Physician Finances Physician Retirement Planning

Planning For Retirement For Physicians Part 3: How Much Money Do You Need To Save For Retirement?

This is the third in a series of posts made in preparation for a presentation I will be making for physicians in fellowship training. In the last post, I made the argument that a physician making $250,000 per year now will need about $9,000,000 in retirement savings 30 years from now in order to maintain the same standard of living that he or she has now. In this post, I’m going to outline the path for getting to that $9,000,000 number.

A $9,000,000 retirement fund is not that difficult for a physician to achieve, as long as the physician starts saving early in their career, saves regularly and invests wisely. And it is all due to the wonder of compound interest.

Let’s again start with an example of a new physician making $250,000 a year currently. Assume that the hospital or group practice employing that physician has a retirement plan that automatically puts away 10% into a retirement plan. That is $25,000 per year right away. Now let’s assume that the physician also puts away an additional $15,000 per year in a 403(b) plan each year. That is a total of $40,000 per year in retirement savings each year. In other words, 16% of your annual income is going into saving for retirement. Let’s further assume that the physician is 30 years old and plans to retire in 35 years at age 65.

Because retirement is a long way away, you can tolerate a lot greater year-to-year volatility in the value of the retirement fund than you could if you were 5-10 years away from retirement. This means that your retirement fund should be primarily invested in stocks as opposed to bonds at age 30. Historically, over the past 90 years, the stock market has averaged a 10% return per year. However, this is an average and there is a lot of year-to-year variability and even decade-to-decade variability so a more realistic return is lower, for example, 7.5%.

At the optimistic 10% average annual rate of return, the $40,000 invested in a retirement fund today will be $1,306,000 in 35 years. At the more realistic 7.5% annual rate of return, that $40,000 will become $548,000 in 35 years. But you will not just be investing into your retirement fund this year, you’ll be investing every year up until retirement.

So, let’s assume that you invest $40,000 per year every year for the next 35 years. At a 10% annual return, the value of your retirement fund will be $14,000,000. At the more realistic 7.5% annual rate of return, the value of your retirement fund will be $7,360,000.

But the reality is that you are unlikely to just put $40,000 into retirement every year for the next 35 years. As inflation gradually increases your salary over time, the amount that you put into your retirement plans will also increase over time, even if your retirement contributions stay as a fixed percentage of your total salary. Therefore, if you keep up with your current investment contributions of 16% of your annual income, you will easily exceed the $9,000,000 retirement fund goal in 35 years.

The good news is that reaching your projected retirement fund balance is achievable. The bad news is that many physicians fall prey to the 2 biggest obstacles in achieving their goal: bad advice and bad judgment. In the next post, I’ll outline some of the common ways that physicians’ annual rate of return gets eroded, leaving them with less money in their retirement account than they had planned on.

August 20, 2016

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital

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