Every person needs to save money for retirement regardless of their profession. The challenges facing Americans in terms of retirement savings has skyrocketed with dwindling pension plans, shakey Social Security benefits, and a lack of sound savings practices.
For doctors, saving for retirement becomes even more important. A delayed entrance into the workforce means many physicians have less time to accumulate the wealth needed to pay off loans, save for retirement, and plan for their financial future.
So how much should doctors have in their retirement savings accounts? Let’s take a look at how you can calculate the money you will need to last through retirement.
Assess Current Lifestyle
How much money do you spend in a year? This may be a difficult question, and the answer may surprise you. Many people find that they spend more in a year than they realize which can help inform the type of costs you could incur in retirement.
Physicians are among the highest paid workers in America and that often translates to being the highest spenders as well. This lifestyle may not go away in retirement. Having a firm grasp on what you spend your money on and why will help you when planning for the amount of money you will need to maintain that lifestyle after you are done working.
Are there aspects of your lifestyle that you could change after you retire? Since your cash flow will significantly alter, implementing some lifestyle changes makes sense so you don’t spend too much of your savings early on.
Determine Your Desired Retirement Lifestyle
Do you know when you want to retire? Are you planning on retiring early? Knowing the age that you want to retire will help when budgeting. You should also have a projection of how long you plan to be retired, in other words your life expectancy. Though no one can know for sure, planning for a set amount of years will help you feel financially secure.
It is important to note that with inflation at 2%, you will need double the amount of money you project in today’s dollars (assuming you retire within 35 years). This means that if you want to have $2 million saved for retirement, you will actually need $4 million when factoring in inflation.
That number goes up to $6.67 million if you believe inflation will be 3.5%
Some expenses will probably go down when you retire:
But there are other expenses that could increase:
The amount of money you will need in retirement is dependent on the lifestyle you want. Perhaps you want to maintain the lifestyle you had while you were working. This option may mean that you will need more than your peers. But if you plan to sell your possessions, hop on a plane, and head to a remote part of Costa Rica for retirement, you may not need as much money as you think.
Having a realistic vision for your retirement plan is the first step to reaching the number you will need to be happy in retirement.
Savings Channels That Can Help
The three-legged stool is a common metaphor linked to the discussion of retirement savings. It was invented to reference the interaction of a pension plan, Social Security benefits, and personal savings for your retirement income. These legs have undergone a significant change since their founding
Many companies do not offer pension plans the way they used to, switching to an employee contribution 401(k) plan. This workplace contribution plan does allow you to save for retirement, but the company itself is only responsible for an employer match which is significantly less than a pension.
Social Security benefits will not offer the same type of support to millennial workers once they reach full retirement age, meaning that it will not have the same effect on retirement income as it once did. It is important to understand so that personal savings can be a higher priority for workers today.
The three-legged stool may still exist, but it functions in different ways. Keep this in mind when looking at retirement saving options and work to prioritize your personal savings.
Crunching the Numbers
There is not a prescriptive formula for calculating the amount of money one needs for retirement. One strategy that can help is to reverse engineer your costs to come up with a number for retirement. Put a number down for each of these points.
- At what age you plan to retire
- Your projected life expectancy (how long you will be retired)
- Your desired lifestyle in retirement and the associated costs
- Inflation & market return assumptions
After you understand the cost of your lifestyle in retirement, apply an inflation-adjusted discount cash flow multiplication to projected savings goal.
Doctors may not need to save more for retirement than other professions, but the truth is that every situation is unique – and you need to develop a retirement savings goal that’s right for you. It all depends on the lifestyle you want and working to provide yourself with the means to pursue that dream.