I’m continuing this miniseries on the economics of medicine by focusing on the important goal every worker anxiously awaits: retirement. Let’s start off by determining what type of lifestyle we want to live when retired. I would like to believe that I would own my home outright. Whether it be in a major urban area or a retiree’s dream home in Florida, we can expect a $300,000 house. Is not unreasonable to assume that I would have to spend 5% of the value of a home each year for property taxes, insurance, and maintenance. Therefore, I should expect to spend about $1250 a month on housing.
If I want to drive a decent car when I’m retired—say, a $30,000 vehicle—I can expect to make payments of just under $600 a month. I can also add monthly payments for food, clothing, medical expenses, Internet access, and a phone bill. Because I’ve worked so hard as a doctor and want to enjoy my retirement, I will expect to spend quite a bit of money dining out and traveling for vacations.
The table below summarizes the monthly expenses I can expect in retirement:
For my particular lifestyle, I will need to earn $52,000 a year from my investments. Given that I should expect to draw no more than 4% annually from my savings, I should retire with $1.3 million in available funds for withdrawal. Since this number is after taxes, and given that I will be in a high tax bracket, I should realistically expect to retire with $2.2 million in savings.
To get to this number, let’s look at how the market has performed historically. Over the past 30 years, the S&P 500 has had an annual rate of return of just over 10%, not accounting for inflation. While there have certainly been extreme ups and downs over the past few years, the market is pretty consistent over the long term. Let’s continue to use 10% as our annual rate of return for retirement investments.
To reach $2.2 million, I would have to invest $12,000 a year for 30 years. Granted, I know very few physicians who can work for a total of 30 years outside of primary care. Many of the physicians I know try to retire after 20 years. Using this number as a timeline, I would need to invest $35,000 a year for 20 years to reach $2.2 million.
Now for the bad news. To become an attending physician, you are going to have to invest 12 years of your life and rack up $200,000 in debt just so you can begin earning a salary that most people in the United States will be ignorantly envious of. Previously, I’ve mentioned that you would have to earn more than $35,000 a year beyond your everyday living expenses so that you could pay off your student loans in 10 years. Now you are going to have to tack on another $35,000 so that you can begin saving for retirement. That’s $70,000 beyond the cost of housing, car payments, food, clothing, health insurance, life insurance, disability insurance, malpractice insurance, and car insurance.
Now for the even worse news. I want you to go to the webpage for your city’s police department. In my area, police officers need only to have earned a high school diploma and reached the age of 18. The starting salary for an officer in my area is $45,000 a year. Just think, you’ll be a resident and working twice as many hours just to make the same amount. Police officers also look forward to gaining other benefits including health Insurance and a pension. Likewise, retired military, teachers, and firefighters can enjoy many years of retirement at the government’s expense by working only a few years relative to the amount of time they will receive entitlement packages.
But let’s take this one step further. Let’s say that a police officer decides to invest $10,000 a year until he becomes old enough to draw Social Security. Assuming the 10% rate of return, he will generate $7.9 million over a 45 year period. If he decides that his pension and Social Security are enough to live on and defers withdrawing any of as investments for an additional 20 years, his total savings will increase to $53 million. And remember, you’re the doctor making the big bucks.
I worked with one veteran in the VA hospital who was retired military, retired police, and had netted himself two pensions and Social Security. He was pulling in $160,000 a year in retirement benefits. Since he was hospitalized with dementia, all of that money went to his family. Not surprisingly, his children were adamant that he be a full code so that they could continue receiving checks. The federal government was the one left with paying the health bills.