[Editor’s Note: I get this question a lot, so today, I’m going to let the Physician on FIRE answer it. I’m amazed how many people think this depends on anything other than spending and perhaps asset allocation. While reading this post, consider the data from the 2019 Medscape survey that shows that 54% of docs in their 70s have a net worth (not just nest egg) of $1-5M, while 22% have more and 25% have less. Clearly, many docs are retiring with not that much money.]
Short answer: It depends.
Better answer: The number will vary from person to person depending on a wide variety of circumstances, but that shouldn’t stop us from coming up with an estimate for you.
Truthfully, the number doesn’t actually vary based on profession alone. A doctor has no inherently different retirement needs than anyone else. At the same time, it’s hard to ignore the fact that most doctors and other high-income individuals tend to spend more money than most, and thus need more money to retire.
The variables that actually matter include current lifestyle, which influences your desired or anticipated spending in retirement, anticipated length of retirement, time to retirement, risk tolerance, ability or willingness to earn income in the future, and passive income streams including pensions and social security.
Will You need $10 Million to Retire?
$10 Million is a lot of money. Few physicians will ever be able to claim a net worth of $10 Million, let alone retirement savings of $10 Million. The vast majority of physicians will retire eventually with less than half of that.
True, some physicians will need that much or more, but don’t assume because you heard that number somewhere that you’ll never be able to retire. Thousands of people retire every day with less than one million dollars in retirement assets, and many physicians can retire quite comfortably with retirement assets in a range of $2 Million to $5 Million in today’s dollars.
What’s your number? Let’s examine the variables to come up with our best guesstimate.
How Much Money Does a Doctor Need to Retire?
What does your life look like today? What creature comforts have become customary? How much do you spend in a year? Are you determined to maintain your current lifestyle indefinitely or do you expect some current expenses to go away?
A good starting point is to track your spending. I use Personal Capital; others find You Need a Budget more useful. It’s difficult to come up with a target number if you have no idea how much money leaves your household each year.
When I first realized that I was financially independent, I wasn’t tracking our spending closely. However, I was keen on earning travel rewards in points and miles, so everything that could be paid by plastic was charged to one rewards credit card or another.
Taking our average credit card bill and adding in the few checks that we write for property tax and piano lessons gave me an estimate of about $75,000 in annual spending.
The first twelve months of detailed expense tracking showed me that we spent $72,000 (without a mortgage — that was already paid off). 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.
If you are keen on retiring early, or at least having the ability to do so, decide if there are line items that you could live without. Perhaps you could do your own lawn or pool maintenance. Cleaning services can also be optional.
Some crazy people (like me) live without cable or dish television. When you’ve pondered these ideas and perhaps come up with a few of your own, you’re ready to move to the next step.
Determine Your Anticipated Retirement Spending Needs
Once you’ve determined about how much your household spends right now and what expenditures you could live without if necessary, you can estimate what your future spending needs might be.
Retirement life will not be the same. Any kids may be grown and out of the house. You may choose to downsize your home or move to a lower cost of living area. You’ll be able to drop disability and term life insurance.
Some expenses in retirement will go down or disappear completely, including the cost of commuting, professional clothing, and you will no longer be contributing to retirement accounts. I don’t consider doing so to be “spending,” but a substantial portion of my paychecks go there, so it’s worth mentioning.
Bear in mind that other costs can rise in retirement, including travel costs, gifts, education of yourself or family, and perhaps gifts as your kids have kids or you choose to be more charitable.
The elephant in the room is the cost of healthcare. People are budgeting anywhere from $5,000 to $50,000 a year for healthcare coverage. Strategies to keep expenses in check may include having taxable income low enough to qualify for a subsidy, purchasing a short-term or catastrophic plan when available penalty-free in 2019, joining a healthcare sharing ministry, or even obtaining citizenship in a foreign country.
I’m tentatively budgeting about $20,000 a year for healthcare expenses for our family of four, but the true number may actually quite a bit higher or lower.
How Long Will You Be Retired?
We’re going to need to know the year, and preferably the month, in which you plan to die. Cause of death is optional, but if you’d like to venture a guess, we’re all ears.
You don’t know? Well, then we’re going to have to consult an actuarial table, consider your habits, health, and family history, and make a wild guess.
It’s best to have a positive outlook and assume you’re going to live a long, healthy life. Not only does that attitude tend to be a self-fulfilling prophecy, but it’s also better to have your money outlast last you as opposed to you outliving your money.
I like to use estimates of living to 85 to 100 years of age. If you retire at 55, expect to be retired for 30 to 45 years. Retiring at 70? Expect another 15 to 30 years. Retiring exceptionally early at 43 like me? Plan to fund the next 42 to 58 years!
Why does it matter? Studies on withdrawal rates, including William Bengen’s study and the Trinity study, looked at retirement horizons of 30 years. Early Retirement Now’s extensive series looks at timeframes up to 60 years. The longer the retirement, the more variability you can expect to see in possible outcomes, and the more damaging particularly poor returns early in retirement can be.
If you’re looking at a retirement of 30 years or less, I think it’s reasonable to plan on initial spending of 4% of your retirement assets each year, and increasing your budget with inflation to maintain lifestyle thereafter.
A longer retirement may require a lower initial withdrawal rate or plans to either increase income or decrease spending if needed. And don’t ignore Social Security; it will be there in some form or another.
hawaii’s green sand beach
How Close Are You to Retirement?
If you plan to retire within the next five years, you can probably get by with less than a $10 Million dollar nest egg. Probably a lot less. But if you’re a medical student today, and you plan to retire in 35 to 40 years, $10 Million may not be enough.
The obvious reason is inflation, which has averaged roughly 3% in the United States over many years. Currently, it is lower than that, but early in my lifetime, inflation ran rampant at a double-digit pace.
You can use the Rule of 72 (how long it takes money to double) to roughly determine how inflation could affect your target number.
With inflation of 2% (about where it is now), you will need twice as much money in 36 years as you do now in today’s dollars. If you want $3 Million in today’s dollars, you’ll want $6 million in 36 years if you expect inflation to remain low at about 2%.
Using the more typical 3% inflation, it will only take 24 years for your purchasing power to drop by half. If $5 Million in today’s dollars is your requirement, expect to accumulate $10 million to retire in 24 years.
What if inflation is above average in your working years? With 4% inflation, you’ll need twice as much in 18 years, and four times as much money to have the same purchasing power 36 years from now.
We hardly notice inflation from year to year, but your grandmother might remember when a candy bar went for a nickel and gasoline was pumped by the friendly attendant for 25 cents a gallon.
What is Your Risk Tolerance When it Comes to Retirement?
Please note that I am not referring to your preference for more risky investments like stocks or safer investments like short-term bonds. The risk tolerance I am talking about is how important is it to be extremely safe from running out of money by maintaining a steady lifestyle throughout retirement.
If your risk tolerance is low, you’ll sleep best with a nearly 100% chance of having your money last a lifetime. You’re willing to give up potentially larger returns for lower volatility. If this sounds like you, you’re probably better off with an initial withdrawal rate of 3 to 3.33%. This requires a nest egg totaling 30 to 33 times your anticipated annual spending in retirement.
If your risk tolerance is high, you could be happy with a projected success rate of greater than 50%. You probably have the ability to cut back on expenses or start earning an income if your portfolio sustains substantial damage in the early years of retirement.
Someone with a higher risk tolerance (and/or shorter retirement) could be good to go with an initial withdrawal rate of 4% or even 5%, requiring 20 to 25 years of annual expenses. FIRECalc is a great calculator to help determine the likelihood of your money lasting and visualizing the possible outcomes of your portfolio at various withdrawal rates.
You can plug in any numbers you like, and FIRECalc will give you all possible results looking at historical data. Starting with $2,000,000 and an initial withdrawal of $100,000 (5%) and increasing with inflation, you could end up as far as $11 Million in the hole, or have as much as $29 Million at the end of 50 years, with 48 of the 97 possibilities showing a positive balance at the end. The average ending position is $1.85 Million.
Passive Income and Social Security
Your expenses can be covered by any combination of withdrawals from your nest egg, income from a pension or social security, or passive income from sources like ownership in rental properties, crowdfunded real estate, breweries, blogs, or other sources.
If your expenses are completely covered by steady and permanent income sources, any nest egg you’ve built up is pure gravy. With pensions becoming less common, and social security unlikely to cover 100% of your desired spending level, such a setup is most likely to come from ownership in small business and physical real estate.
Most retirees will have a portion of their expenses covered by a steady income source. Early retirees tend to ignore the contribution of social security, but for the more traditional retiree, it may very well cover a portion of your annual spending, and that can lower your required nest egg substantially.
For example, if Social Security pays a couple $35,000 a year, and they live on $70,000 a year, then they only need a multiple of the remaining $35,000 to pay for what Social Security doesn’t cover. With a 3.33% withdrawal rate, that would equal 30 x $35,000 or a $1.05 Million dollar nest egg to give the couple a very good likelihood of their money lasting the rest of their lives if they start taking Social Security at retirement.
You can make a similar calculation by determining how much will be covered by pensions or passive income streams. The less steady or guaranteed those income streams are, the less certain you can be about the viability, and the more you should plan on saving.
How Safe are Safe Withdrawal Rates?
When it comes to the future, there’s no such thing as a sure thing, but the research on withdrawal rates is impressively thorough, and the bar of 3% to 4% per year is based on a very unfavorable set of circumstances.
In fact, based on data analyzed by Michael Kitces, a 5% or 6% rule would have worked in many prior years to make your money last 30 years or more. The median outcome, using an initial 4% withdrawal rate (and increasing withdrawals with inflation), is to have about 2.8 times as much money after 30 years compared to what you started with.
Is the very worst possible scenario factored in? Not exactly, but if we experience something far worse than the Great Recession or Great Depression, paper money or your Vanguard balance might not mean much, anyway.
Bringing It All Together to Determine How Much You Need to Retire
To come up with a ballpark figure, use your current rate of spending to guesstimate your future retirement spending needs, accounting for inflation, of course. Reduce your requirements by the value of future income streams.
Determine a safe withdrawal rate that will make you comfortable. I recommend a number in the 3% to 3.5% range (requiring about 28 to 33 years worth of expenses) if some of these apply to you:
- You have little interest or ability to reduce expenses amidst a market downturn.
- You anticipate a retirement exceeding 30 years.
- You plan to hold a substantial portion of your portfolio in bonds (i.e. > 50%).
- You have little or no expected passive income, including Social Security.
You could use an initial withdrawal rate of 4% to 5% (requiring 20 to 25 years of expenses) if you meet some of these criteria:
- The ability and willingness to spend less or earn additional income if needed.
- An anticipated retirement of fewer than 30 years
- A portfolio with a significant stock allocation (75% or more)
- Income in the form of a pension, annuity, Social Security, or other passive income source
You should now have all the information you need to have a rough estimate of your financial independence target — the amount you should aim for to retire without much worry.
Simply multiply your anticipated retirement expenses by a number in the range of 20 to 33. You’ve got your number.
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?
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