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, when 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 often receive a response indicating that the family is spending much less annually than they actually 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 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 based on likely retirement behavior. 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 needs to be saved to ensure there’s enough to last a lifetime without earning income from work. You have probably heard of the 4% rule, and it is indeed a good place to start, with adjustments made over time. So, we will tell a physician’s 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 $1 million for every $40,000 a year they want to spend.

It is not unusual to work with families who spend $250,000 a year and expect that lifestyle in retirement. When we tell them that they probably need at least $6 million in retirement savings, they are often astounded. You can do the math for higher spending amounts.

Depending on the physician’s current savings and age, we can usually assess whether 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 with 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 earn enough income to save much until they are in their fourth decade, in addition to the commonly existing significant student debt, is a real headwind toward saving enough money to retire on an expected lifestyle. It is also difficult to resist the sudden, higher income that usually results when training is over.

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

Another approach we use is to suggest that they "work less, but work longer." This is usually part-time work in their prior practice (maybe no call or weekends), or perhaps working in another role, such as telemedicine or consulting/speaking/teaching for medically related companies. It is ideal if the lower 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 important to begin figuring 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 adviser, especially if you believe having a third party will help with discipline and investments.

Steven Podnos, M.D., CFP, practiced pulmonary and critical care medicine in both private practice and in the Air Force reserve for 40 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].