How much money do docs need to retire on?
Well… it depends on many factors.
When I first posted this question back in March 2018 on the DentalTown.com forum; I had no idea it would attract so many eyeballs (over 7000 views as of this writing!)
Before we discuss the details, let’s highlight a few fun facts that keep many of us from retiring when & how we want…
Michelle Schroeder-Garnder over at MakingSenseofCents.com put together a nice list of the Money Habits of the Average American. For me, #1 on the list was shocking –
The average American household has $132,529 worth of debt.
This did NOT include those that had a mortgage (bumped the average up to $172,806). Also, if you focus in only on us docs, I’m sure the average is MUCH higher taking the student loans into consideration.
Also noted, the average credit card balance alone is $16,061. It’s no wonder why so many Americans are living paycheck to paycheck with $16K of credit card debt looming over their heads.
Everyone is Different
There’s a multitude of different factors at play such as:
- What age do you plan to retire?
- Will you continue to work in retirement (part-time)?
- How much annual income will you need?
- What will your life expectancy be? (crystal ball anyone?)
- How close are you to retiring?
Say Ahhhh….Self Examination Time
What does your life look like today? How much do you spend in a year? Do you want to maintain your current lifestyle or are you planning on selling the BIG doctor house and downsizing?
As you can now see, each person is going to be different. I strongly suggest you get on board with your spouse as the two of you can accomplish your goals much better & quicker than one trying alone.
A common rule of thumb in planning for retirement is that you only need 70% of your current income to live the same or similar lifestyle during retirement. While this will not be the same across all professions, the good news for doctors is that the actual number is probably much less. Let’s break this down for you…
Current Spending
Are you currently tracking your spending? If not, Personal Capital is a great place to start (100% FREE). It’s going to be very difficult to come up with how much you’re going to need in retirement if you have no clue about what’s going out your household each month.
You don’t necessarily need to track every dollar spent to get a decent idea of your annual spending. Spend a couple hours with your credit card and bank statements, and you should be able to come up with a good enough estimate.
Anticipated Retirement Spending
After you’ve determined about how much your household spends currently it’s now time to shift gears and estimate what your retirement spending needs might be. The good news is… you’re NOT going to need anywhere near what you’ve been used to spending. Let’s break down a few of these categories.
Taxes
For most of us now that are debt-free, taxes are one of our BIGGEST expenses. During retirement, your tax burden is likely to be far lower.
First, you can kiss the days of paying Social Security & Medicare tax goodbye. Your income will be derived from your retirement accounts and will, for the most part, not be derived from “work” as you will now be retired.
Do you want to slash your tax bill even lower? Consider moving to a state without state income tax:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
During retirement, your federal income tax is likely to be lower as you will be earning income that is tax deferred or exempt. For many of us docs, we will look back over our career and have paid a solid seven figures in federal taxes.
Physician on Fire has great advice on how we can pay ZERO in federal taxes even if we retire early.
Retirement Savings
One of the sometimes overlooked details is saving in retirement. Once you are retired, you don’t have to save anymore (unless you want to of course). I currently assist my parents in their semi-retired state and redirect their social security monthly deposits into Vanguard index funds. If you feel the need to save during retirement, by all means go for it.
Once you are debt-free, I challenge you to save 50% of your income in retirement savings. Once you’re retired, this is going to be 50% of your previous income that you do NOT need to replace.
Mortgage
Are you still carrying around a mortgage payment? Many of you won’t entering into retirement which usually accounts for up to 20% of your income.
Many retirees will not only have a home paid off but they will often sell their larger homes and downsize. Not only does this allow them to fund additional money into their nest egg, but will also decrease home maintenance and expenses.
I have an orthopedic friend I play tennis with that has 5 kids. He’s currently 56 and 3 of his 5 kids have moved out. Realization has set in that his current 6,000+ sq ft home is just too much to maintain and unnecessary once his remaining 2 kids have left for good.
The Cost of Raising Kids
For those of you with kids (we have two boys), raising them this day and age can be quite expensive. According to The Department of Agriculture, it estimates each child will cost you a quarter of a million dollars to raise until the age of 18.
The good news is that most of the expenses (college, food, clothing, vehicles, etc.) relating to your children will be gone by the time you retire. (Unless you have boomerang kids!) Also, you will have saved for college (or most of it) and wedding (if applicable) during your working career.
Ephesians 5:31 “Therefore a man shall leave his father and mother and hold fast to his wife, and the two shall become one flesh.”
While everyone’s situations are different, let’s give a quick example to illustrate the points illustrated in this post. Please keep in mind this does not take into consideration your spouse’s income, only yours. The example starts with the current salary and either reduces or increases expenses in order to determine how much income you will need yearly (in retirement) to live a similar lifestyle in retirement.
Example:
Current Salary: $250,000
Reduction: Elimination of taxes (State, Social Security, Medicare) – 15% – ($37,500)
Reduction: Retirement savings eliminated – 20% – ($50,000)
Reduction: Mortgage paid off – 20% – ($50,000)
Reduction: Home Maintenance and Expenses – 5% – ($12,500)
Reduction: Job Related Expenses – 2% -($5,000)
Reduction: Kids – 5% -($12,500)
Current Salary needed after all reductions: $82,500
Addition: Increase in Travel and Medical – 20% – $40,000
Current Salary after all changes* – $122,500 (49%)
Prior estimated income needed at retirement: $175,000 (70% of current income)
As you can see in the above example, our doctor will only need $122,500 to live a similar life during retirement as enjoyed pre-retirement. This resulted in only needing to plan for 49% of their current income, not the general assumption of 70%.
Some Expenses Will Rise
Healthcare – Nobody knows what the future holds for healthcare. We recently saw our monthly premiums increase 3X the start of this year (even using the highest deductible plan). If you plan on retiring early, you’re on your own until age 65 when Medicare kicks in.
Travel – We love to travel and see our costs will more than likely increase during retirement. We enjoy experiences more than purchasing material items (most studies about happiness confirm this). Most retirees that I know tell me this, “Now that we’re retired, the ONLY two things we look forward to is eating and traveling.” Enough said.
However, during retirement, you may find ways to keep your travel costs lower than when you were working with kids. During pre-retirement, typically your travel time depends on the kid’s school/sports schedule. This usually forces people to travel during peak times (summer and Christmas.) For example, we went skiing at one of our favorite places this year in Colorado. We noticed the day we left to return home (Christmas Eve) the room cost tripled.
During retirement, you have the advantage of traveling during off-peak times so you can also take advantage of last-minute deals.
How Long Will You Be Retired?
Unless you know a fortune teller that can predict the exact date of your death, this is another factor in determining how much you’re going to need to retire.
I don’t know about you, but I want my money to outlast me as opposed to me outliving my money.
What’s the point in wealth withOUT health? I see too many docs that grind it out practicing too many hours, missing out on the short time they have with their kids, partaking in unhealthy eating & drinking habits and reaching retirement either too sick or burned out to enjoy it.
If you don’t own a crystal ball, consider looking at your family to get a feel of your potential life expectancy. Both of my sets of grandparents lived well into their 80’s so that’s a starting point for me.
I plan on using estimates of living to 85 to 100 years of age. If you retire at 58, expect to be retired for 30 to 40 years. Retiring at 70? Expect another 15 to 30 years.
Why does it matter? It matters a lot assuming you want to outlast your money. I see too many people spending their entire careers saving for retirement to live like paupers when they get there due to fear of running out of money. What’s the fun in that?
There have been several studies that look at withdrawal rates during retirement including one of the most famous one, The Trinity Study.
For most of us, I think it’s reasonable to plan on an initial annual spending of 4% of your retirement assets.
Flipping the 4 percent rule can help you figure out how big your portfolio needs to be, or what’s called your “magic number.” Simply divide your annual spending by 0.04 (or multiple it by 25) to get your target.
Pay Off Your Debt
Once you get rid of your debt payments (cars, mortgage, etc.) this is exactly the same as creating additional income. This is HUGE when entering retirement.
Don’t Forget About Social Security
Patience (not patients!) pays off. Waiting to claim Social Security benefits can boost your payouts significantly. Instead of beginning to accept benefits at age 62, you can increase your payment by up to 8%/year until age 70.
Ex: Here’s how waiting would affect someone eligible to get $2K/month at age 67:
Monthly Payout Claiming Age
$1400 62
$1500 63
$1600 64
$1733 65
$1866 66
$2000 67
$2160 68
$2320 69
$2480 70
As you can see from the above example, patience really does PAY off.
Bringing It All Together
To come up with a ballpark figure you’re going to need to retire, take your current rate of spending to guesstimate your future retirement spending needs, accounting for inflation, of course.
Next, you can lower your requirement by your future income streams (real estate, social security, investments, etc).
Determine a safe withdrawal rate (anywhere from 3-5%).
Want it done for you? There’s a multitude of retirement calculators out there that can get fairly complex.
Here’s one I like to get you started toward your “magic number.”
How much do you think you need to retire?
Comment below!