How Much Do Doctors Need to Retire?

Ahh the age-old question…how much do I need to retire?  For the sake of this article, we will be asking how much do doctors need to retire?  Why distinguish the two?  Well, as it turns out, for a lot of reasons.  For starters, doctors get a late start regarding retirement savings.  Further, as with many other healthcare professions, physicians also commonly generate high incomes following completion of their training.  However, all of these factors are pointless if one doesn’t understand the factors that influence ‘your number.’  How much do you need to retire? 

Well, that is a more complicated question than you think.  Depending on various expectations and extrinsic influences, that number can be highly variable.  ‘Your number’ may even change for you throughout the course of your retirement savings period.  With this post, I hope to help you understand the factors that play a role in your retirement savings.  So, how much do doctors need to retire? 

Doctors get a late start

First and foremost, it is important to understand why this question differs for physicians compared to other professions.  For those not in the healthcare field, physician education requires years of training.  Often this is complicated by the accumulation of substantial amounts of debt.  Don’t believe me?  Just check out what we are doing to pay off our combined $670,000 medical education debt…yikes!  

Commonly, physicians (to-be) graduate college at the age of 21.  Assuming they are immediately accepted into medical school, what follows are four more grueling years of education while taking on student debt.  Graduation from medical school often places them at approximately 25-26 years of age.  From here, they will transition to internship and residency.  These post-graduate years of education (residency) can range from 2-8 years depending on one’s chosen specialty.  During this time their salary is largely regulated and based on geographic location, specialty, and year of training.  Often income tracks just below the average U.S. household income based on 2021 U.S. Census data. 

By now, these physicians are graduating anywhere between 28 and 33 years of age.  Unlike many of their non-doctor peers, they have accumulated large amounts of wealth, managed on middle-class salaries, and been unable to make substantial contributions to their retirement portfolio.  Even more, sometimes when they finally start to make ‘real’ doctor money, the last thing these eager physicians want to do is save 20-25% of it!  Because of this, retirement for doctors is slightly more complicated and nuanced.

When do you want to retire?

OK, so one of the first questions that will impact your retirement number is when you plan to retire.  A better way to ask this is, at what age do you want to retire?  For many this defaults to 66-67 years of age (depending on when you were born) as this is the age social security takes effect.  However, for physicians who have grown accustomed to a certain standard of living, I assure that social security will not be enough. 

This question is especially important to this website because so many individuals are interested in financial independence and retiring early (FIRE movement).  For individuals seeking to cut ties with a profession burdened by politics and burnout, your retirement age may be far sooner than 67.  This is important as your retirement age will largely dictate your savings rate.  For those looking to retire within a decade of training completion…you will need to be saving drastically more than individuals looking to retire in their mid-sixties.  So…ask yourself, when do you ideally want to retire?

How long do you plan to be retired?

This may seem like a stupid question to ask, but it is very important.  None of us can predict how long we will be retired.  I would imagine that many individuals reading this would love to live to be 100 and die peacefully in their sleep, but we have no way of knowing that. 

However, we can often use our retirement expectations to help us determine how many years we should plan for. 

What lifestyle do you expect in retirement?

Another critical question influencing your retirement is your lifestyle expectation.  For many, ‘the good life’ begins when training ends.  Now I could rant for ages about ‘living like a resident’ for a few years to get your finances in order.  I would argue it is never a good idea to have your lifestyle expand to match your income.  This creates golden handcuffs that shackle you to your income.  However, assuming your finances are in order, the lifestyle often achieved by physicians can be quite comfortable.  As such, individuals and their significant others grow accustomed to certain qualities of life.  As you consider retirement, it is important to factor in standard of living. 

Let me explain…

Let’s say for a moment you are an internist making approximately $250,000 before taxes.  To further this analogy, let’s assume you are maxing out your 401(K) contributions also, so subtract $22,400.  Take home, now, is closer to $135,000 after you factor in taxes.  Monthly this comes out to roughly $11,250.  Now this take-home pay covers your lifestyle.  This includes your mortgage, any student loan repayments, groceries, utilities, gasoline, etc.  You get it!  This is what you live off of. 

Now, if you are comfortable with this lifestyle, this number can help you paint a roadmap for the retirement savings needed to sustain this lifestyle.  However, if you are able to pay off your student loans and your mortgage, then all of the sudden that $11,250 goes a lot farther. 

Do you want your most luxurious years to be in retirement?  Do you wish to sustain your current lifestyle?  Are you over the materialistic ‘rat race’ and want to lower your cost of living after retirement?  These are all great questions and ones that will impact your retirement ‘number.’

How are you saving?

The next question to address is how you are saving for retirement?  This can come in the form of pre-tax (most retirement plans) or after tax (Roth) retirement accounts.  Much of this is dependent on what options are available to you through your employer.  Further, this can be influenced by your current tax bracket as well as what tax bracket you plan to be in when you retire. 

Further, are you utilizing a backdoor Roth IRA after maxing out your employer retirement accounts?  Are you contributing enough to get the employer match, assuming one is offered?  How you are saving for retirement, as well as what vehicles you are utilizing can have impacts on how much you need to retire.

The benefit of side hustles

Other means of retirement assets include side hustle businesses, passive income, and real estate investing.  There are countless other avenues of saving for retirement, but this is pertinent as these will influence how much you need to save.  For example, if you need to live off of approximately $8,000 monthly, but you have passive income from rental properties, or you have an online business that produces $2,000 monthly, then this lowers how much you need to save annually…or it impacts how quickly you reach financial independence.  Assets like real estate can often have higher rates of return on investment than index funds, another factor influencing your ‘number.’ 

Don’t forget other revenue streams

Lastly, you need to make sure you are factoring social security and pensions into your calculations.  Not every job offers a pension, but if you are employed by a government entity, or another employer who offers a pension, this can offset the amount needed to be saved for retirement.  In terms of social security, as of the publishing of the article, the average individual will receive approximately $22,000 annually.  The average eligible couple will receive roughly $35,600.  For those retiring at the maximum retirement age of 67 who are eligible for maximum benefits, they can receive as much as $43,000 annually. 

This is important because if you are an individual planning to live on $8,000 monthly (to continue the example above), then at a 4% withdrawal rate and assuming a 25-year retirement, then you would need a nest egg of $2,400,000.  However, if you receive the average individual social security payout of approximately $22,000 annually, then over the course of 25 years that would equal $550,000 (not factoring compounding or inflation).  Therefore, an individual looking to retire with a monthly payout of $8,000 really only needs a nest egg of $1,850,000 to live happily ever after. 

How much are you saving?

How much you are saving is also a big factor.  The 20% recommendation is often thrown out, and honestly it is not a bad place to start.  However, like so many things regarding retirement, it depends…

For starters, the portion of your income you need to save is largely dependent on when you plan on retiring.  As I alluded to earlier, the earlier you plan to retire, the more you need to save.  Your expected lifestyle will also have a ‘hand in the pot’ as well.  It makes complete sense that if you don’t make serious contributions toward retirement until you are 30 years old, but plan on working until you are 67, that saving 20% may be appropriate.  However, if you wish to be financially independent and retire early (say…in your early 40s), you very well may need to save more than half of your income or more!

The 25x rule

Here is an oversimplification of this math, but still provides a reasonable place to start.  The 25x rule states that you need approximately 25 times your annual income to retire.  The idea being that on average, if you retire between 59-67, average life expectancy would dictate 25 years’ worth of income would support you for the remainder of your life.  Therefore, take your annual expected salary in retirement and multiply it by 25. 

For example, let’s say a physician makes $250,000 and plans to retire at the age of 65.  This particular physician has paid off her mortgage and all educational debt and thinks a lifestyle of $100,000 annual is just peachy.  The rule of 25 would state that she needs 25 times $100,000, or approximately $2,500,000 to retire and be supported until the age of 90.  Now this is a huge oversimplification of the math.  This does not factor in the market, rate of real return, inflation, possible pension, social security, employer contribution, etc. …but you get the point. 

If this physician is 30 years old and plans to retire at 65, she would need to save roughly $71,428.50 annually, or 29% of her take home pay each year, still living off $178,571.50 annually.  Not a bad living!  However, if she wishes to retire in 15 years, at the age of 45, she would need to save roughly $166,666.67 annually!  That is two-thirds of her salary each year to retire early.  This means she would be living off of $82,500 each year.  This is a substantially lower quality of life, but still more than the average American household income.  Doable, but much more of a sacrifice. 

Want to expedite your retirement savings?

Want to expedite this?  This physician would need to live way below her means, get a higher paying job, move to a lower cost of living area, marry another with significant income, or create a side hustle/business. 

What is the rate of inflation?

If you don’t live under a rock, then likely you have been bombarded by concerns over recent rates of inflation.  Inflation, as it applies to investments and retirement savings, is basically a measure of how much more expensive certain goods and services have become of a certain period of time…usually measured on an annual basis.  For the United States, much of this data comes from the Consumer Price Index (CPI) and can help us determine the rate that these goods and services are increasing. 

Historically, the US averages approximately 2-3% year over year inflation.  In layman’s terms, this means that everything gets roughly 2-3% more expensive each year.

Why is inflation so important?

Well, if $1.00 will afford you a coffee today, but the rate of inflation is going up steadily at 2% annually, then in 50 years you will need $2.00 to buy a coffee, or 100% more to purchase that same coffee.  This is another oversimplification, but it matters…a lot.  Because if you wish to return to a lifestyle of $100,000, what you are calculating is $100,000 of today’s dollars. 

However, with inflation going up consistently (some years worse than others) that same $100,000 will buy far less in 30 years when you retire.  If inflation goes up steadily at 2% annually, in fact it will buy you 60% less.  This has impacts on how you save and plan for retirement, often meaning you need to save more to offset inflation.  Keep that in mind.

What is your ‘real return?’

Another factor when calculating retirement expectations is ‘real return.’  The idea behind this is the concept of what your return rate is after all expense ratios, inflation, and taxes are taken out.  This is important as you understand how economics affects your actual investments year over year. 

Here is another example for you.  Let’s say you log into your Vanguard account and it says this financial year your investments increased 6%.  That sounds great right?  However, if your expense ratios take 1% of your portfolio, and the rate of inflation was 3% that year, then your actual rate of return, or ‘real rate’ is only 2%… potentially lower if you factor in taxes.  When inflation runs higher than the average 2-3% annually, this can have significant ramifications for your ability to reach your retirement goals.

Understanding your real rate of return is important for a couple of reasons.  First and foremost, it helps you understand the actual return on your investments after adjusting for economic forces and expenses that often go underappreciated.  Second, the real rate is a far more accurate indicator of your investment portfolio’s success.  Understanding the real rate of return can help you better view investments and how lucrative they really are. 

Social security, pensions, and taxes

There are a few topics that affect your retirement that are worthy of mentioning here, as a point of caution.  First, social security payments are something that can influence your calculations.  This is important because if you are planning on living on approximately $8,000 monthly, for example, with a 4% withdrawal rate (assuming a 25 year retirement) then you need a nest egg of roughly $2,400,000.  However, if you receive the average individual social security payout of approximately $22,000 annually, then over a 25 year retirement, that approaches $550,000 (not factoring compounding or inflation).  Therefore, an individual looking to retire with a monthly payout of $8,000 really only needs to save $1,850,000 and social security would pay the rest! 

Social security

However, social security is not a guarantee in the future.  As you ‘crunch the numbers’ to determine what your savings for retirement should be, I would create calculations that both include and exclude social security to understand how impactful it can be, and if you should hedge against future uncertainty. 

Pensions

Secondly, certain professions offer pensions.  If you are a candidate to receive a pension following retirement, I would work to include this in your calculations.  Pension can be a significant contribution to the longevity of your nest egg.  Further they can highly offset your retirement saving needs.  Keep this in mind. 

Taxes

Lastly, taxes. One last factor to consider when thinking about ‘your number’ is how your withdrawals will be taxed in retirement. If the majority of your retirement savings are housed in pre-tax vehicles like 401ks or brokerage accounts, these are subject to taxation at the time of withdrawal. Therefore (to use the example above) if you need $2,400,000 in retirement, but are taxed at 35% at the time of retirement, then really you need more like $3,692,000 saved to offset taxation. Yikes!

So… how much do doctors need to retire?

OK… so you made it this far…whew!  I’m proud of you.  Now, let us put all of this together and try to answer the questions… How much do doctors need to retire?

In order to make all of the content above formulate into something digestible, I feel an example is best.  Let us now take that same physician from above and put everything into context. 

Dr. Works-Hard, a case study

Let’s say we Dr. Works-Hard is a 30-year-old single physician who recently completed all of her medical training.  She is a first year attending physician who makes approximately $250,000 annually (before taxes).  Her wishes are to retire at the age of 65 and expects to live another 25 years after retirement.  She thinks that she would realistically live on $100,000 annually in retirement and have all of her needs met.  She has never saved for retirement and currently has a nest egg of $0.  This is an extreme example I know… but bear with me. 

Dr. Works-Hard, age 30, single, retirement age 65

If Dr. Works-Hard plans to save 20% of her salary annually, or $50,000.  Inflation averages 2% and her investments average 6% growth.  She chooses to only use Vanguard index funds with negligible expense ratios; thus, her real rate of return is approximately 4% annually.  At this rate, saving $50,000 annually with a real rate of return of 4%, she can expect to retire at the age of 65 with a nest egg of roughly $3,492,895.  Even if she withdraws $100,000 annually, her investments alone will cover her expenses (assuming market stability).  She would likely still go to her grave, at the age of 90, with a nest egg of $4,188,689.  Wow!

Dr. Works-Hard, age 30, married, retirement age 45

Now, let’s say Dr. Works-Hard does the math above and is flabbergasted.  She decides she wants to retire much earlier than 65…life is too short!  She plays with the numbers and gets married to a significant other with a contributory income as well.  Her spouse nets $100,000 before taxes, bringing their before tax household income to $350,000.  They decide they no longer need to live off of $100,000 annually in retirement and decide that $80,000 is just fine…and they want to retire in 15 years at the age of 45. 

They decide to save $15,000 monthly, or $180,000 annually.  This is approximately 51% of their yearly income.  Again, their Vanguard index fund investments increase at 6% annually, but with stable 2% inflation their real rate is 4% annually.  Saving 51% of their income annually for 15 years at a real rate of 4% would result in a $3,604,245.00 nest egg by the age of 45.  Less than scenario 1, but they get to retire 15 years earlier. 

Now, in scenario 2, Dr. Works-Hard and her spouse both increase their income by getting married, lowering their expenses in retirement, and saving boat loads… Now if they withdraw $80,000 annually, or just over 2% of their nest egg, they will literally never run out of money during their lives.  In fact, with a real rate of return of 4% and a withdrawal rate of 2% in retirement, their investments will likely grow at a similar rate as their withdraws…even better!

Retirement calculator tools

There are some really great retirement calculators online that can better demonstrate retirement expectations.  Often, these tools will put your calculations in graphical form which can help better visualize your financial roadmap.  I have outlined a few below.  I highly encourage you to check these out.   Play with the numbers, change your contribution amount, your real rate of return, you expected retirement age, etc.  It can be incredibly helpful to see what outcomes are possible.  Here are some of the tools I have found most helpful:

Retirement Calculator – nerdwallet

The Retirement Calculator from nerdwallet is a tool I have found incredibly useful when ‘playing with the numbers.’ I encourage you to also utilize the optional drop-down menu that allows you to enter aspects like monthly retirement spending, other income, retirement age, etc. 

Ultimate Retirement Calculator – FinancialMentor

The Ultimate Retirement Calculator from FinancialMentor is another great retirement calculator on the internet.  I use this one also because it allows you to input even more variables.  This calculator also provides a graphical and spreadsheet representation of your savings and withdrawals.

Retirement Withdrawal Calculator – Mutual of Omaha

There is also a retirement withdrawal calculator from Mutual of Omaha that is helpful when determining how long your money will last in retirement.  This tool factors in nest egg at retirement, annual rate of investment returns, and how much you plan to withdraw annually.  It also asks if you want your withdrawals to match inflation, i.e., you increase your withdrawals by 2% annually etc.  Lastly it asks about your federal marginal tax bracket at retirement which is important.  Check it out!

Compound Investment Calculator – Investor.gov

The Compound Interest Calculator tool from Investor.gov can be really fun to play with.  This is a compound interest calculator that uses your initial investment, your monthly contribution, time in years, and your estimated interest rate and then provides a graphical representation of your nest egg growth.  This tool allows you to put a variance range on your real return and you can see how it can drastically affect what you can achieve.  Oh, the difference 1% can make!

Take home points

So, how much do doctors need to retire?  As you can see above, that is a complicated question, with an even more complicated answer.  I cannot give you a specific number because… it depends! The answer is widely variable based on your retirement expectations. 

If you are an individual who enjoys their job, never wants to retire, and is in it for the long haul, then you are in luck.  Depending on your savings rate and real return (and multiple other factors) you can either live a life of luxury in retirement, or enjoy the majority of your earnings now while still building a decent sized nest egg.  Individuals in this scenario often can get away saving 20-30% of their income annually, retire in their mid-to-late 60’s and enter retirement with solid financial footing. 

However, if you see your profession as a means to an end, and wish to retire as soon as possible, there are options for you too.  If you are willing to live well below your means, invest somewhat aggressively, and save a large majority of your income, you have a real opportunity to achieve FIRE in 10-15 of completion of your training.  Woohoo!

Retirement can come in a variety of flavors

There are also about a million other scenarios in between, all of which are affected by factors both in and out of your control.  Markets will fluctuate, there will be periodic recessions, and even the chance for depressions.  Inflation could steadily increase slowly, but can occasionally jump, affecting your real rate of return.  Lastly, social security is not a future guarantee, and I would encourage you to both include and exclude social security in your calculations, to better understand its impact.  However, if you are steadfast in your savings and work to build slightly more than you need, there is a very strong chance you reach your retirement goals. 

What I have outlined above are, what I consider to be, the most influential factors on this topic.  From your savings rate to your actual rate of return, there are a few factors that must be understood before you can begin to accurately determine your retirement needs.  Whether you are trying to build towards a retirement after a long and prosperous career, or reach FIRE as soon as possible, there are options if you are willing to work the numbers.  I hope you have found this article helpful, and as always… 

Stay motivated!

The Motivated M.D.

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