How Much Do You Need To Retire?

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.

Infographic: Raising a Child Today Could Cost a Quarter of a Million | Statista

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 5:31Therefore 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!

If you're not using Personal Capital yet, sign up today. It's one of my favorite resources!

8 comments

  • I completely agree. Not only do the numbers make sense, but people tend to spend a lot less in retirement. Health care is always the big question mark.

    I have clients who are little old ladies with millions in the bank and they hardly spend anything. They are creatures of habit and just want the same cup of coffee every morning. No matter how much I tell them to spend a little money and enjoy it they simply can’t. Nice post.

  • Hi Debt Free DDS!
    Love your site! What I think resonates most with me about this post is your comment about docs working like beasts and missing out on life with their families. Having tonnes of money later doesn’t buy back that lost time. I work in a high burnout field of medicine (ICU) and have certainly been guilty of that in the first part of my career. It was when my oldest turned 9 and we were able to start to do mutually interesting things together that I paused and looked around. We only get one shot at raising our kids and time and guidance to becoming independent is the most valuable thing we can give them. Once they’re financially on their own, your costs drop anyway. That said, working like a beast before my kids were born and when they were very young has given me more time and options now.
    -LD

    • LD:
      Yea, ICU is rough. My best friend works here at the local PICU. He works LONG hours and told me it’s tough keeping staff around because of it + burn out.
      Regarding your statement about lost time, my kids are now 13 and 11. It’s CRAZY to think in 5-7 years, we’ll be empty nesters. Glad you’ve seen the light at what’s MOST important…TIME.

  • Great post, Doc. You covered most, if not all of the major variables. We are planning on spending about 70% of what we currently earn during retirement. As you wrote, where we spend our money will change. More money will be shifted to travel, healthcare, and leasure expenses.

    • Hi Dave: Thanks for reading and sharing. You’re correct, where most of us spend our $$ in retirement will change, especially if NO PLAN is in placed before the big day.

      What we don’t know is what will happen with our health. For that reason, many retirees should be focusing on living a healthier retirement to help keep medical costs down but more importantly, ENJOY RETIREMENT.

  • Regarding the age at which one decides to begin to draw Social Security, if I do my math right, deciding to wait until 70 has an opportunity cost of $134,400 by the age of 70 if I use your example. It will take up to the age of 78 before you come out ahead on the deal by waiting to 70, as compared to 62. Seeing as most of your spending will occur in your 60’s, it seems to make sense to me to grab it when it is available.

    • Brian, I’m usually the formula posted on the social security site. There are numerous calculators out there but you can play around with.

      I’m not telling you what you should or should not do I’m simply giving you the option.

      You never know, you could live over 100!

Leave a Reply

Your email address will not be published. Required fields are marked *