Continuing on with our CFE week, I come to another book I read this year (despite it being published in 2017 by an ophthalmologist by the name of Ralph P. Crew) called Retirement Planning for Young Physicians. The theme of the book seems to be that you need to save a lot of money to retire — being mentioned in nearly every chapter.
Perhaps the greatest reason for a financial strategy is retirement. You will probably live another twenty-five to thirty years after you retire. How will this be funded? Due to the length of your education, by the time you start practicing, you will be almost a decade behind in retirement contributions…larger, more consistent contributions will be required to catch up and produce retirement incomes commensurate with your working lifestyle…It is impossible to completely fund a successful retirement with a 401(k)/403(b), the standard retirement programs for hospital and employed physicians. Additional savings will have to occur, through other retirement plans, after-tax savings, and lifestyle adjustments.
While I don't necessarily disagree with most of that, like many of you when I see the word “impossible” I start running numbers in my head. Now I have a 401(k)/profit-sharing plan (actually two) that I can contribute $56K to each year. My wife has one as well. Putting $168K/year into 401(k)s from age 30 to age 65 and earning 5% real on it would add up to over $15 Million dollars in today's money. That seems like plenty to retire on to me.
To be fair, Dr. Crew is talking about a typical 401(k) at a hospital for an employed doc. That doc would certainly get at least the employee $19,000 contribution and would likely get at least some matching dollars, perhaps another $11,000 on average for a total of $30,000. Let's say that doc also didn't get started until 35 and so only had 30 years to save. She still ends up with $2 Million today's dollars, about $80K/year in retirement income. When added to a Social Security of $40-50K/year, again in today's dollars, that's still probably plenty for most docs. So is it a good idea to save above and beyond your 401(k) or 403(b) in places such as Backdoor Roth IRAs, your spouse's retirement plans, and even a taxable account? Sure. But is it impossible to fund a successful retirement just with a 401(k)? Probably not.
The number one financial concern of physicians of all ages is having enough money to retire. Thirty-nine percent of physicians report that they are behind in saving for retirement….Only 37 percent of physicians in their sixties are without debt..a third of physicians in their thirties plan to retire before the age of sixty-five, but less than two-thirds max out their 401(k)/403(b) yearly. Sadly, only two-thirds of doctors in their fifties maximize 401(k)/403(b) contributions.
If you can't save $19K on an income of $275K (7%) or heck an income of $150K (13%), you've got a spending problem, not an earning problem. Imagine trying to say with a straight face to someone living on the average household income of $60K/year that you really need that money now.
Many of you will retire early. This could be by your own choice or necessitated by health or family issues…60 percent of retirees left the workforce earlier than planned. Thirty-seven percent…due to health issues. Only 16 percent retired earl because they could afford it. Fifty-one percent of workers expect to work in retirement.
A good reminder that man plans and God laughs. You are far from being 100% in control of your retirement date. When in doubt, save more.
Some critics may say that my savings suggestions are too aggressive and will result in surplus retirement savings. The White Coat Advisor claims, after extensive calculations, that you will need only 28 percent of your income in retirement. He neglects the fact that the future growth of wages will be flat an ignores the deleterious effects of inflation.
It's probably a bad idea to send me a review copy of your book with a paragraph like this in it.
First, I can't be your critic if I don't know who the heck you are.
Second, it's White Coat Investor, not Advisor, although if someone tries to use White Coat Advisor (again) my IP attorney will get some extra business.
Third, I never claimed that YOU would only need 28% of your income in retirement. I claimed that I would only need 28 percent of my pre-retirement income in retirement. Frankly, that number has dropped under 10% for me now. What I claimed is that MOST docs, if they run the numbers for themselves, would discover that they only need their portfolio to replace 25-50% of their pre-retirement income. This isn't a particularly hard to discover fact.
A typical working doctor might be paying something like 7% in payroll taxes (Social Security and Medicare). That all goes away in retirement. That same doctor might be paying 20-30% in income taxes before retirement, but that could easily be under 10% in retirement. Mortgages go away in retirement if you pay them off. Perhaps another 15%. The kids are through college and living on their own. Maybe that's another 5% of your gross. You don't have to save for retirement either, another 20%. Life insurance, disability insurance, commuting costs, and work expenses….gone…gone…gone…gone. Add it up for yourself, then add back in any other expenses that may go up like travel, health care, or gifts. What number did you get to? Oh, something between 25% and 50%? Weird. Me too. And that is probably before counting in a Social Security benefit (which may take you right down to 28%)
Fourth, I certainly included the effects of future wages and inflation like I generally do in any type of long-term calculation.
At any rate, I found it kind of hilarious to be accused of not telling people to save enough money. So I'm writing a whole post today telling you to save more money, just in case you missed that message in my writing somehow.
Dr. Crew lists out his fixed expenses in retirement at $38K per year. He then says:
Let's extrapolate my fixed expenses to the year 2052, thirty-five years from now, when you will be ready to retire….If I apply [inflation] to my fixed expenses, they become approximately $113,000 in 2052. Makes you think, doesn't it? You will need a boatload of money when you retire just to pay for these costs. Current formulas suggest that your retirement savings should be twenty-five times the amount you will be spending year in retirement. So in 2052, you will need almost three million dollars in your account just to pay for your modest fixed expenses. Variable spending will require significant additional resources.
Later in the book, he tells young docs exactly how much they will need. In chapter 6 he says:
You will need about $8,000,000 to retire comfortably thirty-five years from now.
In Chapter 20 he says:
You will need to save about $54,000 per year for the next thirty-five years.
I don't necessarily disagree with either of those numbers. Although the specificity is almost laughable (and he does admit elsewhere that it is different for everyone), lots of people benefit from just being given a ballpark number. Bear in mind, of course, that $8M in 35 years is the equivalent of $2.7M today.
Let's continue pounding the message of “Save More!” into your thick skull.
It is quite possible that you will live as long in retirement as you practiced medicine. That's a long time! You will need a lot of money! The only way to be financially prepared is to acquire significant assets during the working phase of your life. Your ability to do this as a hospital employee will be limited. Small business–that is, private practice–allows for many opportunities to accumulate wealth. The US tax code was specifically written for business…When you work for someone else, they have these advantages, not you. Presently, only 22 percent of physicians in their thirties are self-employed or partners in a medical group. This compares to over 50 percent of doctors over sixty.
In Emergency Medicine, only 8% of docs own their job these days. It definitely impedes the building of wealth to be losing a large percentage of the dollars you generate clinically. Don't kid yourself, when a business does well, the profits go to the owners, not the employees. I haven't been an employee for a decade, and I don't plan to go back. But is it possible to build plenty of wealth as an employee, especially a highly-paid one like a doc? Absolutely. You just need to avoid the effects of debt and have a high savings rate.
I was able to retire after twenty-six years because of my total dedication to retirement investing, owning my own practice, and my family's commitment to a moderate lifestyle. My success depended on all three components. Most new graduates will have complete access to only one of these conditions: the ability to live a modest lifestyle.
Say what? I guess it is really just one thing though if you think about it. If you live well below your means, you're also “totally dedicated to retirement investing.”
You need to be careful not to be too confident that your nest egg will be sufficient. To be safe, you should probably save more than you think you need. Imagine retiring in February 2008, thinking that you had enough saved for retirement, only to find a year later that your fund's value had decreased by 43 percent….
While I appreciate the importance of understanding Sequence of Returns Risk and the need for most doctors to save much more than they are, the scaremongering and cherry-picked time period are a bit much in this one, especially given the frequency of this message in the book.
In summary, as an employed physician, it's unlikely that you will have enough saved to retire comfortably without making extraordinary efforts. About $44,000 needs to be invested yearly for thirty years [for] you to have a modest retirement. It is important to maximize all retirement programs through your employer, but you will still need to save considerably more on your own in after-tax vehicles. This will require living a modest lifestyle. Be prepared to work past age sixty-five for both the extra income and the increase in your assets that occur over time.
I'm starting to wonder what the rest of America is going to do if it is so hopeless for the top 1-2%.
I am not suffering from any financial strain. As a disclaimer, I live in a small town in the Midwest and have a modest lifestyle except for travel. If I can do it, you can too! It appears that if you are able to save the maximum allowed defined contribution of $54,000 a year for thirty-five years, maximize the catch-up for another fifteen years, and receive Social Security payments, you should have a successful retirement. It won't be lavish, but it will be comfortable…You will need $8,000,000 to retire comfortably thirty-five years from now.
$54,000 per year for 35 years at 5% real grows to nearly $5M, which should support spending of about $200K/year. That's all in today's dollars. I'll let you decide if that is lavish, comfortable, or somewhere in between.
Let's imagine that a Japanese-like economic downturn occurs shortly after your retirement. You lose 50 percent of your retirement savings and there is no growth in the market for decades…An infinite number of situations can be considered. I have reviewed only a few…Basically, the more money you save, the greater your chance of having a comfortable retirement. Very simple. We cannot predict the future, so we need to be prepared for a wide range of contingencies.
If you live in the Northeast or on the West Coast, the income derived from maximizing savings in a defined contribution will not be enough for a comfortable lifestyle. If you have a moderately high lifestyle, your assets will be insufficient. If you are used to living the high life and figure that at retirement you will suddenly switch to a modest lifestyle, don't fool yourself…Do you like Ramen Noodles?…Unless you are exceedingly disciplined not only in saving for retirement but also in maintaining a modest lifestyle, you are going to need to work past age sixty-five.
The theme continues. Luckily I kind of like ramen.
Those of you who live in areas with a high cost of living have a herculean task ahead of you. It will be difficult for physicians living in moderately expensive locations to save enough to retire comfortably. To retire with a similar lifestyle in a high-cost location will be almost impossible.
Didn't we cover this in the last chapter?
As an employed physician with limited retirement plan options and no practice assets to sell, you will require significant additional retirement savings and lifestyle modifications. Accumulating a large amount of money outside of a retirement account is difficult.
Got it yet?
This chapter was only half a page long, and it didn't actually tell you to save more money, but it did tell you to consider using your HSA.
The most important concept in investing is that you should start saving money now! If you don't save any money, there's nothing to invest. If you don't invest, how will assets grow? If you don't have any financial resources, how will you retire…Money doesn't appear overnight. It's impossible to accumulate [$8 Million] over the last ten years of your practice. It takes an entire career–decades!…Why am I encouraging you to save money–lots of money Because I want you to be able to retire someday. I don't want you to have to work until you are eight-five or live on peanut butter and jelly sandwiches in subsidized housing because you haven't saved.
I kind of like peanut butter sandwiches too. This chapter also mistakenly uses the term fee-based when the author meant fee-only. Remember that fee-based means the advisor charges a fee and a commission.
This chapter also doesn't tell you to save more, but it does quote me about the dangers of mixing insurance and investing. Then the author says:
If an investment advisor tries to sell me a whole life insurance policy or an annuity, it throws up a red flag, and I become very cautious about everything he or she suggests. It's my financial advisor litmus test.
It's actually a pretty good litmus test.
Chapters Fourteen and Fifteen don't mention much about saving money, but Chapter Sixteen is a “financial summary” in bullet point format that includes advice like “save money,” “be disciplined,” and “get started as soon as possible! You are almost a decade behind your peers!”
In case you still haven't gotten the message, Chapter Seventeen is titled “Physician's Don't Save Money.”
There is a culture among physicians in which lifestyle is emphasized…it is exacerbated by the fact that most physicians tend to associate closely with other high-income physicians. There is little opportunity for outside influences to bring financial reason to their world…If moderation isn't achieved, substantial shortages will occur in retirement plans and physicians will be working longer into what should be the quiet, relaxing years of retirement. We live in a protected cocoon. It is time to break out. The biggest barrier to becoming rich is living like you're rich before you are.
It's possible that reimbursement for services will decline. Best-case scenario, it stays flat. But even if reimbursement remains flat, real income will lose value as a result of inflation.
Chapters Nineteen through Twenty One
Chapter Nineteen tells you to buy disability insurance, avoid circular saws, and wear gloves while gardening, but it doesn't tell you to save more money.
Chapter Twenty tells you to maintain your health because
You will need to save about $54,000 per ear for the next thirty-five years. As you age it's essential that you continue to be productive at a very high level for many years to achieve this goal.
Chapter Twenty-One sums up the book:
One thing is certain: your financial prospects will not be as generous as you expect…you will need to save for retirement on your own. This will require willpower, planning, and lifestyle adjustments . Your spouse will need to understand and be supportive. Wages will be flat for most of your career.
You Probably Do Need to Save More
While the book is probably a little heavy with the “you must save more” message and certainly with the “your profession is headed for Hades in a handbasket” message, the truth is that most doctors DO need to save more. It's often a total revelation when I tell a group of docs that they need to save 20% of their gross for retirement. If you start early and have particularly good returns, perhaps 15% is enough. If you want to retire very early, you're obviously going to need more than 20%. But the point is that 5-10% simply is not adequate. If you are in that category, I cannot recommend Retirement Planning for Young Physicians enough. If it doesn't convince you to save more money, it will certainly scare you into doing so.
However, I fear that a book like this will be taken the wrong way. Those who are already oversaving will say, “See, I knew it! I have to cut back to one packet of ramen for lunch” while those who may be undersaving (or even adequately saving) may throw their hands up in despair and give up. If that's you, start with a simple exercise–calculate your savings rate. Take all the dollars you contributed to retirement in 2019 and divided that by all the dollars you made in 2019. Is it at least 20%? Great. Feel free to spend the rest guilt-free. Less than 20%? Figure out what you have to do to get to 20%. Maybe it's putting off that kitchen renovation another year. Maybe it's one less vacation a year. Maybe it's buying a Tesla 3 instead of an S. Maybe it's not using credit cards or actually getting on a real budget. But whatever it takes, get it done. And if it is your partner holding you back, give them this book!
What do you think? Do you think most docs have gotten the message that they need to save more? How can we give them that message without making them give up and without turning the most neurotic of us into true scrooges? Comment below!