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  • % of current income needed in retirement

    I'm nearing the end of training and starting to play with different calculators to estimate expenses and saving rates with my future attending salary. I have a few questions that were inspired by 1) WCI's June newsletter (and more specifically, his take on FIRE - not something I'm planning, but the discussion about the 4%/25x rule reminded me about these questions, and 2) the recent thread about whether we really "need" 10M in retirement as many calculators suggest with a physician salary.

    If we don't save anything more and those are annual expenses, using the 25x rule for FI, 25*400k=10M.

    I then tried https://www.nerdwallet.com/investing...ent-calculator to simulate retirement savings and a target. I plugged in starting at 35 years with net worth 0, saving 20% of monthly income, then kept their default assumptions of 6% real returns, retirement at 65, death at 95, retirement spending equal to 70% of pre-retirement. The calculator suggests that I'd reach age 65 with 10M of the 14.7M "necessary." This leads to my questions of:

    1) I previously thought that a savings rate of 20% of gross was considered by many on these forums to be reasonable in light of the late start that we get relative to non-physicians. But if 25x is also correct, that means it's really a minimum for retiring at 65. To instead retire at 60 with 10M, I'd need to save 30% - and that assumes I can get the extra 5 years out of that money without needing a larger balance. Am I thinking about this incorrectly?

    2) Does anyone have a guess of what it is about this calculator's assumptions that leads to a suggested FI target of 14.77M rather than 10M? 6% real returns seems reasonable, as does ~30-35 years of post-retirement life, so I imagine it's the 70% of pre-retirement income that it assumes I'd want. But it keeps that 70% assumption whether I'm saving 0%, 20%, 30%, or whatever - even though obviously those lower my annual expenses. How do you think of this % of current income needed in retirement number? Or do you just assume that 25x will get you to the right spot?

    Thanks!

  • #2
    you can start by lowering your expectations for expenses in retirement/working life- Do you really plan on spending 400k a year both while working and in retirement? Most of the calculators are not for high income people bc they use percent salary, not percent of expenses. If you want to be financially secure, its what you save that matters early on, not what you make. Live like a resident for a few years, avoid lifestyle creep, dont keep up with the Jones's and you will be fine with saving 20% gross and investing it in passive index funds.
    If you want to spend 400k/yr while working, I hope you make >1 million per year and will be happy working until you physically can not anymore.

    Comment


    • #3
      You have to play around with the optional tab. Most importantly the monthly retirement spending and percentage of current income.

      In order to know how much you need to retire you have to come up with an accurate annual expense in retirement. Essentially impossible where you're at since you're used to a resident salary and don't know how much you actually spend on things to be 'happy' with your spending. Most financially minded people also overestimate how much they need or spend in retirement as well (not a bad problem to have).

      If you want to have $100k a year to spend in retirement, you divide by your safe withdrawal rate to find your retirement number. Most people use 4% so that's where the 25x comes into play. So that's $2.5M. If you want to be safer or be sure it lasts longer than 30 years, use a lower rate like 2-3% (which is still overkill) and you get $3.3-$5M.

      A FI target of $14.77M suggests that you can spend $590k a year for 30 years and essentially have minimal risk of your money running out after the 30 years. In most circumstances, you'll end up with way more money than you started.

      Comment


      • #4
        Remember when thinking about replacing 70% of income, you won't need to save for retirement anymore (so now you're at 80% of income) and I think almost everyone here would also advise you to have your house paid off before you retire, and your house payments are probably more than 10% of income. And given the progressive nature of taxes, you'll also pay less in taxes. This is why you won't need to replace 70% of income but rather probably 40-60% instead

        Comment


        • #5
          Hint: Income of $400k is not your spending by any means. Nor is it your retirement spending needs.
          Subtract taxes and retirement savings and any other big purchases like house and where are you at? Probably around $100k-$150, now add back any new tax estimates and your new spending needs. The rule of thumb 70%-80% basically covers your retirement and savings in the accumulation phase.

          Comment


          • #6
            This is an interesting discussion.
            OP: it’s kind of fun to make these plans, but it’s important to recognize that these sort of projections are very dependent on the parameters used, and one cannot accurately predict future returns. I do think that if you don’t make plans, you are less likely to succeed, so here goes!
            Billy: On the other hand, I’m not sure that given a high income, it is totally unreasonable to spend $400,000 a year and hope to reach $10,000,000. It’s absolutely true that you need a high income, but you don’t need to work forever. Let’s assume that a 32 year old has a zero net worth, earns a million dollars a year, and invests $200,000 a year. What might happen?
            First, can they invest that much? What about taxes? Here’s a link:
            https://www.physicianonfire.com/taxe...llion-dollars/
            taxes owed on $1,000,000 income: $284 k. spend $400k. Invest $200k (there’s an additional $116k for donations, local/state taxes, paying off debt, paying taxes on investments, or simply investing more).
            Start at age 32. Invest $200k in stock market every year.
            Assume 6.4% real, inflation-adjusted return.
            https://www.whitecoatinvestor.com/wh...-market-go-up/
            Assume no taxes on returns (this is of course huge and faulty assumption but one can shelter a lot of income in pre-tax accounts, and try to invest in a tax-efficient manner. If you want a more precise answer, the model would get much more complicated. These are meant as quick calculations to illustrate the impact of compound interest and recurrent annual investments)
            I ran an excel spread sheet: here are some of the results
            Age 42: $3.1 million
            Age 52: $8.4 million
            Age 55: $10.7 million
            Age 62: $18.3 million
            Now I get it that taxes will exert a drag on performance, past returns are not predictive of the future, many would not want to invest only in stocks, many start out with a negative net worth, maybe reimbursement will tank, …

            Comment


            • #7
              Originally posted by HiCOLAdoc View Post
              This is an interesting discussion.
              OP: it’s kind of fun to make these plans, but it’s important to recognize that these sort of projections are very dependent on the parameters used, and one cannot accurately predict future returns. I do think that if you don’t make plans, you are less likely to succeed, so here goes!
              Billy: On the other hand, I’m not sure that given a high income, it is totally unreasonable to spend $400,000 a year and hope to reach $10,000,000. It’s absolutely true that you need a high income, but you don’t need to work forever. Let’s assume that a 32 year old has a zero net worth, earns a million dollars a year, and invests $200,000 a year. What might happen?
              First, can they invest that much? What about taxes? Here’s a link:
              https://www.physicianonfire.com/taxe...llion-dollars/
              taxes owed on $1,000,000 income: $284 k. spend $400k. Invest $200k (there’s an additional $116k for donations, local/state taxes, paying off debt, paying taxes on investments, or simply investing more).
              Start at age 32. Invest $200k in stock market every year.
              Assume 6.4% real, inflation-adjusted return.
              https://www.whitecoatinvestor.com/wh...-market-go-up/
              Assume no taxes on returns (this is of course huge and faulty assumption but one can shelter a lot of income in pre-tax accounts, and try to invest in a tax-efficient manner. If you want a more precise answer, the model would get much more complicated. These are meant as quick calculations to illustrate the impact of compound interest and recurrent annual investments)
              I ran an excel spread sheet: here are some of the results
              Age 42: $3.1 million
              Age 52: $8.4 million
              Age 55: $10.7 million
              Age 62: $18.3 million
              Now I get it that taxes will exert a drag on performance, past returns are not predictive of the future, many would not want to invest only in stocks, many start out with a negative net worth, maybe reimbursement will tank, …
              Certainly from OP training level, very hard to predict much of anything, as resident without much idea of spending. Percentage of income isn't much help if you're a high-earner. I'm sure I could currently spend $400k a year (don't currently), but in retirement? I wonder if there is data about FIRE folks spending level vs the normal retiree spending decline. Probably at normal retirement age the (expected) inflation kept in check by decreased spending, but wonder about FIRE.

              OP I suspect most regulars on the forum save more than 20%

              Comment


              • #8
                Originally posted by childay View Post
                OP I suspect most regulars on the forum save more than 20%
                Ah yeah I was pretty sure I did a poll

                https://forum.whitecoatinvestor.com/...u-save-in-2019

                Comment


                • #9
                  Originally posted by billy View Post
                  you can start by lowering your expectations for expenses in retirement/working life- Do you really plan on spending 400k a year both while working and in retirement? …If you want to spend 400k/yr while working, I hope you make >1 million per year and will be happy working until you physically can not anymore.
                  $400k seems outrageously large to me, at first glance. But then I used https://smartasset.com/taxes/paycheck-calculator to calculate take home pay on a $500k salary living in a HCOL area like Los Angeles, for example. If I make $500k and invest 20% in a mix of maximized 403b and post-tax accounts for retirement, I’ll end up with ~$200k in post-tax earnings, or $17k/month. I realize that’s a lot of money, but with housing in HCOL areas what it is and having other saving needs (car(s), future kids’ education, etc.), $17k/month doesn’t seem like so much that I shouldn’t at least consider whether the 20% is getting me to a retirement at 55, 65, or 75. At the extremes, that would substantially affect what I might otherwise do for housing, for example.

                  Originally posted by Nysoz View Post
                  …If you want to have $100k a year to spend in retirement, you divide by your safe withdrawal rate to find your retirement number. Most people use 4% so that's where the 25x comes into play. So that's $2.5M. If you want to be safer or be sure it lasts longer than 30 years, use a lower rate like 2-3% (which is still overkill) and you get $3.3-$5M…
                  Using the https://www.nerdwallet.com/investing...ent-calculator again, age 35 earning $500k saving 20% gets to 3M at age 51 and 5M at 56. Does that mean that the 20% that people throw around on this site as a good/safe/wise/whatever move in this situation is one that leads to likely FI in one’s mid 50s? I’d love to save 20%+, but my fiancée is less excited about the idea. I realize we should and will find a balance, but I’m trying to at least understand the mathematical argument on this side.

                  Originally posted by childay View Post
                  OP I suspect most regulars on the forum save more than 20%
                  When people say this, do you think they normally mean >20% for retirement, or >20% overall? When I was running the numbers I was hoping to save 20% for retirement and another 15-20% for a down payment. Once that's squared away, I figured the 15-20% would transition to college savings. Once that, something else.. but harder to imagine both of those AND >20% for retirement, at least for me currently.

                  Comment


                  • #10
                    I think many people would suggest saving 20% for retirement. I routinely saved over 30% for retirement. It worked out well!

                    Comment


                    • #11
                      I would also use closer to 3% withdrawal rate rather than 4%. You'd much rather end up wrong overshooting your goal than end up wrong and undershooting it.

                      Comment


                      • #12
                        I think shooting for 3% instead of 4% will result in way too many extra years working if that's not what you want to do. I think what's most important is keeping fixed expenses low and staying flexible. 4% rule assumes you put a serious, serious premium on 0 flexibility during down-turns. I don't think people are actually that inflexible and it would save a lot of stress and give you a longer retirement if you decide that maybe in the worst 1% of scenarios you can downsize the house rather than be so conservative you end up working longer and die with >2.7x your starting nest egg.

                        Comment


                        • #13
                          Originally posted by Urojet View Post

                          Using the https://www.nerdwallet.com/investing...ent-calculator again, age 35 earning $500k saving 20% gets to 3M at age 51 and 5M at 56. Does that mean that the 20% that people throw around on this site as a good/safe/wise/whatever move in this situation is one that leads to likely FI in one’s mid 50s? I’d love to save 20%+, but my fiancée is less excited about the idea. I realize we should and will find a balance, but I’m trying to at least understand the mathematical argument on this side.
                          Play around with the calculator and see how much time you can save by saving more early on. Compound interest is the eighth wonder of the world.

                          20% is a quick and dirty recommendation. Most here save way more. If you increase savings to 25% you shave 3 years to your goal. 30% is 5 years earlier.

                          Personally I’m very frugal and saved around 50% and got lucky with my investments so I reached my FI number in 5 years.

                          Comment


                          • #14
                            Originally posted by HiCOLAdoc View Post
                            This is an interesting discussion.
                            OP: it’s kind of fun to make these plans, but it’s important to recognize that these sort of projections are very dependent on the parameters used, and one cannot accurately predict future returns. I do think that if you don’t make plans, you are less likely to succeed, so here goes!
                            Billy: On the other hand, I’m not sure that given a high income, it is totally unreasonable to spend $400,000 a year and hope to reach $10,000,000. It’s absolutely true that you need a high income, but you don’t need to work forever. Let’s assume that a 32 year old has a zero net worth, earns a million dollars a year, and invests $200,000 a year. What might happen?
                            First, can they invest that much? What about taxes? Here’s a link:
                            https://www.physicianonfire.com/taxe...llion-dollars/
                            taxes owed on $1,000,000 income: $284 k. spend $400k. Invest $200k (there’s an additional $116k for donations, local/state taxes, paying off debt, paying taxes on investments, or simply investing more).
                            Start at age 32. Invest $200k in stock market every year.
                            Assume 6.4% real, inflation-adjusted return.
                            https://www.whitecoatinvestor.com/wh...-market-go-up/
                            Assume no taxes on returns (this is of course huge and faulty assumption but one can shelter a lot of income in pre-tax accounts, and try to invest in a tax-efficient manner. If you want a more precise answer, the model would get much more complicated. These are meant as quick calculations to illustrate the impact of compound interest and recurrent annual investments)
                            I ran an excel spread sheet: here are some of the results
                            Age 42: $3.1 million
                            Age 52: $8.4 million
                            Age 55: $10.7 million
                            Age 62: $18.3 million
                            Now I get it that taxes will exert a drag on performance, past returns are not predictive of the future, many would not want to invest only in stocks, many start out with a negative net worth, maybe reimbursement will tank, …
                            OPs talking about california, where a million dollar income would incur high taxes, along with a high cost of living. And I would assume a large property tax also, so not sure 116 would cover all the extra taxes/tithing/debts. But my point was these (OPs) calculators assume a percentage of your income as needed to live off of in retirement, which is untrue- its the percentage of your expenses that you need to account for.

                            OP- If I came of as harsh, I apologize- but I also live in a HCOL area, and see young attendings who make 2x I do tell me they cant save 100k even though they make 525k- the reality is because of their expenses. They are also buying new bmws after owning infinitis, big houses, etc. Then they ask me how I can afford to only work 4 days/week. In your example, even if you learn to live off of (gasp) just 200k (aka ~4x what the avg american family and you are currently living off of), you wont need to invest as much as you otherwise would for retirement. You actually will end up investing more (bigger gap between pay and expenses) meaning you become FI earlier, which especially in medicine should be a goal because of the increased level of BS you will have to deal with, and the constant threats to our reimbursements, etc. You'd then only need 5 million for your FIRE/retirement, and paradoxically if you worked the same length of time will end up way past that number.

                            Comment


                            • #15
                              Saving rate 20% is just a good starting point to evaluate your plans. You can start your budget by lopping off 20% and then focus on your expenses. At this point there aren’t a lot of secrets. Keep your housing and transportation bills as low as possible and the rest will likely take care of itself.

                              Billy makes a lot of good points. This is all about the margin you leave yourself between income and expenses. It is much easier to start at a higher savings rate with lower expenses than to reverse course when you figure out you didn’t save enough.

                              I tend to only use firecalc.com for my forecasting anymore.

                              Comment

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