Why physicians consistently underestimate retirement spending

In the financial planning process, an important discussion revolves around "how much money do I need to retire?" We hear this commonly from physicians and it is a contrast to the days when I practiced medicine, and physicians seemed to work forever. But the answer always hinges on our follow up question: "how much do you want to spend in retirement?"

We commonly get a response that the family is spending much less annually than they really are. We will hear an unrealistically low amount that could not possibly explain the family's lifestyle. So, we usually follow up with two questions: How much did you earn last year and how much did you save? The difference is what the family spends. We do make adjustments for costs that usually go away in retirement (for example, life insurance premiums, disability insurance, Social Security premiums on income, and hopefully many of the costs associated with raising children) and then come up with a rough estimate of what the family would spend in retirement.

The next step is to revise that amount by likely behavior in retirement. If we are told that they look forward to a lot of travel, we can assume that expenses early in retirement will possibly go higher rather than lower. Once we decide on a reasonable number, we talk about how much need to be saved to ensure enough money to last for a lifetime of not earning money by working. You probably have heard of the 4% rule, and it is indeed a good place to start, with adjustments made in the future. So, we will tell a physician family that we take the amount they need and subtract any secure income streams they might have (usually only Social Security, but sometimes a pension is present), and then figure on having around a million dollars for every forty thousand dollars a year they want to spend.

It is not unusual to work with families that are spending $250,000 a year and expect that lifestyle in retirement. When we tell them that they probably need at least $5 million in retirement savings, they are often astounded. You can do the math for higher spending amounts.

Depending on the current present savings and age of the physician, we can usually assess if they are on the right track. It is not uncommon to talk to someone who has $1 million to $2 million saved, is spending $200,000 a year or more, and wants to retire within five years. It is our unpleasant job to inform them that they will be quite unhappy if they proceed in doing that.

So, we try to start early whenever we can, and stress to young families that they need to start earlier and save more than they expect. The fact that physician families usually don't make enough income to save much until they are in their fourth decade in addition to the commonly existing significant student debt are real headwinds toward saving enough money to retire in an expected lifestyle. It is also hard to resist enjoying the usual suddenly higher income that results when training is over.

Another common approach we use for "undersaved" physician families is to suggest working longer. This accomplishes a couple of factors that help retirement success. First, there is an income longer from which to save more. Second, their existing savings have a little more time to grow. Finally, the number of years in which their retirement funds needs to last is shorter.

Another approach we use is to suggest that they "work less, but work longer." This is usually some part time work in their prior practice (maybe no call or weekends), or perhaps working in another role like telemedicine or consulting/speaking/teaching for medically related companies. It is ideal if the working less income is enough to live comfortably on, but even if it is not, having some income allows smaller retirement savings distributions (with hopefully more growth for the remaining funds) and again, a shorter period of time in true no-earning retirement.

In any event, my point is that it is very common for physician families to underestimate just how much money they will need to live as they wish to in retirement. Wherever you are in your career, it is so important to begin to figure out your retirement savings goals. Start with the simple assessment I mentioned about income minus savings and go from there. Seek out impartial help from a financial advisor, especially if you believe having a third party will help with discipline and investments.

Steven Podnos, MD, CFP, practiced pulmonary and critical care medicine in both private practice and in the Air Force reserve for forty years. He is the founder and CEO of Wealth Care LLC, a fiduciary fee-only financial planning practice and can be reached at [email protected].