What’s the Magic Number a Doctor Needs to Retire?

What’s the Magic Number a Doctor Needs to Retire? on providentcpas.com

Doctors can get burned out fast, and early retirement grows more and more appealing. How do you know when you have enough saved to maintain your lifestyle?

The thought of early retirement is appealing to most doctors, who are often overworked and exhausted. But how do you know how much money you’ll need when the time comes?

The bad news is, there’s not one magic number to have saved for retirement. The amount a given person will need depends on a variety of factors, such as:

  • Where you live geographically
  • The kind of lifestyle you want to lead (i.e., alone in a cabin growing your own food vs. in a Manhattan penthouse)
  • The family members who depend on you
  • The traveling you want to do
  • If you have passive income, such as from a rental property

The good news is that it’s not impossible to figure out your own, personal magic number. Here are important factors to consider when you’re creating your retirement plan, regardless of your stage in your career path.

Figure out how much you need to live comfortably

Start by simply tracking your spending, if you don’t do this already. Aside from big monthly expenses like a mortgage or car payments, where is your money going?

While your priorities may change in retirement, chances are you won’t want to give up certain luxuries that you’ve gotten used to, like shopping at certain stores, having every cable channel imaginable, or booking travel without a second thought. The first step is knowing what you spend and what’s important to you.

Factor costs that may go up into retirement planning

It’s crucial to realize that in retirement, you may spend even more on certain things since you’ll have more free time. You’ll likely want to travel quite a bit more or spend more money on eating out at restaurants.

And another big expense that is likely to change significantly in retirement is healthcare, which remains one of the biggest costs for retirees. Fidelity estimates that the average couple will need $280,000 to cover healthcare costs throughout retirement. This, of course, will depend on your health, age, location, and other factors.

Don’t forget the costs that may go down

Remember that you’ll no longer be contributing to your retirement accounts, so you can eliminate that expense from your projected budget. And things like commuting costs will be less expensive.

When you retire, you’ll most likely save on taxes as well. You’ll no longer have to pay Social Security or Medicare taxes since you’ll be receiving income from your retirement accounts. If you have a Roth IRA, that income has already been taxed so you won’t have to pay taxes on the distributions.

Many people have their mortgages paid off by the time they retire, or they decide to sell their home and downsize – other ways to pay significantly less each month.

Inflation changes the retirement planning numbers

When figuring out your priorities and your ideal number with family, don’t forget about inflation. Remember that you’re estimating the annual income you’ll need in today’s economy. Depending on how close you are to retirement age, things could change drastically by the time you get there. A rule of thumb is to tack on 3 to 4 percent annually to account for inflation.

It’s often estimated that the average person will need 70 percent of his or her salary in retirement. For high-paying doctors, that’s probably a lot less, depending on your chosen lifestyle.

The Financial Residency laid out a helpful estimate that assumed a doctor who made $200,000 per year could reduce their income by 52 percent in retirement, eliminating taxes, saving for retirement, mortgage and home expenses, job-related expenses, and the cost of children.

Assess your risk tolerance

Once you figure out how much you’ll need in retirement, create a plan that will get you there. One important part of doing so is assessing your tolerance for risk. Young investors will often take more risks in where they’re putting their money than those nearing retirement. And it makes sense—the farther you are from retirement, the more time you’ll have to correct a big loss.

But it’s also important to assess your risk tolerance during retirement. How much risk are you willing to take to lose a safe, steady income stream, in exchange for the potential to see bigger returns?

Some retirees prefer to have that safe stream of income and they don’t mind giving up the potential for big returns. This means the withdrawal rate of your retirement funds should be around 3 percent, and you’ll need about 30 times your annual spending amount.

If, however, you have a higher risk tolerance, your withdrawal rate may be 4 or 5 percent, requiring 40 to 50 times your annual income amount saved up.

There are plenty of online retirement calculators you can use to play around with these numbers, like this one from Physician on Fire.

Create a retirement plan that’s realistic

It may be tempting to predict that you need much less per year in retirement than is practical. Working as a physician is extremely taxing and the retirement lifestyle starts to look better and better as you continue to put in long hours.

But don’t jump the gun. You don’t want to be in a position where you regret retiring. You don’t want to think, “If only I’d hung on a couple more years, I’d be able to do XYZ.”

Reviewing your plan each year will help you stay on track and adjust investments as needed. And of course, whenever possible, try to save even more than you had accounted for. Your retired self will thank you later.

To set up a tax strategy that saves the most money possible while you’re working – and sets you up to more quickly hit your retirement goals – meet with a professional tax advisor from Provident CPA & Business Advisors.