monthly brokerage deposits.
It was hard to bite my tongue when I saw my peers throwing money around and thinking that retirement funding was the occasional IRA or poorly funded non Roth 401k. I can certainly see how so many people in healthcare retire with so little.
Great article! I have a basic question though. Since a large portion of my retirement savings is in pretax retirement accounts, how should I account for the taxes that I will need to pay on it when I take it out in retirement? Say, for example, that I have $2 million in pre-tax accounts; not all of that is my money. If I assume that I will be paying an average of 25% of it in taxes, do I only count $1.5 million towards the amount that I need to retire? Thanks!
Either that or adjust the budget to account for the fact that your withdrawals need to cover taxes too. You definitely have to account for taxes in some way.
” If you only ever spend the income, you’re right that you’ll never run out of money. It’s a very, very safe withdrawal plan. So safe that I’d love to be your heir, because you’re going to leave dramatically more behind than you retired with.”
Exactly. Plan to be a net saver through retirement. Let your charities and heirs inherit with no capital gains taxes.
We will take our RMDs, pay the tax, spend some and save the rest. Save all of the after tax income on our cap weighted broad market index funds and all of the after tax net from SS. Very low risk of running out of money. UNLESS illness or societal changes make our expenses rise dramatically. UNLESS a terrible market drastically cuts the value of our tax deferred assets and RMDs come in much lower than expected.
I never understood the attitude that says the Great Depression cannot happen again. It happened once, so we know it is possible. The “worst market ever” is always worse than anything that came before. I wonder how many people in 1929 thought that the at that time “worst ever” could happen again, let alone something worse. I hope there is not another Great Depression or something worse, but I see no reason to assume this cannot happen.
Social Security. I agree that it is difficult imagine politics shifting to the point that politicians sunset the program entirely. But there are recurring suggestions to means test the benefit. Those with little to no assets saved for retirement could end up with their full promised benefits or more.
Fat cat doctors who run elaborate Roth conversion scenarios to minimize taxes on the 7-figure account could be frozen out. Anyone who is “rich”, meaning who has more money than the speaker, “does not need the money” and can be stiffed.
It’s your money and your choice, but I think we’ve all learned from your past comments that you’re way out on the far side of the spectrum on this point.
This is a great article! I plan to read 2% of it every year until I retire.
It is kind of long isn’t it?
How do you factor in future value? we feel on track for reaching our “number” as determined by our current expenses, by our desired retirement age. But when viewed as FV @3% inflation discounting, it starts becoming unachievable (except by dropping the expenses by 20% or more)
No magic to this.
Increase income if you can.
Cut expenses to the extent you can.
Work longer.
A combination of these will get you to independence.
Yea, you have to account for inflation. That usually means saving more and investing more aggressively and working longer than you would otherwise prefer. But keep in mind the 4% rule DOES take inflation into account, at least after retirement.
I have done similar types of calcs for myself and friends – they are amazed at how little they actually spend on their lifestyle.
Hobbies can cost more – they can also generate savings. Gardening, cooking, auto or home repair etc.
Seniors get significant tax breaks or hotel dining, travel etc price breaks.
All in all, retirement is not as expensive as often believed.
I feel doctors should aim for a 10 million networth to retire (not including my primary home). Why work so hard and not have an incredible networth. Simple save , invest,, Rinse repeat.
Hard to apply one number to all kinds of different doctors with different incomes and different situations. While $10M might be easy for you and me, it might not be for a single parent FP working part-time who came out of med school at 42.
Saving $10mil would be such a huge missed opportunity to live our lives for us family docs and “lower paid” specialities. I am aiming for a minimum of $3mil and withdrawing $120k/yr. (4%) That keeps me at my same standard of living minus most kids expenses. I currently save 35% of gross income. currently am projected at $5mil (inflation adjusted) if I retire at 60, but not sure I want to work full time that long b/c of all unpaid time working. If I were to aim for $10mil, I would be doing nothing fun with my life right now but have a lot of money for when I am “old and decrepit”. at least once a day my elderly patients tell me to take vacations, etc now while you still can. $10mil savings goal would lead to less happiness long term, not more. Goal is not to “die the richest person in the graveyard.”
Well said.
This is an amazingly funny comment “Goal is not to die the richest person in the graveyard.” I agree! But, some people make pricey coffins for themselves—like the famous singer Aretha Franklin—she was laid to rest in a gold coffin!
https://rollingout.com/2018/09/01/5-things-to-know-about-aretha-franklins-amazing-gold-casket/
Taj Mahal anyone?
Those who have done their research already have retirement, few “know” it yet though … BTC
Look out below, markets will continue their slide into 2023-24 turmoil, which I think will mean fewer “retirements”!
I always enjoy bitcoin prognistications like this. Jim or Josh, can we round up all of Scuchy’s such lugubrious divinations and have a yearly look at how well he or she has done? Wait, is that…Michael Burry? Oh do tell when I should bet against credit default swaps or collateralized debt obligations!!
Good God…..This is complete garbage.
Hard to know how to respond to that useful bit of specific, constructive criticism.
I’m not quite 50 yet but I’m saving and investing regularly. Love my practice of medicine, which pulled my family out of dirt poverty—yet I think it might be best to also become less “dependent” on a medical professional salary and invest in other fields that enable “absentee ownership” of lucrative businesses that will enable an income equivalent to my medical salary—then everything I earn in my medical profession is what it has always been—for the wonderful joy of practicing.
Anyone doing absentee ownership of lucrative businesses? What have you invested in and how does the business carry you financially? I’ve been advised by business brokers that laundromats, coffee shops, and real estate income are very good sources of passive income.
We had someone on the podcast recently that helps people get into non-food franchises. Lots of WCIers have real estate investments. Pretty much all own index mutual funds, which are extremely passive sources of business income.