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Top-down and bottom-up retiremet planning

Top-down retirement planning is accumulating enough wealth so that you can’t possibly run out of money during your retirement. It tends to rely on you retiring later in life and maximizing all your retirement options. It’s a well-tested system and something other financial experts such as the White Coat Investor would recommend.

Bottom-up retirement planning is optimizing every aspect of your retired life and figuring out exactly how much in investments and how much in earned income you need. Then you set out to meet that need in multiple ways with various levels of security. This method is less structured and though not as mainstream for medical professionals, a more haphazard version of this is how most Americans plan for their retirement.

I advocate the bottom-up approach because it’s more intuitive and requires a lot less physical work on the part of the medical professional.


Top-down retirement planning

If you have managed to save $10M for retirement, it’s hard to run out of money even if you have another 30 years before you die. This is the advantage of top-down retirement planning – plenty of money to last you for a long time.

The downside to top-down retirement planning is that you often have to work far longer, invest more conservatively, and might have your boat rocked a little more if the markets misbehave.

The margins might seem more favorable because you’ll likely end up with far more money than you’ll need. But you’ll have a protracted path to getting to your destination.

Though you might feel itchy in your pants when you see your net worth go from $10M to $7M in a bear market, you’ll eventually die with a net worth of $12M.

The way top-down retirement planning works is that you work for as long as possible and max out your retirement contributions. You spend on the lifestyle you desire until you are in your 50’s and have made a dent in your student loans. That’s when you hustle even harder and direct a good portion of your disposable income towards your retirement.


Bottom-up retirement planning

The main focus of bottom-up retirement planning is focusing on the sustainability of the entire system. You’re planning for your ideal lifestyle rather than trying to overshoot by multiple standards of deviation.

Cutting your expenses is at the core of this kind of retirement planning. With less money spent, you have a cheaper overhead to support in the future. Planning for $3k/month is so much easier than $10k.

Since debt keeps you locked into a cycle of money-making and payment-making, in the bottom up retirement planning approach the goal is to get rid of debt as soon as possible.

Working just to maximize your income is inefficient. You don’t know if you might burn out, you don’t know what life disasters might be in store for you. Bottom-up’s goal is to earn the best income, doing the most desirable work, for as long as possible.

Because you’re working from the bottom up, many hobbies can become part of the revenue stream for your household. You might rent a spare bedroom or write a book on the side. You might sell some instructional material or teach at the community college on weekends. You might consult for a medical group or do some telemedicine while enjoying some travel overseas.

A turning point occurs when you are doing so many different things which you enjoy, all of which earn you just a bit of money. At this point you start having enough income to cover your overhead and you can drop out of the rat race.

You just continue doing what you enjoy, whatever combination of things it might be. The bottom-up approach relies on you earning an income while being productive in your society. Hopefully you’ll find things to do which will earn you money well into your later years.


Pitfalls of maximizing income

As medical professionals it feels easier to outearn our poor spending habits. In a financial pinch it’s easier to work a little more to cover the spending with extra income. Another workaholic is born.

The spending then keeps getting more bloated. We justify going into more debt and taking more luxurious vacations. It’s also a habit which imprints on the kittens and puppies we birth.

While cruising into retirement, the spending habit remains and planning for it becomes crucial. Which means that by default many of us find it easier to adopt the top-down retirement planning model.

The second layer of risk is if something happens in our lives such as a health failure, a family disaster, an addiction problem, a lawsuit, or some other career trap. This can create a ton of stress because the decreased income can majorly shake our lifestyles.


Current retirement paradigm

Media articles are written by those who financially benefit from the dissemination of such information. Professional advice can be biased in such ways as well.

Researching how much you need for retirement as a medical professional, it’s common to come across $5M-10M numbers. Plenty of retirement calculators online will steer you in this direction.

The harder you work, the more patients you see, the longer you work, the richer hospitals, banks, and debt institutions will become. For someone with a potential lifetime income of $10M-30M, you are a goldmine for many systems.

Even some financial advisors will benefit from you earning more and saving far in excess of what you need for retirement. This is particularly common in the asset under management (AUM) model.


Retiring poor

There are 55-year-old doctors out there who are worried about retiring poor. Each has their own reason but, man, that’s a terrible feeling to have.

Avoiding retiring poor doesn’t need to be complicated but it requires planning. I will continue to advocate the bottom-up approach for those who can detach themselves from the expensive lifestyle of a physician.

Debt and risk are the biggest hurdles for the medical professional to conquer. After that it’s curbing spending. Hopefully the shit I talk about here will give you some strategies to address each of these.

One reply on “Top-down and bottom-up retiremet planning”

I probably have employed a hybrid of the top down and bottom up models. I am probably going to work several years more then I need to to pad my nest egg. I also have eliminated all my debt already and have done various forms of arbitrage (most notable geoarbitrage) to keep my living expenses to a very small fraction of my income.

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