I had another great urgent care shift the other day. I hadn’t done a 10-hour shift in quite a long time, but to keep up my skill, it’s good that I do a few of these occasionally. During this shift, I met a new physician colleague in her early 50s who told me that she was aiming for early retirement in 4 years. However, because of the 80% retirement rule that she was following at the behest of her financial adviser, she didn’t think she would make it.
The 80% Retirement Rule
Many of us are familiar with the 80% retirement rule, it’s the concept that every big brokerage firm tries to sell doctors on. It states that to retire comfortably, we should secure 80% of our pre-retirement income for the years after retirement.
There is plenty of data backing up the 80% retirement rule. The average consumer, regardless of their income, reports the highest satisfaction when their spending is somewhere within that 80% of their pre-retirement income.
If you are making $200k gross, then you can retire once you can build up enough assets to bring in $160k/year.
If you are making $450k/year then you will need $360k/year.
If you are making $50,000/year during your working years, then you aim for $40,000 gross during retirement.
This advice is incredibly lucrative for brokerage houses because it means that high-earning professionals will have to park most of their income in retirement accounts. Because of the current model where brokerages charge a certain percentage of your assets yearly, the more you hold with them, the richer they get.
Justifying The 80 Percent Rule
The 80% retirement rule could make sense because many people use external factors to make their decisions in life. They spend based on how much they make. They spend to the limit of their income.
When a physician household makes $300k after taxes, they will oftentimes own a multimillion-dollar home, drive $100k+ automobiles and sport exotic moccasins which they can wear on expensive vacations. With such lifestyles, it’s likely that this household will need well above $200k/year to satisfy their need for luxury.
This is a good time to mention that there is nothing wrong with wanting such luxuries. But come on, a Bentley with calfskin leather… that’s over the top and not sustainable. Some will need to make such purchases at some point in their lives to realize their futility.
It’s never too late to recognize that excess spending forces healthcare professionals to work harder and longer. Many resources will have to be depleted to support such a luxurious lifestyle, and it’s hard to give back much to our community when most of our time and money is spent coming up with the next expression of richness.
There are plenty of retirement myths out there. However, some financial advisers may use fear tactics to drive their point home – not always out of ill intention.
Some advisers will instill fear by discussing healthcare costs and inflation. These 2 are perhaps the most costly of retirement factors. And though healthcare professionals should know better, they, too fear their healthcare costs when they are no longer covered by a workplace health insurance plan.
I have talked about inflation in other posts and find it to be a manipulative concept more so than a real phenomenon. Inflation is like aging – I can age gracefully or become decrepit. And though there is a chance I may lose the genetic lottery, I can drastically offset any deleterious effects by adjusting my lifestyle.
My Conversation With Dr. M
Dr. M’s income is around $300k a year, so she aims to have $240k coming in starting at age 55 every year, before taxes, until the day she dies. Her parents have lived close to 90, and she is incredibly healthy.
Dr. M has no offspring and no partner.
By age 65, she will receive a pension which will replace 50% of her income, she will need another $90k/year for another 25+ years to meet her $240k/year goal. According to her financial adviser, she will need nearly $3 million, her pension, and her social security income.
She has been practicing medicine for over 2 decades, and though she loves her profession, she falls into that common category of doctors who wouldn’t mind not having to work.
She expressed that she is incredibly jealous that I was able to retire from medicine.
How much money does she need to retire?
I’m only using her example to make a point. I have no idea how much she actually needs to retire.
We had a great conversation about the concept of retirement, how her money grows in investment accounts (in the long run), and the fact that it’s unlikely that she will stop working completely, meaning she likely won’t even touch her retirement accounts.
You can see such a characteristic in some people – they are producers of resourceful assets, not impetuous consumers.
For nearly a decade, she has been keeping a savings account with enough to cover the entire balance of her mortgage (I love this idea). She mentioned that this gives her peace of mind and is something her financial adviser approves of. This was to protect her home in case of a job loss.
Her investments have done quite well over the years, and she is invested in fairly low-risk, low-fee securities. It’s a shame she has had that amount of cash sitting on the sidelines collecting dust.
And though she hasn’t lost much in terms of inflation the past few years, she has lost out on some healthy investment returns.
However, the feeling of safety this money gives her and the low-interest rates on her mortgage, coupled with the ability to write off some of the interest payments against her income, is likely far more powerful than any gains she could have had with that money invested.
How Dr. M envisions her retirement
Ideally, she wants to spend more time on her main hobby, which she enjoys only 1x a week right now. The rest of the time, she wants to travel since she is single and has friends all over the world.
We didn’t delve into her traveling habits which I think could be a book’s worth of discussion in itself.
She doesn’t want to forget her skills and would like to work a bit in her specialty after retirement, here and there, without having to do the overnight shifts. She could also see herself volunteering her clinical knowledge, but she enjoys working for Kaiser Permanente.
What about the fear of job loss?
Let’s say she got fired today; what would happen? Well, she’d get another job because she is a doctor, so that fear is unrealistic. I have a post brewing on the security of jobs that healthcare professionals get to enjoy – it’s incredibly understated.
If she got fired for terrible misconduct, which would make her less employable, then she could earn a bit of income teaching the hobby which she enjoys – she agreed that she’d not only enjoy that but that there is a marketplace for it as well.
If she got severely ill and disabled, then she could access her retirement accounts early, and likely qualify for State disability as well as her workplace’s group policy disability.
In summary, it’s healthy to have a bit of worry about the unknown such as job loss, major illness, inflation and disability. However, she has enough contingencies built in that it wouldn’t make much sense in her case to worry about such things.
Dr. M could retire today
We touched on the fact that she could retire today based on her numbers. It was such a shocking concept for her that she had to shake the idea out of her head for a moment – we both cracked up because it’s such a natural reaction when something you’ve been wanting has been there all along.
The reality likely is that she won’t just pull the plug on work. No sudden and immediate retirement for her.
I didn’t tell her she could retire today. I have no business making such a claim. We just did some math on paper after assessing her realistic spending needs and accounting for her likely income in retirement. Every scenario we worked through ended in her favor.
As a specialist, her hourly income is much higher than mine. Working even a few hours a month would cover her living expenses in total. She has enough savings to use either to pay down her mortgage or to use to travel the world for a long time. She even has enough equity in her home that she could capitalize on a reverse mortgage in case her worst fears were realized.
Dr. M will need to spend some more time thinking about her options. She has one expensive habit that she worries she will need to cut back on if she decides to retire. This may or may not be true – it depends on whether she is willing to support that expenditure with an occasional shift. I have a feeling that in time she would stop spending less in that category if she could have more free time in return.
What’s The Right Retirement Rule?
The online personal finance community likes some permutation of the 4% rule, which is based on the expected returns of passive, low-cost securities investments.
Some may not realize that whenever a system is “discovered” by the consumer to derive some financial benefit, it will soon get exploited by privy companies. Most potential profit margins will be sequestered through the legislature or financial transactions.
The right retirement rule is to minimize your dependency on income, decrease your need for expenses to derive pleasure from life, and create multiple potential sources of income.
Dr. M could decrease her reliance on her income by recognizing the power of her passive income and her ability to adjust her spending. She also could try to pursue her ability to earn income by teaching the hobby she practices.
One thing is for sure, in a country such as the USA, there will always be inexpensive access to amazing entertainment, healthy food, safe living arrangements, education and healthcare.
I can live in a safe neighborhood with minimal pollution, enjoy clean water, express myself in almost any way I choose, and have access to amazing food, electricity, free libraries, and top-notch healthcare for around $1,000/month. Feel free to disagree but not only do many college students live such a lifestyle but so do my parents.
The Conundrum For The Financial Adviser
If you are tasked with ensuring that your client’s portfolio will see them through their retirement without any glitches, you have your work cut out for you. You have to consider no less than 20 different risks (pdf) which your client’s portfolio may encounter, including:
- inflation risk
- health expense risk
- timing risk
- public policy risk
- sequence of return risk
- market risk
- excess withdrawal risk
The financial adviser has to build so many different levels of return into the portfolio that it can be daunting. Aiming beyond the target income needs is the best way to ensure success.
Don’t get it twisted. That’s no cheap price to pay for the client. To generate more retirement income, you will need to set more aside, meaning you have to work more, earn more, risk more and pay more taxes.
The Solution To Avoid Oversaving
If the client is willing to take on extra risk and control their consumer behavior, it will create quite a bit of safety within the retirement plan.
I oversaved for my retirement. It’s 2022 as of this update and I have more than enough money in my net worth. I’ll likely never access most of it.
At worst, the client would have to go to work for a few months, maybe even a few years during retirement. Likely, never more than a few hours a month if they are healthcare professionals.
Curbing our consumer behavior is one of the most potent skills you can acquire during your working years. We are raised in this society to spend money to acquire solutions to certain problems. It not only supposedly stimulates the economy, but it’s patriotic. This is quite obvious when watching an advertisement where a non-existent problem is created and a solution is offered for sale.