The economics of medicine: retirement
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.
(I got my calculations from mortgage calculator and money chimp.)
Half MD.com 
Paul Arkay said,
May 5, 2009 at 4:25 pm
Where is a police officer going to get $10,000 a year? His costs of living are the same as a doctor. Seriously, if anyone can invest 22% of their income, their still living at home with their mother. If you want to be seriously taken, try to figure out that we’re all in the same boat. No one can save for retirement now, we are all getting screwed. The only difference is that I will never make a six figure income.
Half M.D.: That’s your choice to spend rather than invest. The Chinese are typically saving >30% of their income. I don’t see why a police officer at the age of 19 who makes double what I do now couldn’t put back a few dollars.
Michael Rack, MD said,
May 5, 2009 at 5:43 pm
You mention social security for the police officer, but I don’t see you calculating in social security for your retirement income.
Half M.D.: I left it out because I want to drive home the point that we shouldn’t depend on social security when we retire. And given the direction that it’s heading, I wouldn’t count on its continued existence when we retire.
Miami_med said,
May 5, 2009 at 7:38 pm
Also, attempting to calculate retirement needs without accounting for inflation is sort of like a first semester physics problem with a massless elephant on a frictionless surface. You are correct, that the time value of money is huge in terms of accumulating a substantial nest egg, and waiting to save until one’s thirties (and starting six figures in the hole at that) is severely detrimental in saving for retirement.
Half M.D.: Even with inflation, the S&P 500 has had an annual rate of return > 6%. Given that salaries rise with inflation, I’m not too concerned about the final numbers. The calculations show that saving a little early can have huge pay offs for retirement later. They also show that taking a middle class job out of high school with no debt may lead to greater net lifetime income than taking a higher paying job years later with lots of educational debt.
DoubleA said,
May 7, 2009 at 10:48 am
I think you’ve underestimated the cost of medical care when you’re retired. If you develop a chronic condition, you’re probably staring at a couple hundred a month in prescription costs alone. If this is a budget, I think you should expect to prepare for a major operation or two. Out of pocket expenses can easily reach into the 10s of thousands of dollars.
By the way, great blog
Half M.D.: Good point. You should always plan to spend more, rather than less.
Clinton said,
May 11, 2009 at 5:09 am
I like your economics of medicine discussion. I agree with a lot of what you have to say.
Here’s my take on the financial discussion — which is more of a philosophical point, since I don’t have the same number-crunching savvy as you.
What is your goal in life: do you want to acquire things or experiences?
Becoming a doctor may not get you very many “things” compared to other graduate-level programs, but it certainly gives you a LOT of opportunities to experience unique (and often very private) things that others are not privy to. If you do research, you’ll have plenty of opportunities to travel for conferences.
When you account for private schools, piano lessons, etc… these are all the sorts of experiences that you can afford to give to your children as a doctor! Not many salaried workers could do the same. Especially if they are putting away >30% of their income so they can have a cushier retirement package than a (re)tired physician.
emma said,
June 2, 2009 at 9:00 am
IF one is not saving at least 50% of his income over the course of first job (hopefully during high school) thru age 50, and acruing ZERO debt, it ain’t gonna happen.
and YES, it CAN be done.
one day you wake up and discover that LESS has most DEFINITELY become MORE.
emma said,
June 2, 2009 at 9:01 am
oh — and NO — not living with one’s mother. the only way you will gain such experience is when the folks say, “See ya later, old buddy.”