When Can I Retire?

Whenever Don McLean is asked what the lyrics to his iconic song “American Pie” mean, he answers: “They mean that I don’t have to work anymore.”

It would be nice if those of us who have never written an enigmatic hit tune could receive an unequivocal signal when it’s safe to retire. Unfortunately, the road to retirement is fraught with challenges, not least of which is locating the right off-ramp.

We tend to live longer than planned, so we run the risk of outliving our savings, which are often underfunded to begin with. And we don’t face facts about end-of-life care. Few of us have long-term care insurance, or the means to self-fund an extended long-term care situation, as I will discuss next month.

Many of us lack a clear idea of where our retirement income will come from, or if it will be there when we arrive. Doctors in particular are notorious for mismanaging their investments. Many try to self-manage retirement plans and personal savings without adequate time or knowledge to do it right. Involving a qualified financial professional is usually a far better strategy than going it alone.

So, assuming you have a solid savings plan, and solid help with its management – how will you know when you can safely retire? As with everything else, it depends; but to arrive at any sort of reliable ballpark figure, you’ll need to know three things: how much you realistically expect to spend annually after retirement; how much principal will throw off that amount in interest and dividends each year; and how far your present savings are from that target.

An oft-quoted rule of thumb is that, in retirement, your expenses will be about 70% of what they are now. In my opinion, that’s nonsense. While a few bills, such as disability and malpractice insurance premiums, will go away, other costs, such as recreation and medical care, will increase. I suggest assuming that your spending will not diminish significantly in retirement. Those of us who love travel or fancy toys may need even more.

Once you have an estimate of your annual retirement expenses, you’ll need to determine how much principal you’ll need – usually in fixed pensions and invested assets – to generate that income. Most financial advisors use the 5% rule: Assume your nest egg will pay you a conservative 5% of its value each year in dividends and interest. That rule has worked well, on average, over the long term. So if you estimate your postretirement spending will be around $100,000 per year (in today’s dollars), you’ll need about $2 million in assets. For $200,000 annual spending, you’ll need $4 million. (Should you factor in Social Security? Yes, if you’re 50 years or older; if you’re younger, I wouldn’t count on receiving any entitlements, and be pleasantly surprised if you do.)

How do you accumulate that kind of money? Financial experts say too many physicians invest too aggressively. For retirement, safety is the key. The most foolproof strategy – seldom employed, because it’s boring – is to sock away a fixed amount per month (after your retirement plan has been funded) in a mutual fund. $1,000 per month for 25 years with the market earning 10% (its historic long-term average) comes to almost $2 million, with the power of compounded interest working for you. And the earlier you start, the better.

It is never too soon to think about retirement. Young physicians often defer contributing to their retirement plans because they want to save for a new house or for college for their children. But there are tangible tax benefits that you get now, because your contributions usually reduce your taxable income, and your funds grow tax free until you withdraw them, presumably in a lower tax bracket.

At any age, it’s hard to motivate yourself to save, because it generally requires spending less money now. The way I do it is to pay myself first; that is, each month I make my regular savings contribution before considering any new purchases.

In the end, the strategy is very straightforward: Fill your retirement plan to its legal limit and let it grow, tax deferred. Then invest for the long term, with your target amount in mind. And once again, the earlier you start, the better.

Joseph S. Eastern, MD practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.