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Personal finance isn’t taught in most medical schools or residency training programs, so it’s no wonder many doctors don’t start saving sooner. Here’s some back-of-the-napkin math on how much you need to save each year to reach your retirement goals. By Jimmy Turner, MD

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I’d like to say it is an uncommon story, but it happens all the time: I am walking down the hall at my hospital when someone comes up to me and says, “Hey, Jimmy! Guess what I just did. I started maxing out my 403B. Isn’t that great?”

My reaction is always the same. First, I give them a high-five and congratulate them on their accomplishment, because investing at any age is a “win” worth celebrating. Then, my analytical mind quietly determines how long they’ve been out of training, and how much money they’ve lost by not investing sooner. The answer is usually a lot — there is a reason that “time in the market” is one of the keys to financial success.

In this article, I hope to help you understand the importance of getting started early. How much should a doctor save each year to retire at the age you want? To answer this question, we will discuss a practical framework to figure out if your annual savings rate is sufficient to reach your goals. 

Note: This is Part 1 of a two-part series on investing. In Part 1, we will discuss how to determine your annual savings rate. In Part 2, we will discuss what that annual savings rate should be composed of based on investment studies. 

The Three Variables for Your Annual Savings Rate

You can’t make a game plan if you don’t know how to identify when you’ve “won the game.” Said differently, if you want to get to where you are going, you need to determine the final destination first.  Here are the three variables that will help you form your game plan and get to your destination of choice:

1. How Much Will You Spend in Retirement?

The first step in this journey is to determine how much money you need annually to live the lifestyle you want in retirement. Once you figure this out, you will be able to determine your Financial Independence (FI) number. 

Your FI number can be determined by multiplying your anticipated annual spending in retirement by 25, which is based on findings from the Trinity Study and “the four % rule” that came out of it. Essentially, the 4% rule states that if you want a 100% chance that your retirement income will last 30 years, you can withdraw 4% of your nest egg each year - assuming your asset allocation is reasonable. 

For example, if you’ve saved $3 million, this will allow you to take out $120,000 each year, and rest reliably assured it will last 30 years. If you multiply $120,000 per year by 25X, this amounts to $3 million. In other words, the 4% rule and the 25X rule are reciprocal. (It should be noted, however, that if you plan to retire early, and need the money to last let’s say 40 years, then you might consider multiplying your annual spending by 30X in lieu of the traditional 25X multiplier.)

One way to calculate your anticipated annual spending in retirement is to take the last three months of your credit card or bank statements and determine how much you currently spend in a 12-month period. Then, subtract all of the costs that you no longer expect to carry into retirement (e.g., kid’s college savings, mortgage/auto loan payments, saving for retirement). 

2. Figure Out Your Timeline

The next variable to consider is the age by which you want to be financially independent. This is important because it helps determine how long you have to accomplish your goal. 

Your timeline can drastically impact your savings rate, which speaks to the importance of starting to save early. For example, if you want to be financially independent by age 60 you will not need to save as much money each year as you would if you wanted to be financially independent 10 years earlier at age 50. 

A simple way to determine your timeline is to ask yourself, “At what age would I like to be able to practice medicine because I want to and not because I have to due to financial constraints?” We will all want this at some point, the question is by what age do you want to be financially independent, which is highly variable and dependent on your life goals.

3. Gather Your Savings Information

The final variable you need in this equation is to determine what you’ve already accumulated. Make sure to include everything. Common accounts include 401K/403B, 457 plans, Health Savings Accounts (HSA), cash balance plans, your taxable brokerage account, and any other retirement accounts you have available to you. What is the total amount you have invested for retirement when everything is included? Write it down.

OK, So…How Much Money Do I Need to Save?

Now that we have our three variables, it is time to punch some numbers into a financial calculator (this calculator is my favorite) to determine your annual savings rate based on the three variables you’ve just determined.

To walk us through this, we will use Dr. Smith, a fictional practicing anesthesiologist.

Let’s say that Dr. Smith would like to have $10,000 per month to spend in retirement. She also wants to retire early at age of 55. Using a 30X multiplier given her early retirement means her financial independence number is $3.6 million. Further, we are going to assume that Dr. Smith is 37 years old and currently has $250,000 saved for retirement.

Utilizing our handy dandy calculator, we are going to start with the end goal of $3.6 million in mind. I am going to punch in Dr. Smith’s current age, anticipated retirement age, and current savings. Then, I’m going to backwards engineer her annual savings rate (which should include any retirement matching) until we get to her goal of $3.6 million. 

Starting with 20% of Our Income

Not sure where to start? I suggest plugging in 20% of your gross income. So, I’m going to start with $80,000 based on Dr. Smith’s income of $400,000. Let’s see where that gets us. Here are the inputs (top) and results (bottom):

From this, you’ll see that by saving $80,000 per year based on the assumptions above at age 55 Dr. Smith will have accumulated $2.85 million (highlighted in red). This is significantly lower than Dr. Smith’s FI number of $3.6 million. So, now we will increase her annual savings rate in the calculator until we get to Dr. Smith’s goal of $3.6 million.

After gradually increasing the number, it was determined that Dr. Smith would need to save ~$105,000 annually. To Dr. Smith, this may seem like a reasonable, or unreasonable number. It is about 25% of her gross income. This is definitely within the realm of possibility, but still, she may bristle at this number. 

If Dr. Smith doesn’t like this number, this brings into view one of three possibilities. She can (1) increase her annual savings rate, (2) plan to spend less money in retirement, or (3) aim to reach financial independence later to give her more time to get to her goal. 

Note: You may notice that I assume a 6% rate of return. This is because I am taking into account inflation (2% rate) and subtracting this from an anticipated 8% rate of return. If you’d like to be more conservative, the numbers can be adjusted accordingly.

What If Dr. Smith Had a Time Machine?
Let’s say that Dr. Smith had a time machine and could go back to the age of 30 when she finished their residency. With just seven additional years of savings, how much would this lower her annual savings rate assuming she started with nothing saved for retirement?

The answer is ~$75,000. Said differently, by starting 7 years earlier, Dr. Smith will be required to save $30,000 less each year. The too long; didn’t read is that starting to invest earlier is paramount to success. Again, time in the market is a key principle when it comes to investing. 

Bringing It Home

In this article, we covered how to determine your annual savings rate. By now, my hope is that you are either encouraged that you are saving enough to get to your goals, or that this has now caused you to reflect on how you might make changes if they are necessary. 

In the next part of this series, we will take the next step and determine how to invest utilizing your annual savings rate. What do the studies say about best investing practices? Are there certain investing strategies that have been proven more effective than others? We will discuss all of this and more next time. For now, go determine your current annual savings rate. That way you can be walking the halls where you work with confidence and your head held high knowing that you are on the way to reaching your financial goals. Now that would garner an even bigger high-five! 

Dr. Jimmy Turner is a practicing academic anesthesiologist at Wake Forest School of Medicine. He is also the author of "The Physician Philosopher’s Guide to Personal Finance," host of the "Money Meets Medicine" podcast, and Chief Medical Officer and co-founder of Attend, a comprehensive financial platform for doctors, by doctors that will launch in the summer/fall of 2023.

The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan. 

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