Saving for Retirement as a doctor:
Future Value Calculator Helps set your target
After reading Smart Money’s article, 41% of all doctors have less than $500,000 in savings I had to do some self-reflection. After practicing medicine for over 14 years am I on the right track with my savings?
Wall Street Physician’s article on Future Value Spreadsheets has to be one of the easiest ways to look at savings if you have a good target.
Start with current physician retirement data
For example, if the top 30% of physicians had used this calculator and have amassed over $3,000,000, then how did they do it?
*since the article did not specify the class of funds, the numbers will be used in generic terms.
What is the easiest way to use the Future Value Calculator?
To solve this easy problem, the FVC needs four variables, Periods(N), Starting Amount, Interest rate,(I/Y) and Periodic Deposit(PMT). First, we need a rough estimate for an interest rate.
From 1986 to 2016 the S+P returned 9.9%! Making very loose assumptions and having a portfolio with a mix of index base equities and bonds, let’s assume the average rate of return ~5-6%.
The next number is Period(N) which can be any interval such as day, week, year or whatever you want. I like to use years since it makes for an easier calculation.
The starting amount for this example will be zero. For you, it could be negative or positive depending on student loan debt or any nest egg already saved.
Finally, the Periodic Deposit(PMT) is the amount invested each year.
Now I will adjust PMT until I get us a result greater than $3million using Calculator.net It took me a few tries to get to the result I want.
After some trial and error, it looks like these physicians started saving ~$38,000/year(PMT) for 30 years(N) @ 6%(I/Y), then the FV = $3 Million.
Breaking this down even further would require monthly deposits of ~$3200 month or $730/week
Depending on specialty, salary and seniority will make this either easier or challenging but not impossible.
Physicians have a late start compared to other professions
Assuming four years of undergrad, four years of medical school and four years of residency, physicians have a delayed start averaging 12-15 years or around 30-33 years old. Since we have a late start, unfortunately, we have to make it up by being more diligent in our savings. But by this point, we should be experts in delayed gratification!
What if we had skipped medical school when to physician extender school(PA, NP, CRNA, etc.)?
If you went straight to nursing to get a BSN followed by a Master’s in Nursing, then you can be earning ~$95K in 6 years, instead of 12 earning money at 24 years old instead of 34 years old. How would this look from an FVC perspective?
Starting as early as possible matters
Using the same goal with ten more years(N), we get the following:
Adding ten years reduces the amount needed to be saved
$38,000 – $ 19,500 = $18,500
$1652/month or $375/week, a decrease of 48%
Although there were many assumptions made in this scenario, having an earlier start gets to the same goal at the same age with much less required to save.
*Plug in your numbers to see what you get: Here
What happens if my 401K were maxed out 30 years ago?
We looked at very two specific situations above but many physicians and physician extenders have higher salaries and in some cases can even have very generous benefits packages where they have a fully funded 401K.
In 1988 the max annual defined contribution limit was $30K which has been consistently increasing since 2000. If you use the table provided by the IRS for the past 30 years plug in the numbers with a spreadsheet, it looks like this:
Just doing the minimum resulted in an end balance of $2,679,455. Therefore, all the physicians worth more than $3 million contributed more than the maximum allowed with post-tax investments.
Still, this would have been a very sound strategy assuming they could live off a 4% withdrawal rate.
What happens if I max out my 401k today?
Since we don’t know what the future holds or the IRS thinks all we can do is estimate with what we already know, the $55K limit for earners less than 50.
Plugging in the all the numbers yields ~$4.3 million. But, if adjusted for inflation 30 years from now at a 2% rate, it could be worth $2,227,069
If nothing else changes which will most likely not happen, just saving with a 401K defined contribution will not result in a better outcome than physicians 30 years ago if you take inflation into consideration.
Therefore, matching what physicians in the past accomplished will require some tweaking and making contributions greater than the minimum.
What if I only have a 403B?
Many physicians are employed today by large academic and non-profit organizations that do not offer a generous fully funded 401k and only offer a 403b usually with a very small match. Or these employers will offer other retirement vehicles separate from the 401K or 403b to allow their employees a way to invest with pre-tax dollars without having to make matching contributions. Let’s assume an individual max contribution of $18,500 and a 2% match (2% of $163K or whatever max most employers impose).
This situation is worse than the prior 401K example, and if you also factor in inflation, then this will only be worth $948,731.
First Determine your target then Aim for it
After looking at some historical data and differing time frames, one thing becomes more clear, first determine your target then using the future value and inflation calculator decide what will be needed to be saved to get this outcome.
To have the same purchasing power in 30 years at the physicians who saved $3 million in retirement in today’s money we will need:
We will need $5,434,086 by 2048 assuming we started at zero.
Future Value Calculator Scenarios
Plugging in the number in the FVC:
Breaking this down even further again will require monthly contributions of $5,750 or $1,327/wk.
The point of using these calculations demonstrates that relying on a 401k or 403b will not necessarily get a similar outcome of top savers confirmed by the AMA data, especially if you consider inflation. IF you agree with the assumptions of the proposed interest rates, then an additional amount of money will need to be saved in post-tax dollars amounting to the difference.
Fully funded 401k difference: +$14,000/year
403b with employer contribution: +$47,240/year
How much money will I get to spend in retirement?
Using the 4% rule to determine a safe withdrawal rate the above nest egg will produce ~$218,000 of income before taxes assuming all of it was pretax. The other assumptions include a 50/50 mix of stocks and bonds as discussed in MMD Article. Since we can’t full determine what the federal tax rate will be today, we will use today’s tax code to make a guess. Using XML tax calc:
Based upon this calculation this nest egg will produce ~$204,000/yr of income or $17,333/mo. (Not factoring in state or local taxes)
What are the odds of successful withdrawal?
Since we cannot predict the future, we have to make an educated guess using mathematical models and adjust them as the future unfolds. There are two methods for calculating the odds of success
- Monte Carlo Analysis uses computer modeling, a set of assumptions and hundreds of random simulations with fluctuations in potential market outcome until the model runs out of money or the time frame it measures ends. Then based upon all these simulations will look at a probability of successfully not running out of money.
- FireCalc looks at historical data starting in 1871 to present and runs the portfolio’s starting value and withdrawal rate for every single year. Then it calculates a “success rate(not running out of money)” based upon the set of assumptions.
Monte Carlo Analysis of the above nest-egg
How comfortable are you with the outcome?
The Monet Carlo Result: 92% chance of success
FireCalc: 94.9% chance of success
Both these outcomes, in my opinion, are acceptable but the numbers can be manipulated to accomplish whatever result lets you sleep at night. For comparison sake, my ex-Financial Advisor recommends an 85% or higher in the Monte Carlo analysis.
How should you use these calculators?
Since every single situation is different, determine the following:
- What is my annual burn rate based upon lifestyle and expenses?
- How much do I need to save to continue to maintain this lifestyle using the ~4% rule?
- Factor in other contributions like pensions, alternative retirement vehicles, etc.
- Calculate the amount of considering inflation.
- Plug in the numbers into the FVC calculator until you get a result that makes sense for you.
- Calculate your odds of success using the Monte Carlo and FireCalc analysis.
- Keep track of your individual annualized rate of return
- Make adjustments as need with changes in the economy but never save less unless you spend less.
- Keep a spreadsheet up to date with all your investments.
- Use a data aggregator like mint.com or personal capital to keep track of spending.
Annual income Pre-tax and Post-tax
The above table was made using another simple tax calculator so take it with a grain of salt. Use this a general guide for setting your future target.
What about other unexpected expenses?
Life isn’t predictable so having an emergency fund will also be necessary above and beyond whatever saving strategy you determine. I like to have ~5% of my capital in cash for such an event also since I have owned a home for several years I also have a home equity line of credit which I only use for emergencies.
Am I on the right track?
I recently went on a spending freeze as of last April and dismissed my financial advisor. After this I started to plug in all my numbers: Currently, I am 75%/25% stocks and bonds. I plan on contributing $115,400 per year going forward and will increase this amount as the IRS increases the limits of contributions. Here is my breakdown for 2019:
If my I plan on spending $250K per year for 30 years:
Monte Carlo: 98% Success Rate
FireCalc: 100% Success Rate
How can I use the Monte Carlo and FireCalc to Choose my target:
Depending on how well I can sleep at night, the sweet spot is somewhere between 5-6 million. I ran the Monte Carlo simulator and $5.5million results in an 84% chance of success and an 81.4% chance of success with FireCalc. I have found my target, and everything above this is a cushion.
My wife and I spent two entire weekends sitting at the kitchen table with colored markers and several 2ft x 2.5ft easel pads and not only created our offense with a basic saving plan and future growth projection but also developed a game plan to match our spending limits.
After reflecting on our spending habits(leaving a lot to be desired!) my wife and I as a team have taken the first steps to agree to a semi-strict budget. Once we decided on a number, we used Future Value Calculators to determine our potential growth under reasonable market conditions. Based upon these assumptions using Monte Carlo analysis and the FireCalc calculator we conclude that we are currently on track for a healthy retirement.
This process is necessary and very insightful for making investment decisions but also illustrates the need for having a savings and spending plan.
I am blessed with having the ability to sock away a decent amount of savings given my career choice. Many physicians and non-physician medical professionals can also benefit from reverse engineering the amount need to retire to make a sound plan starting today. If you want to be in the top quartile of retired physicians then relying solely on a 401K may not cut it and you would be wise to figure out how much more you will need to save going forward.
Good Luck and Happy Calculating!