Q: I’m just a couple of years away from retirement. How do I know if I’ve saved enough?
A: This is probably the number one question among physicians approaching retirement, and depending on whom you ask, you could get 10 different answers. Unfortunately, there is no one-size-fits-all formula, and too many online tools use generalizations that fail to take into account your unique situation.
There is not a textbook definition of sufficient retirement income, so it’s important to ensure you have enough money saved to enjoy retirement in the manner you choose. A variety of factors to consider include the following:
Retirement income needs. You can find various “rules of thumb” indicating you need anywhere from 60% to more than 100% of your pre-retirement income. Look carefully at your current expenses and how you plan to spend your retirement before deciding how much you'll need. If you pay off your mortgage, stay in good health, live in a city with a low cost of living, and engage in inexpensive hobbies, then you might get by with less than 100% of your working income.
However, if you plan to travel extensively, need to pay for health insurance, and still maintain significant debt levels, even 100% of your income may not be enough. Additionally, make sure to factor in any additional major purchases you plan to make in retirement. Examining your current and anticipated expenses will help you hone in on a figure.
Retirement age. Many physicians would like to retire before age 65, but that typically requires significant personal savings. You want to be sure your retirement savings and other income sources, such as Social Security, will support you for what could be a very lengthy retirement. Reducing or extending your retirement age by a couple of years can significantly affect the ultimate amount you need.
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Life expectancy. Most people take into account the average life expectancy when estimating the length of their retirement. However, an average life expectancy means you have a 50% chance of living beyond that age. To ensure you don’t run out of retirement income, it's typically better to be conservative and assume you'll live at least a few years past the average. When deciding how many years to add, consider your own health as well as how long other family members have lived.
Rate of return. The rate of return on your investments plays a huge role in determining the amount of savings you will have at retirement. At a minimum, make sure your expectations are based on average returns over a very long period. Again, it’s safer to be more conservative and assume a rate of return lower than long-term averages.