Making Sure Your Retirement Savings Last As Long As You Do

Editor’s note: Today’s Post is from our PhREI Network partner, Jordan Frey MD, The Prudent Plastic Surgeon.

This is a must read for anyone in the early stages of retirement planning. Dr. Frey provides a simple, straightforward saving strategy and retirement plan. He walks you through saving targets, developing a budget, the concept of a withdrawal rate and lastly how to calculate your future retirement account balance. At the end the of post there is a step by step guide on how to use excel to calculate your future retirement account balance based on your saving rate and years of saving….. It is awesome.

Published by The Prudent Plastic Surgeon on July 21, 2020

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.

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. 

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

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 the White Coat Investor’s 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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