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How Much Is Enough Retirement Savings?

How much money do we need for retirement savings?

This seems like a simple question on its face, but it’s one that requires a lot of forethought and planning.

retirement savings investing prudent plastic surgeon
Wouldn’t mind visiting the Galapagos again

Your goal nest egg is such a major factor in setting the how and when of retirement. Once you set your number, you can focus on attacking these important questions.

Without knowing your goal, I can assure you that you will never get there. If you don’t have a set, determined retirement savings amount, you won’t know when you can stop working. More importantly, you won’t know if you will have enough money to live on when you want to stop working.

Again, the concepts are not difficult but so many of us fail to take these steps. Not knowing where the end is can certainly lead to burn out.

Determining the goal retirement amount for my wife and I was one of the first steps that we took after becoming financially literate.

How we found our number

Knowing our expenses

First, you really should have a budget that includes monthly and yearly expenses for needs and wants

I’m not going to go into the nitty gritty of creating a budget here but it’s super important. So, step one is create a budget or at least get a general sense of what your monthly and yearly expenses are (or will be if you are about to step up into an attending salary like I was). 

Once you know what you will be, on average, spending, you have a general sense of how much you will want to have per month and per year when you retire. 

Knowing what won’t be expenses in retirement

Keep in mind though that in retirement you should hopefully have paid off all of your debt, including your current mortgage, so any debt servicing should be zero. Similarly, you will no longer be saving for your retirement, you’ll be living it. You also will not be paying for disability or life insurance in all likelihood. So, you should not have to include these contributions towards your expected retirement expenses.

Your withdrawal rate is the key factor

How much of your retirement savings can you take out for living expenses each year in retirement without running out of money? That’s the biggest piece of the puzzle to estimating how much of a nest egg you will actually need.

A classic financial study demonstrated that if you withdraw 4% of your retirement savings each year during retirement, your nest egg will have the best chance of living as long as you do. This means you will not run out of money before you die. You withdraw 4% per year and the rest of the money is working for you in your investments to keep replenishing so that you have enough for the golden years.

People are usually surprised at this concept as they imagined that they would be able to withdraw a higher amount per year – I know I was!

The magic equation for retirement savings

Regardless, you now have your goal yearly expenses ($X) and a safe withdrawal rate (4%). The following simple equation will then allow you to compute how much of a nest egg you need:

4% = $X/Nest Egg

So, say you predict your monthly expenses to be $10,000. Your desired yearly withdrawal amount is then $120,000 ($10,000 x 12). 

Some back of the envelope math will show you that you then would need a nest egg of $3 million ($120,000/4%). Was this more or less than you were expecting?

Again, that number can be shocking to most as they didn’t predict it would be that high. 

The good news is that as physicians, our income is definitely high enough that we can create a savings rate that will certainly get us to our goals through wise investing in broadly diversified, low cost index funds.

Finally, we have our goal amount. Now all we need is a plan to get there. 

How to get to your goal retirement savings number

On Microsoft Excel, there is a Future Value function that can help predict the growth of your money through savings and investments.

For example, I want to know how much my nest egg will be if I save $50,000/year and expect my investments to grow at a modest 5% after taxes and fees.

I type the following into Excel:

=FV (5%, 30, -50000, 0, 0)

The first value is the interest rate.

The second value is the number of years you are contributing. Let’s say you are 32 like me and will retire in 30 years.

The next value is the annual contribution amount which must be put in as negative.

The first “0” is your current savings. If you have $10,000 already saved, you would put “-10000) in this position.

The last value is a “0” if you are contributing at the end of the year, which is default, or a “1” if contributing at the beginning of the year.

So, we punch this equation in and see that our money would be worth $3.3 million when we retire. 

You now know that you have to save $50,000 annually in wise investments with a net annualized interest of 5% and you will be able to retire when and how you want. That is powerful!

Your written financial plan is the guide to your goal

The last step however is often the hardest for most people. You now need to go back to your budget and allocate to savings whatever annual contribution is necessary to reach your goal nest egg. This needs to become an integral part of your written financial plan.

(Reminder, if you don’t have a financial plan, check out my previous post and use mine as a guide or you can check out my course.)

In the example above, the $50,000 of annual savings is 20% of an annual salary of $250,000. Most physicians will be making around this much. It’s tough love but if you can’t live on a $200,000 annual salary, you have a spending problem and not an income problem.

It’s all about mindset. Everything dollar you spend is a trade-off with something else. Do you want to ensure your financial future for yourself and your family or do you want a car that can go up to 200 mph even though you’ll never drive it that fast? 

Budget and spend intentionally on the things that make you the happiest. Save and invest the rest. 

Once you have this plan in place, you can rest easy and know that your financial future is secure. This will allow you to enjoy the present without worrying as much about the future. It will make you a better doctor and a better person. 

It’s a prime example of financial well-being enhancing your personal well-being!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

    46 thoughts on “How Much Is Enough Retirement Savings?”

    1. the number usually is pretty close to how much per year times how many years – the complex rest of it becomes close to a wash . . .

      Reply
      • Gwoccmed,

        Thanks for reading the blog! The only issue with the (how much you want/year * how many years= nest egg) formula is that when you are looking to FIRE and retire early, it really overestimates the nest egg that you need.

        For example, take me. I’m 32. Let’s say I want $200,000 in cash flow annually and plan to retire in 10 years at age 42. Let’s also say I live until I’m 82. By your formula, I need $8 million. But, by my formula, I need $5 million. That’s a pretty big difference. The reason is that my formula accounts for the continued growth of my nest egg in various investments while I am retired while the other does not.

        Jordan

        Reply
        • Certainly long time frames compound / amplify any, even small, differences in any set of assumptions (especially for yield and inflation) – and shorter horizons are more certain and predictable. Longer horizon needs a bigger buffer to equal more certainty and the numbers converge as horizons shorten (better to be ahead early).
          Agree that most people over-estimate the amount they need to retire and that long term planning is critical.
          At 30, I intended a meager retirement at 45, but increasing lifestyle desires (pre and post retirement) delayed it secure and in style.to 62 – Thanks to 40 years of compounding and with only 2/3 the final amount suggested by most planning guides.
          Thanks for your column, too many people are poorly informed or even clueless. Physicians have more wherewith to benefit from better financial knowledge and understanding

          Reply
          • Absolutely agree gwoccmed! Congrats on your success and I look forward to being on your level!

            On your last point, hopefully we can continue to show other physicians the benefits of financial well being and a new generation of doctors are able to focus on their passion for medicine and not the bottom line.

            Thanks for reading
            Jordan

            Reply
        • Everything is right accept you basic assumptions
          The US dollar looses 1/3 of it’s purchase power every ten years. That is compounded interest. In addition the US government just printed-borrowed three trillion dollars (that was the total federal debt in 1975 to have perspective— and that three trillion took two hundred years to accumulate). This three million dollars in 30 years will have the purchasing power of between six and seven hundred thousand dollars today. You withdraw $120,000 a year plus receive $5,000 per month in additional social security you will pay federal income tax on that amount and have less purchasing power. Look up the price of a loaf of bread 1980 to today- look up a gallon of gas, look up the cost of a Honda Accord. Have perspective. You would need $9 million plus in thirty years to have three million in today’s purchasing power—And that dear friend assumes YOU NEVER GET DIVORCED and move somewhere less expensive upon retirement

          Reply
          • Thanks for the comments Steve! Totally agree, you need to factor in at least a yearly inflation of 3% when deciding how much you need annually to retire on. For me and my expenses, $200,000 in 2020 dollars makes sense (at least so far) based on my written financial plan (check out this post: https://prudentplasticsurgeon.com/still-need-a-written-personal-financial-plan-hereuse-mine/)

            You also bring up a VERY important point re: divorce. The most important aspects of financial planning are actually: one spouse, one job, one house. Shout out to WCI for that.

            Jordan

            Reply
    2. TPPS,

      Excellent article even us old guys can appreciate. Looks like your savings example and Excel formula has a typo. It says saving 50K but you put 35K in the formula.

      Reply
      • You’re right, to keep it simple, taxes and health care were not included. However, with wise investing in the right accounts, taxes should be minimized. Similarly, with wise real estate investing, cost segregation and bonus depreciation should shelter most, if not all, of your real estate income from taxes.

        Reply
    3. Thanks Jordan for some good tips. One thing you left out was the Social Security contribution. Social security will likely ad another $3,000 a month or so to cash flow in retirement depending on what age one retires. Given the $10,000 figure you used as a monthly need, now your equation only requires an $84,000 annual withdrawal ($7,000 X 12) which means not nearly as large of a “nest egg” is required! (Assuming social security is still around when you reach that age).

      Reply
      • Great point! To keep it simple, I ignored social security. That is “icing on the cake.” I hope it will still be around when I can use it!

        Jordan

        Reply
    4. It’s great that you have approached such an import subject. Understanding the finances of retirement should be addressed in med school. The sooner one grasps the concept and starts saving, the better the outcome. There are some who might argue that a 4% draw is generous and puts the retiree at risk of running out of money. I assume you mean withdrawing 4% of the then current balance. Saving in a Roth would be ideal, if one can afford the taxes while saving.

      Reply
      • Thanks N! Some medical schools (I think Wake Forest at least with The Physician Philosopher) are adding financial education to the curriculum. I really wish mine did! Would have limited my mistakes.

        And you are right, this is based on 4% withdrawal of the current nest egg each successive year. It’s not a constant 4% withdrawal of the nest egg amount at the start of retirement. Backdoor Roth and/or Roth conversions are great in the right circumstances.

        Thanks for reading!

        Jordan

        Reply
    5. I quite enjoyed your article. Thanks for sharing. Some thoughts…the 4% withdrawal rate, some feel might be a bit high. Particularly if you plan to live a healthy life into your 90’s. Another thought is that more important than the “your number” is how much of your accumulation do you get to keep. So proper tax strategies are extremely important. Future taxes and market extremes can really quickly erode one’s savings. Protecting income through creating income streams…yep this may involve properly structured annuities. I like Jackson National, if anyone is asking for a suggestion:)
      Again, thanks for the article.
      Dave Anderson, ER physician.

      Reply
      • Thanks for the comment and for reading Dave!

        It’s all about risk tolerance. 4% may be high based on some people’s risk. In the study I quoted, 4% withdrawal rate on a nest egg composed of 50-100% stocks lasted 40 years in ~80-100% of simulations. Depending on retirement age and asset composition, it may need to be adjusted. But it’s a good start for planning!

        An annuity is an option. Admittedly one I could learn more about. I love cash flowing real estate investments as an additional vehicle on top of index fund investments. Cash flow and equity build up lasts a lifetime!

        Jordan

        Reply
    6. It would be good to know how to account for a distant pension or Social Security. For example, after you retire at the age 43 with, say, 3mil and will have a Social Security at the age of 62 worth 20k/yr, how much will you be able to spend from age 43?

      Reply
      • Hi S,

        Thanks for checking out TPPS! To account for Social Security or a distant pension, just find out how much monthly or annually you expect from this source and subtract that from your desired annual amount. Then run the equation as you otherwise would to find out how much nest egg you need. I personally don’t factor in Social Security. Even though I think it will always be around because it is such a popular program, I just treat it like icing on the cake. I don’t want to depend on it but will be happy if I get it on top of my savings.

        Hope you keep reading!

        Jordan

        Reply
    7. I believe it is very important to consider taxes. If most of your savings are in retirement vehicles (except Roth IRAs), the 4% withdrawal will be taxed as ordinary income. If most of your savings are in non-taxed deferred accounts, the 4% ( (over and above return of principle) will be taxed as capital gains.

      This could be a difference of 40% vs 20% taxation and has major impact on spend.

      For every $100 you withdraw from IRA you might have $60 to spend vs $80 to spend if withdrawn from a non-tax deferred account.

      This is of more concern for those retirees with large amounts of savings.

      Reply
    8. Excellent analysis. In addition, much is dependent on what state or city one lives in, nothing new here. What may be of interest is the approach of a Defined Benefits Plan if one is self-employed. Your CPA will explain.

      Reply
      • Lawrence, thanks for stopping by TPPS!

        Totally dependent on where you live in terms of taxes but also cost and quality of living. This should definitely be factored into your assessment of how much you want annually or monthly to live on in retirement. Self-employed retirement options are indeed very important and complex, including the overall and individual contribution limits.

        Jordan

        Reply
    9. My wife and I collect $45,000/year; so we need only $80,000/year from investments.
      Bonds should give you 4% including appreciation with low risk’. Stocks can average 8% but may have 2-3 years of declines. Stocks in utilities and communication can pay 5% dividends. High tech stock have little dividends and high PEs.
      Other investments are too risky.
      Medicare copays are capped at $5000/year. Travel costs are down with covid..Active sports are hard after age 70.

      Reply
    10. I think this was an excellent , realistic and simple way of approximating what you will need in retirement. Looking at how much income you will need every month to live comfortably in retirement { i also figured about 10k per month] and a savings plan to get you there. Maximizing your retirement funds with pre tax dollars into 401k,403b,457 and ira help get you there a lot easier. Also dollar cost averaging into low cost index funds is a simple and easy way of saving for the long term. Time and money and living below your means is a classic century old strategy.

      Reply
    11. You failed to mention a disciplined investing strategy like an s/p 500 index fund or strategic investing over the long term. I am a strategic stock picker but very disciplined have achieved 60x my initial investments over last 25 years and am very comfortable at 69 yo while practicing medicine as a hobby now.. look what annual returns you could have gotten just doing the s/p 500 ( 1928-2016 average rate of return 9.8%)

      Reply
    12. I’ve practiced a little over 30 years and have considered this topic throughout. I’ve reduced my work from part-time since 2012 to essentially retired due to Covid. I agree with the 4 percent rule, as it seems reasonable that this will generally allow your portfolio to grow over time. However I would not suggest that readers make the assumption that your example of 10K per month is enough. Most physicians who have grown accustomed to earning potentially several multiples of this amount will not wish to scale back their spending to this level. I also agree with your figuring backwards from your estimated needs. Most professionals suggest planning on 70-80 percent of your pre-retirement income as a general guideline. In the current Covid situation everyone’s spending is reduced.. very limited travel, dining out, etc. But this will hopefully return to normal, although who knows? My biggest monthly expense is pre-medicare, post retirement health care! Very costly for insurance that only covers catastrophe! Finally I would suggest that you stick with an investment plan, don’t trade too much if you’ve chosen wisely.

      Reply
      • Richard, thanks for coming by TPPS!

        I agree with you in a lot of ways. Most physicians are used to an inflated lifestyle that is not supported by their savings habits and thus are very surprised come retirement time. A big part of my mission is to combat this! We should all try to save and wisely invest at least 20% of our income. My savings rate is 41% and we still live a very comfortable and happy life. It’s even happier for me and my wife because we know we are working towards our financial goals, not just hoping for the best.

        And I love that you have an investment plan that you stick to with little stock turnover (ideally in index funds). My philosophy exactly!
        Check it out here: https://prudentplasticsurgeon.com/stress-free-stock-market-investing-is-easier-than-it-seems/

        Hope you check out more posts!

        Jordan

        Reply
    13. Reasonable planning tool but simplistic. Obviously the future is hard to predict. But you do have to be vigilant about your savings and the financial conditions that you are working in. The dollar can loose its value, the stock market can be bear for years, taxes could become onerous, divorce was mentioned, changes in the area you live in like competition may make your medical practices not capable of saving for example $50,000/year, yours or your family’s health may fail. I think diversification would be more protective of your future retirement, ie. real estate, precious metals, stocks, bonds which do not give you a linear 5% and may require investing different amounts at different time.

      Reply
      • Thanks for coming by TPPS bkinz!

        No one has the crystal ball for the future. Mine is just as cloudy as anyone else. That’s why I think saving and investing in a manner that doesn’t rely on a crystal ball is so important. For me, that’s index fund investing according to a set asset allocation and real estate investing in cash flowing rental properties. Index funds mirror the market as a whole and have always increased over the long term – then I don’t need to worry about bear markets. Cash flowing real estate offers cash flow as well as equity buildup and tax benefits to minimize risk and maximize return.

        As long as you have a sensible written financial plan (https://prudentplasticsurgeon.com/still-need-a-written-personal-financial-plan-hereuse-mine/) that you follow, you will be alright!

        Jordan

        Reply
    14. Thanks for the discussion. I will add this to my Fawcett’s Favorites for next Monday.
      Dr. Cory S. Fawcett
      Financial Success MD

      Reply
    15. The problem with your calculation is nowhere do you take into account income tax. You do take into account inflation but income tax has a much larger effect. For the withdrawal levels you are quoting after retirement the income tax rates could be between 30-50% when you factor in state federal and local taxes. Let’s face it taxes will only rise on the “rich”. So a more realistic calculation would have to factor in income taxes in your post retirement expenses. Taxes and the likely rise in taxes,as we are currently at historic low tax rates, will be a significant retirement expense

      Reply
      • When I calculate my expected expenses in retirement, I am including taxes. I really try to emphasize that people include taxes in their “budget” as too often it is forgotten and a rude surprise. So that’s where it is baked into this calculation!

        Reply
    16. Jordan,
      2 comments, 1 about real estate and one about general long term investing. With real estate, I was surprised at how little you can depreciate per year, so if you’re paying the mortgage over 10 or 15 years, but depreciating over 39 years, there is very little cash flow left. I own 1 small and 1 multi-unit commercial building. Fortunately, I am 100% occupied, but any tenant loss would be tough to avoid having to put in more capital. I would love to hear your opinion on that.
      As far as general investing, I always tried to illustrate to our residents and rotating students the value of starting early using the Rule of 72.

      Reply
    17. Good discussion on an important topic. You need to think about required minimum distribution from IRAs. It goes up every year until the IRA is depleted after about 20 years (how much each year is determined by the IRS estimate of your life span). So, yes, you will be paying taxes whether you need the money or not, and your nest egg in IRAs will be disappearing. Important to know what you are going to do with that money suddenly dropped in your lap.

      Reply
    18. I’m trying to understand why you went into Medicine if you intend to retire so early. Your education was financed by Medicare (hence the taxpayers) and most of us have a sense of obligation to society. You should have given your medical school slot to someone who was going to actually contribute to society instead of making a quick buck.

      Reply
      • I think this is unfortunately such a common misconception in the physician FIRE space. I’m not on the path to financial freedom because I want to retire. I am four years out of training and love what I do! But I know myself and I know that I love it way more anytime I’m doing something because I want to, not because I have to. That is a mindset shift however, it’s an extremely powerful one. If someone is burnt out from medicine and that providing the best, patient cares the result 100% support them, if they decision is to leave medicine. However, that is not all cases.

        Reply
    19. My advice: find a professional money manager who you trust and put away as much money as possible in a retirement plan as soon as you start practicing. Only after maxing out should you consider things like mortgages and .college savings. Making 26 payments yearly instead of 12 will reduce your mortgage by years without spending more money. You don’t even mention Long Term insurance! Social security laws are changing and you may not be able to draw money until late 70’s or early 80’s. Living in a state with no income tax will give you an extra 8+%. (By the way my interest rate on the money I borrowed to start my practice was 18.6%- and that was prime!) If you think inflation won’t eat up most of your savings, see how much more everything costs now compared to as little as 3-4 years ago and then see how much $1 will be worth in 30-40 years.
      I don’t understand why young doctors talk about retiring after 10-15 years of practice. I had a great run at 40 years of internal medicine and wouldn’t change a thing. And yes I am financially independent, spend way more than your projections and will be able to take care of my kids and grandchildren long after I’m gone.

      Reply
    20. I am not sure if the 4% rule works any more, acknowledging the reduced value of our money due to inflation. First of all, what you need to ask is how much will you spend in the expensive ‘first trimester’ of your retirement: ie travel will usually be the largest expense. This monthly x 12 yearly amount is AFTER TAX, So the monthly withdrawal has to bear into consideration what is your tax rate, ie fed and state ( for example in California ) your take home on $120,000 will be $85,000 plus any legitimate deductions: interest on mortgage and 10K in property taxes. So once you know the after tax amount you will need you can then calculate the before tax amount you will need, then you can use a 2-3% rule assuming your investments generate at least 4-5% after management fees and subtracting losses and again with the assumption you will live into your 90s and don’t plan to leave a large legacy. A certified financial advisor can perform a Monte Carlo simulation for verify you got it right.

      Reply

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