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One of the first personal finance questions people ask when they begin financial planning is “How much do I need to save for retirement?

Google “retirement calculator” and you’ll get many, many retirement calculators that will try to identify your “retirement number.” Enter just a few variables like your current age, current income, and retirement age, and these calculators will tell you how many millions of dollars you should aim to save for retirement.

The number you’ll get from common retirement calculators varies widely, and is shocking to many people:

CNN Retirement Calculator

Assuming a 30-year-old new attending makes $300,000 straight out of residency, the CNN retirement calculator assumes an eye-popping amount of money is required for retirement: $15.9 million.

Unless you’re planning to spend all of your time traveling to places like Navagio Beach in Greece during retirement, you probably don’t need $15.9 million like CNN recommends.

Vanguard Retirement Calculator

The Vanguard retirement calculator is a little bit more complex, requiring a bevy of variables including your current age, retirement age, current income, and expected retirement spending as a percentage of your current income. The default spending rate is 85% of your current spending.

Using their calculator, a physician who is currently making $300,000 a year should try to save $6,375,000 for retirement.

AARP Retirement Calculator

The AARP retirement calculator also has a base assumption that you will spend 85% of your pre-retirement income in retirement. They have an option to assume a more modest or more extravagant retirement, which would be 75% or 95% of your income, respectively.

According to the calculator, the “minimum needed to retire” for a 30-year-old new attending making $300,000 per year who plans to retire at 65 is $7,763,229.02.

How much do you really need to spend in retirement?

In my opinion, the retirement number estimates of these calculators are far too high.

While the assumption of spending 85% of your pre-retirement income might be reasonable for middle-income Americans, these assumptions break down for high-income professionals such as physicians.

Many physicians are already giving up 30% or more of their income to taxes. After including money to save for college and retirement, many physicians will spend less than 50% of their gross income during their working years.

Physicians can have a very nice retirement on 50% or less of their pre-retirement income, especially if they do not have mortgages or college tuitions to pay.

Dr. Jim Dahle at the White Coat Investor recently estimated that his annual budget is $150,000 a year, without a mortgage. For a physician making $200,000-$400,000 a year, 85% of pre-retirement income in retirement is probably way more than what most physicians will need to spend.

You can definitely afford to play golf with $140,000 in retirement spending.

How then should you calculate how much to save for retirement?

Instead of assuming that you will spend a certain percentage of your pre-retirement income in retirement, you should instead estimate how much money you will spend in retirement and then figure out how much you need to save in order to achieve that goal.

Estimating how much you need in retirement

It’s hard to predict how much you’ll need (or want) to spend in retirement. Hopefully you’ll spend much more of your income on discretionary items like travel and dining and less on bills such as a mortgage. But unfortunately, healthcare costs are significantly higher in retirement. For some retirees, going to doctor visits can feel like a full-time job!

A reasonable baseline number should be how much you spent in your working years. Assuming your kids are out of the nest and your mortgage is paid off or nearly paid off, you could end up spending less in your retirement. Also, many retirees spend more in the early years of retirement, than as their energy and health declines, they slow down and spend less.

Once you have your annual spending number, multiply it by 25 to get your retirement number. For example, if you currently spend $140,000 a year and plan to continue that spending rate in retirement, then you’ll need to save 25 times that, or $3,500,000, for retirement. This is based on the 4% rule that was popularized by Trinity University researchers in the 1990s. They found that if you spend 4% of your retirement nest egg each year during your retirement, there was a >95% probability that you would not outlive your retirement funds.

Now that I have my retirement number, how much money do I need to save each year to achieve my retirement goals?

There are many financial calculators and spreadsheets out there that you can use to project your net worth over time. For a simple baseline calculator to get you started, I’ve created a simple retirement calculator that can help you project how much you will need to save to meet your retirement goals.

All you need to do is enter your age, current net work, pre-tax and post-tax income, and annual spending, along with a rate of return, and it will let you know when, on average, you’ll meet your retirement savings goal. It assumes you’ll need 25 times your current spending in retirement.

(If you’re reading this on your phone, it’s best to turn your phone horizontally and view the spreadsheet in landscape mode.)

Conclusion

Online retirement calculators generally overestimate how much physicians need for retirement. This is because they assume retirement spending to be a percentage of current income, which overestimates the amount of money necessary for a great retirement. A better baseline estimate is to use your current spending, and then multiply this number by 25 to get your “retirement number.” To reach your retirement number, use my spreadsheet or write your own to estimate how to reach your savings goals.

What do you think? What’s your retirement number? How much do you think you will spend in retirement compared to your current spending or current income?

Poll: What's your retirement number?

12 COMMENTS

  1. I often find those calculators are too high also. It is quite interesting how they come.up with their numbers. The 4% rule is a good place to start and take it from there.

    Also congrats on the views. Seems like you are doing quite well.

  2. This is a clear summary of the issues. It drives me crazy when totals are based on income rather than expenses. It leads to huge numbers like in the beginning of this post.
    In my case, I have never saved a fixed amount or percentage. My income fluctuates a lot based on the decisions I make. I keep my expenses fairly fixed with minimal annual increases. All other income gets reinvested. That method doesn’t fit well into a calculator but it is another way to get FI fairly quickly.
    In my opinion, people who think $4M or more isn’t enough have a spending problem.

    • A lot of it is about mindset about what a “doctor’s” lifestyle should be. $160,000 is obviously way more than anyone really needs to survive, but doctors see their colleagues enjoy a very nice lifestyle, and want to keep up with the Joneses, even if their finances cannot fully pay for it.

      When you see celebrities or athletes spend millions a year, it might seem ridiculous to everyone else, but they have extraordinary societal pressure to live a glamorous lifestyle, whether or not they can afford it in the long-term.

  3. I rarely post but I’m of the camp of expenses dictate outcome. A variable withdrawal rate on any retirement account is prudent imo. Best wishes to this WSP blog!

    • I’m certainly not saying you should withdraw a fixed amount in retirement — if you are willing and able to have a variable withdrawal rate in retirement, the amount you need to save declines. These calculators serve as a good starting point to model how much you might need to save for retirement. Many people will build more complicated spreadsheets or work with a financial advisor to fine-tune their savings requirements to their individual situations.

  4. Great post as usual, WSP. We have a slightly different approach. We already have picked out our retirement date effectively (the day the youngest child leaves to college). We are currently saving about 100k/yr for retirement and earmarking another 125k/yr or so for student loan repayment. When the loans are paid off, that money will be autoinvested in our brokerage account. As long as we don’t increase our spending we should meet our goal. If that number ends up being 4, 5, or 6 million – well, we will adjust our spending post retirement accordingly.

  5. it seems to me that income sources like pensions and Social Security ought to be factored into the equation, but many income models do not. This, self funded retirement income needed could be far less.

    • Excellent point. If you have a recurring, fixed payment (e.g. pension, Social Security), you can multiply that by 25 (using the 4% rule) and subtract that from your retirement number to get what you need to save through investments.

  6. My personal experience and situation has taught me that the timing of the Number is as important as the Number itself. We hit our original Number ($4M) a few years ago. (It was my Number because someone once told me it was a good Number to use.) However, with two kids to launch and the unpredictable outcome of that, no Number less than $10M seemed safe enough.

    As for estimating expenses in retirement, the cost of health care may be the largest single item and the one with the least clarity, casting a shadow on any early retirement plans.

  7. A great post! I guess I have falsely assumed physicians were working later these days (closer to 70). Maybe that’s because I’ve seen more and more physicians asking for policies designed to age 67 or age 70. Based on the stats here, it looks like age 64 (ish) is the average number. But, of course, as you mentioned, each retirement age for each individual will vary based on wealth and health and desire or not to keep trucking. Good stuff here!

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