By Neil Sosler & Marc Singer

As financial planners, the number one question we get asked by physicians is “When will I have enough money to stop practicing medicine?” Unfortunately, due to malpractice concerns and lower insurance reimbursement, more doctors are thinking about retiring early, even though they still have significant medical skill and expertise.

Other major goals that people save for in life such as a child’s college education or a first home come with various financing options including student loans or home mortgages.  Retirement does not have such an option.  Retirement involves utilizing your investment assets to create a cash flow or income stream to replace your employment income.    When your income-generating ability ceases (retirement), you will need to rely solely on your investments and possibly social security.  Anyone younger than 45 knows not to expect much help from social security in the future.  So the question becomes, “How much money is needed to fund your retirement?”

The 5% Rule

We developed this basic premise to help you roughly estimate the amount you will need for retirement. To estimate how much you must accumulate, divide your expected annual personal expenses number by 5% (the 5% rule).

For example, to live comfortably, most physicians need from $10,000 to $14,000 per month after taxes. This amount excludes expenses such as children’s education and life and disability insurance premiums, since these usually cease to exist post retirement.  The $10,000 per month amount ($120,000 per year) divided by 5% equals $2.4 million.  This is the net worth you will need to have saved to provide this monthly income for life.  Monthly expenses of $14,000 require a net worth of $3.3 million at retirement.  The 5% rule assumes an actual rate of return of approximately 8.5% then deducting 3.5% to allow for taxes and inflation.  

These guidelines come with a warning: There is no real margin for error. To be secure, we recommend having 20% extra in assets under management to provide a buffer zone.

The Most Important Variables

In retirement planning, the actual rate of return on investments is of utmost importance.  Earning only 7% versus 8% over your lifetime could mean having to work an additional five years to make up the difference.  Another pitfall is making poor investment choices.  Suppose a doctor puts $20,000 in a high-risk opportunity that goes sour. That initial amount may seem like an affordable risk. However, assuming a 9% return, that $20,000 would be worth $112,000 in twenty years, and $628,000 in another twenty years.  Due to a small, bad investment, you will have lost $628,000 of retirement assets. Our rule of thumb is that physicians cannot afford to lose money on investment choices.

Another important variable in the calculation is determining your expected annual personal expenses at retirement.  This sounds easy, but figuring out how much you spend now and how much you may decide to spend in retirement can become a difficult number to calculate.

Conclusion

The 5% rule is a simplified calculation; a detailed retirement projection includes year-by-year cash flow and expense projections that vary at different stages of one’s life.

Named by Worth Magazine and Medical Economics as one of the Top Financial Advisors nationally for physicians, Singer Xenos is an established wealth management firm managing over $600 million in assets such as retirement plans, annuities and personal accounts, with an emphasis on wealth building and protection from malpractice claims.