Question: I am 55 years old and would like to retire. I just finished paying off my house and have $1.5 million in my retirement accounts. Is that enough?

Unfortunately, more information is required to find the correct answer to this question. Although there are many rules of thumb, such as you need 20 times your annual income to retire, these rules are useless for the typical American and even worse for a physician. Twenty times a typical emergency physician income of $275,000 is $5.5 million, far more than the vast majority of physicians need to enjoy a wonderful retirement. The best way to figure out how large your nest egg needs to be in order to retire without having to worry about ever running out of money is to first determine your expenses in retirement and then determine if you have the resources to pay those expenses.

The Good News

The best estimate of your expenses in retirement is what you are spending just before retirement along with some common-sense adjustments. The good news for physicians is that the majority of their expenses may completely disappear upon reaching financial independence and retiring. Consider Table 1, an example of a physician making $300,000 and his pre-retirement and post-retirement expenses.

This particular physician finds that he only needs $68,492 per year, or 23 percent of his pre-retirement income, to maintain his standard of living. However, that 23 percent is by no means a rule of thumb and is highly individualized. You may find you only need 20 percent of your pre-retirement income, or perhaps you may need as much as 50 percent. However, it is unlikely that you will need the 70 to 80 percent that some financial planners estimate once you subtract your savings, insurance costs, payroll taxes, mortgage payments, and expenses related to your children.

The Bad News

There is also some bad news associated with retirement planning. Financial professionals use a concept called the safe withdrawal rate, which is the amount of money you can withdraw from a reasonable portfolio each year, adjusted to inflation, while expecting that portfolio to last throughout your retirement. Although this number varies slightly over time and no one can predict future market returns, most experts agree the number is somewhere around 4 percent. That means a portfolio of $1 million can safely support an income of only about $40,000 per year, adjusted upward each year for inflation. Using this number, you can quickly see that an annual income of $120,000 will require a portfolio of $3 million. To make matters worse, if all or most of that portfolio is in tax-deferred accounts like 401(k)s and traditional IRAs, the after-tax income will be even lower.

Other Income Sources

Other sources of income decrease the expenses your portfolio must pay for. The most common of these is Social Security. The Social Security Administration sends you a statement each year with an estimate of the income you will receive at your full retirement age. There are a few things to keep in mind when evaluating that figure. First, it assumes you will continue working until your full retirement age. If you retire early, such as at age 55, that number may be significantly lower. Social Security averages the highest 35 years of earnings in determining your payment. If you only work for 25 years, Social Security will use 10 years’ worth of $0 earnings to determine your payment.

Retirement rules of thumb say you need 20 times your annual income to retire. Twenty times a typical emergency physician income of $275,000 is $5.5 million, far more than the vast majority of physicians need to enjoy a wonderful retirement.

Second, delaying Social Security payments to age 70 is one of the best ways to insure against your own longevity. But if you plan on retiring at 50 or even 60, you will need a plan to bridge the gap to Social Security at age 70 (not to mention Medicare at age 65).