How Much Money Does a Doctor Need to Retire?

Written by: Corey Janoff

This post was originally published on April 21, 2020 and has since been revised and updated.

How much money does a doctor need to retire?  It depends.   That’s my favorite answer to almost any financial planning question ????.  There is no one-size-fits-all approach when it comes to financial planning for physicians.  Each person is unique and has a different set of goals, lifestyle, etc.  That being said, there are some general guidelines that doctors can follow to know what to shoot for when it comes to retirement planning.  Let’s dive in!

Getting Started

First things first, it will be helpful to get a rough idea what your desired lifestyle and expenses will be like in retirement.  That’s the most important piece to determining how much money you need to retire as a doctor.  Expenses will change over time.  Early in retirement, assuming you are healthy and able, you will likely spend more money on travel and entertainment.  As you age, traveling and going out of the house in general will become more cumbersome, so naturally some of your expenses will decrease.  Towards the end, assisted living costs could be a huge expense, so planning for those is helpful.

Some of the obvious expenses are going to be housing costs, food, utilities, transportation, insurances, entertainment, travel, and possibly gifts/charity.

Don’t forget taxes.  Any money withdrawn from pre-tax retirement accounts is taxed as ordinary income.  Investment earnings are taxed at capital gains tax rates.  And even if you own your house outright, you will still owe property taxes on your house.

Depending on the path you are on, you may have some debt payments present (mortgage being the most likely one).  It’s also smart to factor in a buffer for unexpected expenses.

Most doctors want to live a similar lifestyle in retirement to the life they grow accustomed to living while working.  If you fall into that camp, you can probably take all of your current expenses and cross off a few that (hopefully) won’t be present in retirement.

Some of the big expenses that will likely be gone or should be gone by retirement are:

• Mortgage
• Student loan payments
• Childcare expenses (including school tuition payments).
• Disability Insurance premiums – no longer need to protect income if you’re retired. This could be upwards of $1,000/month for some doctors.

For some of you, these expenses could amount to over half of your current monthly expenditures! Some of the existing expenses may be replaced with increased travel and fun in retirement.  Those plan tickets and green fees can start to add up!

If you plan to retire before age 65, you will need to pay for private health insurance out of pocket until Medicare kicks in, which won’t be cheap (probably at least $1,000/month for a couple, if not per person).

We don’t want to overcomplicate things, though.  No need to analyze year by year what your anticipated expenses will be under evolving circumstances.  We want to make this is as simple as possible.  Therefore, add up all the expenses you anticipate having in today dollars and that’s what we’ll base our projections on.

Financial planning is a giant guessing game, so don’t worry about precision for this exercise.  There are so many variables that are constantly changing, it is impossible to make precise projections.  If we’re trying to get a ballpark estimate, we’re not worried about decimal places.  We can refine things after we have a rough idea of where we want to go.  As a surgeon you don’t start with a scalpel – you start with a Sharpie and mark the area where you will be operating.

As Carl Richards says, the goal isn’t to have a perfect financial projection today; the goal is to make the projection less wrong tomorrow.

The Rule of 25

To help figure out how much money a doctor needs to retire, the simplest retirement rule of thumb I have come across is the rule of 25.  Take your annual spending number that you estimated earlier and multiply that by 25.  As a doctor, that’s how much you likely need in order to achieve financial independence and potentially retire at a reasonable age.

If you’re going for FIRE (Financial Independence, Retire Early), or fatFIRE, you might want to make that number 30x or 35x to plan for a longer retirement.

This, of course, doesn’t guarantee your money will last forever.  However, if you run a bunch of simulations, more times than not the money will last longer than you will.

One caveat to this is inflation.  If you are 35 years old today, cost of living is likely going to double by the time you turn 60.  If you estimate you need $100,000/year in today dollars to support your lifestyle in retirement, you will need $200,000/year when you are 60 years old to provide that same lifestyle.  That means the $2.5 million in today dollars you need to be financially independent ($100K x 25 = $2.5M) will really be $5 million if you are aiming to retire at age 60.

If you are 35 now and want to live on $200k/year in today dollars in retirement starting in your early 60’s, you will likely need to accumulate $10 million in order to retire.   Easy math.

If you have sources of passive income, be sure to factor that into the equation as well.  For example, if you have rental properties that will generate you $5,000/month net rental income, that reduces the annual spending need from your other investments by $60k/year.

Related: 8 Passive Income Streams for Doctors

Some doctors reading this may be close to their target number already!  Other physicians may be feeling a pit in their stomach at this moment.   If you are the latter, it’s important to remember that you need to sacrifice for what you want in life.

You put in a lot of hard work and made sacrifices to become a doctor.  You also need to put in some hard work and make sacrifices if you want to be financially independent one day.

About a year ago, I put together a table of retirement savings targets by age to give people an idea of where they should be at various stages in life.  The path to the finish line is not linear.

Devise a Retirement Strategy

Many doctors don’t even start their first real job until they are over the age of 30.  That is why it is imperative to make saving for your future a priority early.  I have coached physicians to invest at least 20% of their gross income for retirement.   If you are getting a later start and don’t start saving until closer to the age of 40, that percentage should be more like 25-30% or greater.

If you can get in that retirement savings habit, that should put you on a healthy track to be able to retire by your mid-60’s and live a comfortable life in retirement, similar to the lifestyle you grew accustomed to living while working. No guarantees of course.   Obviously the more you save, the greater the probability of success.

Not everyone wants to retire in their mid-60’s, so the percentages and rules of thumb must be adjusted for each individual.

In one of our Financial Clarity for Doctors podcast interviews with Physician on FIRE (published April 27^th, 2020), he recommends investing half of your take-home pay to get on a fast track to financial independence.  If you can do that from the start, you have a good chance of becoming financially independent within about 15 years of entering practice.

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At a minimum, physicians should be maxing out the available tax-advantaged retirement plans available to them.  There are numerous retirement plans for doctors, yet not all doctors will have access to all of them.

Most physicians will have access to a pre-tax retirement through their employer (if self-employed, you can establish an Individual 401k, and even a cash balance plan if you really want to save a lot pre-tax).

A Backdoor Roth IRA is also a viable option for most doctors and their spouse, although it can create some tax headaches if certain rules aren’t followed.

Beyond that, the options for investing are wide open.  You will need to save more in addition to those two accounts if you want to have enough money to retire one day.  A taxable account is a great next step.  Don’t forget to implement tax loss harvesting when the market is down.

The specific accounts utilized, and the specific investments within the accounts matter far less than the amount saved on an ongoing basis.  Your savings rate matters a lot more than anything else when it comes to achieving financial independence.

There are many paths to get to the final destination.  Saving for retirement is like biking across the country.  There are a lot of routes and strategies you could take to accomplish the journey.  Regardless of the strategy, some planning and strategizing needs to be done to ensure a successful trip.