Did you know that 41% of all doctors have less than $500,000 in their retirement account even though their average salary is $294,000 a year? How much a doctor will need to retire is a question that varies from doctor to doctor, depending on their lifestyle and plans during retirement. If your considering your own situation, you need to ask yourself three questions;
1.) When do you plan on retiring?
2.) What do you plan on doing during your retirement years?
3.) What other sources of income can you anticipate receiving during your retirement?
The average life expectancy of an American is 78.7 years. So when your considering retirement, you need to ensure that you have an appropriate level of funds to extend beyond that date (after all, when it comes to life expectancy, we all want to beat the average). As a result, your age at retirement has a big impact on how much you need when you finally decide to hang up your stethoscope. The earlier you retire, the more non-earning years you have to provide for.
In looking at your needs in retirement, unless you drastically going to change your lifestyle, most financial experts agree that you will need approximately 70% of your pre-retirement income to maintain the same quality of living that you had before you retired. This means you need to understand your expenditure patterns to truly determine what your needs will be. Certain expenses will either decrease or disappear; such as commuting, professional clothing, taxes, mortgage costs, and children related costs… (they would have hopefully moved out by the time you retire thus decreasing the expense of having children at home; kids are expensive).
Medical expenses are the most common “new” retirement expense that need to be consider, as this is one of the few expenses that actually increases in retirement years. Unanticipated medical expenses can wreck years of retirement goals, so you should prepare for health costs as part of your retirement planning. Considered funding a health savings account on your own at work, as this type of plan can help you prepare for any current medical expenses as well as any healthcare costs in retirement. You should also consider a long-term care policy that will cover any chronic issues that may pop-up later in life and look into health plans to supplement Medicare coverage, to better control the rising cost of healthcare in later years.
Finally, in determining how much you need to save in order to meet your retirement goals, you have to consider other income streams that you may have, such as social security, rental income, investment returns, etc. In addition, many retirees move out of state or downsize their homes. If you own a home that is fully paid off, this could provide additional resources that can be used to help with your retirement needs.
So let’s look at a hypothetical example. If after calculating your post-retirement monthly expenses you determine you will be spending approximately $150,000 per year on a pre- tax basis, you would need approximately $3,750,000 at retirement. This is based upon an estimated 25 year past retirement life expectancy and assumes that investment income and inflation are equivalent. Higher rates of returns on investments will decrease the amount necessary at retirement, as will additional sources of income. For instance, if you receive $2,000 per month in social security, $1,500 per month in rental income, and your investments outperform inflation by $2,000 per month, your requirement at retirement would shrink to approximately $2,100,000.
So when should you start saving to generate that number? If you plan on retiring at the age of 67 and you start saving at the age of 30, you would need to save approximately $1,300 per month to generate $2.1 million at retirement, but if you wait until the age of 40 to start, you will need to save more than double that at almost $2,700 a month. It is always a great idea to start saving as early as possible in order to maximize your retirement lifestyle. The power of compounding returns is real.
If, after taking into consideration your retirement expenses and your estimated retirement income, you feel you still won’t have enough to retire, there are some steps you can take to further enhance your ability to enjoy your retirement. First, delay your retirement until you are 70 so you will be able to receive the max social security benefits. The difference between retiring at the age of 70 or 65 is almost 50% more benefits. This will also decrease the number of post retirement years, which will reduce the amount of resources you will need at retirement. Second, max out your retirement plan contributions. Keep in mind that once you reach age 50, you can make catch up contributions of $6,000 per year to your retirement plan. Also, as previously discussed, the earlier you purchase long-term care coverage, the cheaper the annual premiums will be.
Everyone’s idea of retirement is different, but life shouldn’t stop when you retire. It’s important that you properly plan to ensure that you have the resources necessary to live your retirement years on your terms. The key is, the sooner you start the planning process, the better off you will be.
The analysis included in this article are for exhibition purposes only. We suggest you speak to your financial advisor and accountant to plan for your personal retirement. If you need assistance, feel free to call us.
Brian Warfield, MS
Brian is a member of Cerini & Associate’s senior SED audit and consulting staff where he works with nonprofit, special education and school district clients.