Physicians work incredibly hard. Many are constantly on-call and the demand and pressure get ratcheted up and up. There are demands on your time with paperwork, patients, insurance, hospital administration, residents, and so much more.
You’ve missed countless family events like soccer games, baseball games, plays, and holidays in the pursuit of chasing your professional dreams and helping the community.
You are tired of the rat race and want to be done. You want to retire and catch up before you miss more.
Yet, you’re not sure if you can.
The next two incredibly important components that can determine having a secure retirement are when you retire and the rate of return you get on your investments.
Case Study# 2: Scenarios# 1 through 5: 45-year-old Orthopedic Surgeon With Current $530,000 Portfolio (433k Income, 40k Savings, Has an Employer Pension, 3.73% Inflation, Student Debts paid off in a few years, Living Expenses of 110k)
Scenario# 1 | Scenario# 2 | Scenario# 3 | Scenario# 4 | Scenario# 5 | |
Retires at Age | 65 | 65 | 65 | 62 | 60 |
Income In Retirement at Age 65 | $130,000 | $130,000 | $130,000 | $105,529 | $101,700 |
Rate of Return | 6% | 8% | 4% | 6% | 6% |
Money At Retirement | $4,469,000 | $5,449,600 | $3,763,000 | $3,428,000 | $2,832,000 |
Money at Death, Age 90 | $2,703,000 | $12,167,000 | Negative $457,000 | Negative $1,125,588 | Negative $3,300,000 |
2.1 Action S
Case Study# 2: Scenarios# 6 through 9: 45-year-old Orthopedic Surgeon With Current $530,000 Portfolio (433k Income, Has an Employer Pension, 3.73% Inflation, Student Debts paid off in a few years)
Scenario# 6 | Scenario# 7 | Scenario# 8 | Scenario# 9 | |
Retires at Age | 62 | 60 | 62 | 60 |
Income In Retirement at Age 65 | $105,529 | $101,700 | $105,529 | $101,700 |
Living Expenses | $95,000 | $95,000 | $80,000 | $80,000 |
Annual Savings | $55,000 | $55,000 | $70,000 | $70,000 |
Rate of Return | 6% | 6% | 6% | 6% |
Money At Retirement | $3,797,000 | $3,147,385 | $4,201,000 | $3,494,000 |
Money at Death, Age 90 | $1,321,000 | Negative $1,860,000 | $4,848,000 | $2,970,000 |
In these scenarios, we can truly see the impact of rates of return and retiring at different ages.
Unfortunately, the rate of return you earn is mostly out of control. You can’t dictate what the stock market or bond market will do.
As much I would love to tell you that you will earn 10% for the rest of your life, my crystal ball is broken and ain’t working right now.
However, you do have in control what you ASSUME the rate of return you can achieve.
I generally lean towards being more conservative, because I would rather be pleasantly surprised than shocked and be forced to have clients go back to work.
As we can see here, the impact is tremendous as interest compounds!
Retiring at the same age with the same savings rate, but a different rate of return from 4% to 8% leads to a $1.7 million difference at retirement!
Then, even more shocking, it leads to a $12.5 million difference at age 90.
As a general principle, I feel that a 5% or 6% rate of return is very sustainable. This is what I often input in my financial plans for clients.
Frankly, in retirement, we could tweak it even further to be more conservative closer to 4% to 5% because we want to be much more protective with the principal.
This is why we generally suggest to clients to be MORE aggressive when they are younger because the compounding of an 8% interest rate can lead to huge differences down the road. Heck, if you don’t need the money for 20 years, why not?
Secondly, we explored- what if this doctor retired at a younger age?
This can be very tricky for several reasons.
First, if you have a pension and/or social security, you will very likely take it at a younger age which means it will be SUBSTANTIALLY LESS than if you wait.
Second, what does your healthcare expense look like before age 65 when you are eligible for Medicare? Will you have to get an individual policy or does your employer help to cover your medical expenses?
Those individual policies are incredibly expensive and rates have been skyrocketing the last decade.
Third, stuff happens. You need a new roof, a new car, a new engine, a new deck, the kids need money.
Do you have enough of a portfolio to factor in for “stuff happens”?
However, all of this being said, it all ties back to our earlier discussion of living expenses and income. If you save and save and save, you could easily cover any of these gaps. You save enough that you could wait to draw social security until age 65.
In scenarios 6 through 9, we can see that if this doctor can live on $80,000 a year rather than $110,000 a year then they can definitely retire at age 60.
Heck, they are saving close to $70,000 every year! That’s almost as much as they are spending for living expenses (not including the mortgage, student loans, etc).
I didn’t run any scenarios showing higher living expenses during the working years and then lowering living expenses in retirement, but I’m sure that by now you get the idea.
Takeaways and Action Steps:
- Look at your current portfolio. How much is in bonds and how much is in stocks? On a scale of 1 to 5, how aggressive or conservative is it?
- Review your portfolio’s performance over the last 10 years. What has been the average annual rate of return? Discuss this with your advisor. Then consider, what is the projected return over the next 10 years? What is an acceptable range of returns?
- Consider this question, when do you want to be financially free? When would you like to retire?
- What are you currently saving? Is your desired retirement date attainable? What would you need to do to achieve that goal?
- Could you increase your rate of return, bump up your savings, and decrease living expenses in order to achieve that goal?
Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation