Many people have no idea how much they need to retire. This amount can be measured as both a net worth (of investment assets) and as an income. People also aren’t sure whether or not to include the amount shown on their Social Security statements. My latest presentation on QuantiaMD discusses this important concept. It also discusses the fact that most docs won’t need anything near their pre-retirement gross income in order to maintain the same standard of living in retirement as they had in their peak earnings years.
My most recent presentation on QuantiaMD was # 6 in the series. This is really a fun format if you haven’t seen any of the others. They are 8-15 minutes long, contains slides, polls (usually with much different results than the ones I do of regular site readers), and audio. If you haven’t seen the first five, you can find them here:
#1 Live Like A Resident (804 comments)
#2 Student Loan Management (398 comments)
#3 Your Largest Tax Break (753 comments)
#4 The Backdoor Roth IRA (444 comments)
# 5 The Safe Withdrawal Rate (333 comments)
Number six in the series is all about how much money you really need to retire. Future presentations include The Basics of Estate Planning, and The Basics of Asset Protection. Click the link below to view the presentation.
How Much Do You Really Need To Retire?
At any rate, check this presentation out and then come back and let me know what you think in the comments section. How much do you feel like you need to retire? What process did you use to determine that amount? Comment below!
Oh my gosh, I felt a bit embarrassed that those are my colleagues. Some of those questions… On the bright side, it boosted my self-confidence.
We all start somewhere, right? It really does demonstrate the need to evangelize this information to colleagues. I hate to be preachy, but man, if you don’t know any of this stuff I can literally save/make you millions.
Can you please make these articles and videos available on your website or at least not require us to join more sites/passwords/apps. We support your website and feel like pawns being used for you to double dip for income from both websites.
You are supposed to be able to watch the entire presentation without signing up for or logging in to QuantiaMD. If you are unable to do so, let me know and I’ll have that fixed. I made sure of that before producing the presentations for them so that all my attorney (and other non-medical professional) readers could get to them.
Obviously, since I’ve sold the presentation to Quantia, I can’t just post it on my site. It’s their material and they paid me for it. I know it’s annoying to have to click one more link, but I suppose the alternative is to not watch it. Plus, I don’t have the storage/bandwidth capability right now to run a bunch of video on the site.
As far as “double-dipping,” I can only produce so much content each month. Most regular readers on this site came here because I reached out to them on another site ( such as Bogleheads, SDN, MMM, half a dozen other forums, QuantiaMD etc) or in a printed publication (ACEP NOW, CNN, New York Times, Forbes, Practice Link etc). So I expect to continue to produce content in other places as part of my marketing efforts. Of course, it seems silly to put all the effort in to producing new content and not even let regular readers know about it. At any rate, there are only two more presentations left in the QuantiaMD series, so it won’t be a problem for you for too much longer.
Double dip away. The variety of presentation formats is a bonus in my opinion (even if the content can be a little repetitive). Plus you got bills to pay.
Don’t remind me. I just did my taxes this morning and will be writing 3 checks totaling over $80K on April 15th.
Is it time for the annual disclosure of the effective tax rate yet? I’m 13.9% (federal) + 4% state, 1st year out of fellowship, so only 1/2 year of attending salary.
Funny you should ask. I just did my taxes this morning. I think it will be about 24% including Federal, Payroll, and State tax rates. A good problem to have. I’ll probably do a post about it, but honestly the only particularly interesting thing about my finances this year compared to last is how much money this blog made in 2014, which I already wrote about. Otherwise all my income and deductions look pretty similar.
My effective tax rate was 18%. Same situation, first year out of residency. I am going to hate to see the student loan deduction go away for me next year.
Speaking of student loan interest deductions, I refi’d with DRB this past year and paid off about $40K in uncapitalized interest on my loans – none of which I get to deduct this year (though I could have last year). I almost cried when I got my 1098. Something to consider when looking at the timing of refinancing.
the student loan interest deduction is capped at $2500 anyway…
every year i scream looking at how much interest we pay and none is deductible!
That $2500 limit is one more variable to look at when comparing which debt to pay off first, but most likely it will all be disallowed after a full year post residency due to income limits.
I paid for house before student loans, simply because most of my student loans would be forgiven if I died, but the mortgage wouldn’t. They get you one way or the next!
you will need around 70% of income when you retire
If both spouses work you might have 50-60k in ss benefits
Being debt free is crucial and many when retired move to less costly states like florida with no state income taxes and no estate taxes
Get a number, and see how much monthly you need to contrtibute to reach your goal at age 67-70
Assume returns in th6-7% range with a well diversified low cost portfolio of mostly index funds
Personal assets-I LOVE INDIOVIDUAL MUNIS and the monthly tax free income stream
As physicians you guys get a LATE START-in residency you should be contributing to IRA or Roth or whatever ret plan is available
TIME IN THE MKTS IS AS IMPORTANT AS ANYTHING except ASSET ALLOCATION
70% seems a bit high to me, but everyone is different. Right now after paying loans, saving, taxes and charities, my actual living expenses are closer to 25% of my gross income. No loans, no saving lower taxes and charities in retirement means I won’t need even close to 70% once I retire.
I disagree that most docs will need 70% of income to retire, especially 70% from their portfolio alone. Run the numbers on the savings rates it takes to get that. I certainly don’t need $400K of income in retirement when I’m spending less than $200K in income now, and that’s with a mortgage. Who needs a new wakeboat every year?
Think of it this way. If you make $300K a year, and you want 70% of that from the portfolio in retirement, that’s $210K. That means a portfolio of $5.25M. If you making a pretty nice 5% real on that portfolio, and you work for 25 years, what percentage of your income do you need to save each year to get there? The answer is 35%. Of your gross. Now, if your after-saving income (not to even talk about taxes) is only 65% of your gross, why would you possibly need 70% of your current gross in retirement, when there is no college to save for, no work-related expenses, hopefully no mortgage, no life or disability insurance, no kid-related expenses etc etc. Plus you get Social Security! At any rate, I think most docs will need something in the 25-50% range of their income replaced by their portfolio, and might be fine with even less + SS.
https://www.whitecoatinvestor.com/percentage-of-current-income-needed-in-retirement/
I would agree that you don’t need 70%…Although it would be great to be able to retire on 70% of my current income, I don’t think I will “need” to. Get rid of the term life, high pay long term disability, college savings for kids, daycare for 2 kids, mortgage and student loan payments and that clears an extra crap ton of money. I could take six to eight 10,000 dollar vacations a year on this money alone. I’m not saying I would take a bunch of high dollar vacations, but by the time I hit retirement age I will already have an extra 75,000 grand per year less of expenses.
Just dropping retirement savings and 2/3 of your tax burden is huge. For me, retirement savings and taxes are over 50% of my gross income.
You forgot to mention that you no longer need to save for retirement, that is a pretty big expense in its own right. Most docs can have a very nice retirement spending less than $125,000 per year, if the house and cars are paid off. Social security should be roughly $40-50k. This is a deeply personal financial issue and will be different for everyone.
I agree. That works out to about 10K/month. Not everyone is the same obviously but that level of income is quite generous for anyone with reasonable frugality. That implies a “Number” of 3M ($3,000,000 x 4% = $120,000 per year).
Good illustration of how expenses vanish in retirement, and also good encouragement not to retire with debt.
Your aside re rental real estate also makes sense. I keep thinking more and more that real estate is the key to a strong retirement… you never dip into principal and its value and rents inflate with the market. And unlike portfolio assets, you can offset income with depreciation and other expenses. It’s riskier though, as your tenants could always move out, but with a diverse portfolio of property that risk could be minimized.
The average doc is not making a fortune nowadays and their incomes will drop as they all get swallowed up into hospital, corporations, and group practices and their fees tightened
So if the average is 300k, you will need 75K in retirement??????
No Way as too many of you real doctors(I am dmd) spend too much on lavish lifestyles and are terrible planners and gamblers as well
most docs financial IQ IS LOW!
Interesting response, Ken. Do you have a solution?
It’s all about your expenses Ken. If you’ll need $125K to maintain your lifestyle, and you’re getting $50k from SS, then yes, $75K is plenty in retirement. I have a lot of months where I’m spending less than 20% of what I’m making now. The rest goes to taxes, charity, and mostly savings, both for the long-term and the short-term. I certainly won’t need anywhere near my gross income in retirement. I’d be like Richard Pryor in Brewster’s Millions trying to spend that much money every year in retirement.
If you are Richard Pryor, can I hire you for a day as The Toy that my kids want?
Nice job as always, WCI.
It is pretty basic and not too much new for regular readers here. The examples are great for making the ideas clear and the message is critical for the wider audience of physicians. Other sources don’t make your great distinctions between wants and needs or on basing retirement on expenses vs working income. Again they are basic concepts but so important and they are ignored or not understood by others.
If it’s basic that says something about your level of understanding. As you can tell from the questions and comments after the presentation, I’m speaking to an audience with a much lower level of financial sophistication at QuantiaMD than I am here. Part of that is due to my efforts here, and part of it is simply the nature of people who read financial blogs. The level of sophistication I usually run into when I go on speaking engagements is more similar to that at QuantiaMD than to those who regularly read here.
I was banking on 5-6% fixed return at retirement. Bought amny 10yr cds a few yrs ago at 5%. Now you get about 3.2%
Obviously living in metro NYC is more expensive than living in Florida so everyone’s number is different.
Far too amny docs fail to save and plan and live too high so they never reach critical masss
For me starting in l975-4 million was my goal. Not sure how I arrived at that number but it must have been a good guess. Probably felt I would want 200k in income.
But I was uneducated then and did not consider SS
For most docs today I would say the minimum is 2 million at full ret age. An easy goal for 40yrs of smart investing
I agree most docs should be able to get to $2 Million with a reasonable savings rate and investment strategy, and that is probably enough for most docs. That was my original goal, but I confess it’s been creeping up the last couple of years. It might be $4 Million by the time all is said and done due to both inflation and hedonistic inflation.
Have a goal and shoot for 20% higher
2 million will cut it if you live in a state like florida and lower your lifestyle and not pay state income taxes
That amount would NOT cut it in metro nyc
Most docs will need double to keep the Mercedes on the driveway
Too many docs need to show their wealth
I drive an 07 camry bought used
If docs lived like they did in school they would be richer sooner, as Mr Schiller from Yale stated today
Sure. Make $200K and live on $20K. It is a recipe for financial success. Pretty tough to do for long though. And no reason to be quite that extreme unless you really place zero value on additional consumption.
BTW, Schiller is a perma-bear. His advice is always to save more because the economy is going to hell in a handbasket. Every now and then, he’s right. Stopped clock and all that.
Both times he called the market they were quite obviously too hot (dot com) or built on a house of cards (2008), the latter being more obvious in retrospect. I havent finished his most recent edition, but with the differences in accounting (pro forma to gaap) and frankly the different markets from 1871-1954 and 1954 onwards are very different, and accounting practices have been changing. we have spent more than 23 years above the supposed long term CAPE average for…98% of the time.
I think its a great overall indicator for the market, but it does have several drawbacks which are fundamentally based on the data used for calculating it and the assumptions made (earnings from all eras are equivocal), both of which have issues. On the other hand, it is a good indicator of the range of possible forward returns are. If you took him at face value the s&p would need to correct to 1100, which is absurd.
You also have to take into account the greater market involvement as a whole, general acceptance due to history that long term the market is beneficial, algos, the internet and self learning by the market. There were decades where very very few people were in the market overall and stocks were wildly distrusted, if you were in the market you held bonds like any other reasonable person.
You couldnt just reinvest dividends, buying was a pain and had to be done in large blocks in person, and there was little history of the market. What little that existed was difficult to access. The fed did not have such a narrow mission regarding inflation, etc…All of these things have changed, and while irrationality and other forced hand situations (mass retirement, emergencies, generational size differences) will still effect the market I’d be shocked if we had lows as low as in the past on the whole, or the decades of buying opportunity (the whole 80s were on sale, and the decades after the depression).
Now, I’d be super excited to pick stuff up on liquidation prices, but those opportunities are shorter lived now than in the past. After the great recession there was only one month, march 2009 where things were crazy crazy low like similar times of the past that lasted much longer. It was also the only time PE10/cape correctly identified value.
Just food for thought, there will always be opportunity for intelligent moves inside and out of the market.
I seem to recall many more calls by Shiller (that didn’t pan out) than the two you remember, but yes, he got those two right.
You are probably right about calls in general, I was thinking about how he has been fortunate to time releases of his book with overall to major down turns. This probably has turned him more generally into confirmation bias to over calling, I just seem to miss his minor stuff. Hes always prominent when doing the book circuit though, guess thats whats sticking out to me now.
The secret to making stock market predictions is to make them frequently.
WC-what% of physicians do you think are well enough educated in personal investing to wing it on their own? Only mean stock and bond investing using mpt. Bet its very very LOW!!!
You’re probably right, unfortunately. I had a brilliant doc who was a very unsuccessful entrepreneur recently asking me basic questions about index funds.
By the way, did this series pay for the dining room table?
Not even close. That table was 2 months of book royalties.
WCI,
Not sure if you have anything like this, but how about a post about questions that 4th year students should ask at residency interviews in terms of financial details and also for residents to ask when applying for attending jobs?
While that might be an interesting post, I think I’d probably discourage residents from asking many financial questions at interviews. The main reason is that residency is about learning how to practice medicine the best you can. Plus, many of those interviewing might be turned off if you seem “money hungry.” That vibe will probably always be present among academics. Most importantly, it just doesn’t matter since the pay and benefits for residencies are all very similar and usually posted on the website. In fact, I picked the lowest paying residency on my match list (then was pleasantly surprised by a $3K raise just before starting). At any rate, the only question that REALLY matters is whether the residency is a 501(c)3, in case you go for PSLF. Truthfully, the cost of living of the city matters far more to your finances than anything unique the program offers.
I agree that what really matters is the cost of living where you train, if you are concerned about how you will fare financially during residency. One of the biggest financial boosts to my life was that I ended up going to both medical school and residency in a city with a low cost of living. I didn’t plan it that way, they just happened to be the best programs to which I was accepted. Another thing that affects your financial situation is whether you are allowed to moonlight and whether you have time to do it. But that is another thing best not asked when in a residency interview. You can ask that in a casual way of a resident that you meet, as in, “is is pretty expensive to live here? Do the residents need to moonlight in order to make ends meet?”
Boost number two was that I had significant exposure to private practice urologists during my residency who were not stingy with practical financial advice. So when it came time to evaluate practice opportunities, I was more than ready. THAT is the time to ask money questions, although not right away in the interview process.
As one of my private practice mentors told me, when a practice you are interviewing for after residency responds to your financial/compensation questions by saying, “well, we’re really not about money here, that’s not what is important to us docs,” you have just been told that money is ABSOLUTELY extremely important to somebody there, and they plan to use you to their financial advantage.
The questions should be very different between an interviewing MS4 trying to match (don’t do it! “So my wage is about $10.75 an hour? How many vacation days do I get?”) and going out for the real job board-certified. Big difference.
I haven’t had a chance to fire up the iPad at a quiet time and watch the QuantiaMD presentation, so my apologies if this is redundant. A nice easy rule of thumb based off the Trinity study safe withdrawal rule (and courtesy of Mr. MM) is that once one’s investments reach 25x that of one’s yearly spending then the game has been won.
I like this definition, noting that one’s income is conspicuously absent from it. Investment balance and yearly spending define it all.
One thing that is very relevant, but was overlooked in this presentation, and the 4% withdrawal rate presentation, is that retired people gradually, voluntarily, decrease their spending. It happens at a rate of about 2% a year. The data is probably skewed to the low side by people with lower net worth. In reality, “wealthy” people probably spend even less than a 2% decrease each year as they age because more of their spending is discretionary.
When even a 2% decrease in annual spending is factored in, the safe withdrawal rate jumps significantly.
Combined with Bengen recalculating Safemax with a position in small cap stocks, the historic safe withdrawal rate that incorporates both those factors is very close to 6%.
You make an excellent point about the cost of overestimating the amount needed for retirement savings. I think you may want to consider these issues when you are tempted to default to the 4% number. That number hinges on a constantly increasing withdrawal equal to inflation, and older people don’t actually spend at an inflation adjusted rate.
Bob
The studies I have seen on retirement spending show it is bimodal. It is very high early on, then gradually decreasing before ramping up dramatically in the year or two before death.
But I agree with your general point, that people who get fixated on the 4% number (or worse, some crazy number like 2.5%) are likely to spend less than they could. The studies show that, historically, if you spend 4%, you’re more likely to die with more money than you had on the eve of retirement than less, much less running out of money. The 4% comes from the worst case scenario, and by definition, most people won’t hit that. I’m not sure I’d feel good about making a general blanket recommendation to retirees to spend 6%, but I do advocate tracking as you go along and if the portfolio is doing well, spending more. If it is doing poorly, spend less. That’s much easier to do if you have a floor under your spending from SS, a pension, +/- a SPIA.
The problem is we live in a sound bite world, and people will only pay attention briefly. That limits one to saying things like “a 4% withdrawal rate is safe”.
But when multiple factors are looked at it becomes clear that 4% is a very conservative number, and IMO distorts reality.
Small cap incorporation into asset allocation raises Safemax to 4.5%.
Incorporating variable spending, wherein a retiree decreases spending during down markets, builds in a significant safety buffer, further increasing the “safe withdrawal number”, while making it less absolute year to year. This is very easy for high income/high net worth retirees, who have a large portion of their incomes going to discretionary expenses.
Decreasing spending during retirement is a very significant factor, that really should get more consideration. On this forum, our colleagues will all fall into the highest income and wealth categories. Those categories see the largest decrease in retirement spending. And they are relatively immune to a bump in spending at the end of life, because they generally have Medigap insurance. Kitces has a nice article that talks about Blanchet’s research at Morningstar and Bernickes previous research pulled from the BLS data. For the upper income cohort, it appears that spending decreases at an average of over 3% annually, in Blanchet’s graphs. And there is never a year where spending increases once retirement starts. Here is the link: https://www.kitces.com/blog/estimating-changes-in-retirement-expenditures-and-the-retirement-spending-smile/
And that spending decrease is magnified in financial planning terms when we consider that social security will constantly increase with inflation. All the spending decreases can come via smaller withdrawals from our retirement accounts. A typical retiring high income earner may receive close to $50K (with spousal benefit) from social security. If they are drawing another $100K from retirement savings, then all of the decrease in spending comes from only 2/3rds of their revenue source. So a 3% spending decrease equates to a 4.5% decrease in withdrawal from the retirement account.
The implications of these various factors combine to paint a picture that suggests that a dramatically higher withdrawal rate than 4% is in fact safe for high income/high net worth retirees.
Thanks for the discussion, the forum, and the opportunity to post comments.
Bob Koenitzer DDS
I wish you were right Bob that most docs will fall into the highest wealth/income categories. Sadly, I know it isn’t true. Perhaps most of those who actually read this will though.
While I absolutely agree with all your comments, it really all comes down to the definition of “safe” that you use. I suspect your and my definition of “safe” is very different from some of the hyperconservative Bogleheads talking about 3% withdrawal rates.