how much do doctors need to retire

How Much Do Doctors Need to Retire?

How Much Money Do Doctors Need to Retire? Monte Carlo and the 4% Rule


How much do doctors need to retire? A fair questions, and one with an easy answer.

The back of the envelope answer to the question “how much do doctors need to retire” is: 25 times their expenses. Yes, this is the inverse of the well-known 4% rule of thumb. The big question, of course, is what are expenses going to be in the future?

So, what is the slightly more nuanced answer for the question how much do doctors need to retire? What if we looked backwards and then forwards to attempt to come up with an answer?

Let’s dig in!


How Much Do Doctors Need to Retire?

The question: “Do I have Enough to Retire” is one most face at some point in life. While retirement is about much more than money, if you don’t have enough, you might not get a chance to enjoy the better parts of it! Doctors are no different than anyone else, but as this is a physician blog; how much do doctors need to retire?

Talking strictly numbers, of course, the most important number is how much to spend in retirement? After all, you can outspend any nest egg if you try hard enough! After you know how much you need, the next step is to look backwards and look forward to see if you have enough to retire.

We can look backwards (the 4% Rule) and look forwards (Monte Carlo) and determine: how much do doctors need to retire?


Looking Backwards (The 4% Rule)

I have written quite a bit about the 4% rule both in normal and early retirement. See:

The summary: if history is any guide, you can take an inflation adjusted 4% of your broadly diversified portfolio and not run out of money over 30 years. This is the basic conclusion of the 4% Rule as to how much doctors need to retire. To get to your retirement number: multiply your annual expenses by 25.

I say this is looking backwards because it uses historical returns. We know the past: stock, bond and cash returns, as well as inflation, are known. Looking backwards informs us: over 30-year rolling periods of time, what initial withdrawal rate almost never fails.


Looking Forward (Monte Carlo)

Monte Carlo projections are a bit like magic. Add a bit of this assumption and a side of that assumption, and the result is pretty unreliable. The only thing we know about future expectations is that we are going to be wrong!

Please understand this: Monte Carlo provides a success rate percentage that is unreliable, and completely depends on assumptions. That is, I really don’t like Monte Carlo. It is only useful as a relative, comparative tool. That is, if this is “your number,” then what does a change in one assumption do to your success odds.

What does Monte Carlo have to do with how much a physician needs to retire? Looking forward, that is, using sets of random future returns, Monte Carlo lets us run multiple iterations of possible return futures to determine how a given asset allocation performs. A dash of this and a bit of that… and you have the future!

Given how much you have now, how do possible future returns affect the percentage of times you might succeed in retirement given your current asset allocation?


Here are some references:


Next, let’s look at some examples of the 4% Rule and Monte Carlo to see how much a doctor needs to retire.


Examples: How Much Do Doctors Need to Retire?


Monte Carlo

Let’s start with a 65-year-old couple.

how much do doctors need to retire?

Above are the Monte Carlo odds that their 1.6M nest egg provides enough to retire and live to age 90.

On the left, they plan to spend $7k a month, which is an 6% withdrawal rate on the portfolio (not including non-investment assets). Odds are 95% and they will, on average, end up with $1.15M at age 90.

On the right, they plan to spend 8k a month instead; a 7.5% withdrawal rate. Odds and amount remaining are less.

Note we can make Monte Carlo Odds go from 95% all the way down to 71% just by increasing spending by 12k a year.

Understand this about Monte Carlo: you can pretty much make the odds whatever you please by small changes in spending or return assumptions over time.


Withdrawal Rate

Next, let’s look at their withdrawal rate.

how much money do doctors need to retire

Above, they have a 6% withdrawal rate after social security and pension. Yet given linear return assumptions they do just fine!

The message here is: a 6% withdrawal rate is fine as long as you are over the hump regarding sequence of returns risk. These folks have a nice social security in addition to a pension. Despite a high withdrawal rate, they have a high fundedness ratio (the amount of floor income met by stable sources of income). As they have less than 30 years to worry about; they can withdrawal more than 4% very safely!

In summary: Monte Carlo odds change drastically depending on how much you spend, and withdrawal rate can be higher than 4% if you have other stable sources of income and a short time span.

Let’s look at another example.


How Much Do Doctors Need to Retire: Second Example

Again, let’s have a look at the future with Monte Carlo and the past with the Safe withdrawal rate.

Monte Carlo Doctor Retirement

In this example, we have a 50-year-old conservative couple with a 50/50 portfolio; on the right, note they have a 58% chance of success.

Because this Monte Carlo software is built to show of the “ability” of a financial planner, look what happens when we make their portfolio broadly diversified 90/10. Odds go all the way up to 86%, and remarkably, they have 10x more money at the “end” of the plan.

“Give me your money, folks, and I’ll increase your odds of success!” Pretty good marketing tool, this Monte Carlo, eh? In summary, doctors need much less money to retire if they give it to someone who uses monte carlo!

Just by toggling the aggressiveness of the asset allocation in the program, you can vastly change Monte Carlo odds and remaining balances.


safe withdrawal doctor retirement

And look above; a 3% withdrawal rate but the Monte Carlo above is only 58?

Well here, this couple has minimal amount of social security and no pension. And they are starting at age 50 instead of the first couple starting at age 65. The withdrawal rate now seems absurdly low when you get to RMD age, but the Monte Carlo odds are very low. Here, they have low odds due to lack of stable income (pension and social security), and a length of retirement.


Summary: How much do doctors need to Retire?

In summary, Monte Carlo can be very sensitive to asset allocation (as the returns are random, but there is always an equity premium over time), to the length of the plan (it really doesn’t “like” early retirement), and to small changes in yearly funding requirements.

Withdrawal rate and the 4% rule of thumb can be off depending on type of assets and product allocation. (Product Allocation is the best mix of products and portfolio in retirement to mitigate known retirement risks)

From these examples, I hope you see retirement planning is more of an art rather than a science. Yes, there are a lot of moving parts, and they can greatly affect a doctor’s retirement “number.”

Start with understanding your expenses in retirement. This is key. After that, look at all of your assets including social security, pensions, real estate, part time work, and then understand your asset allocation, length of retirement, and sequence risk all tie in to how much a doctor needs to retire.

It is really straightforward: 25x your expenses. Or it is not!

In the end, when you ask yourself “how much do doctors need to retire,” you are going to have to take a leap of faith. Understanding the risks in retirement is important, but the best laid plans often go astray. The best advice: be prepared, and be flexible (have some wiggle room)!


Other resources for doctors to consider:

Here is a physician retirement checklist for physicians to get started!

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