How to Estimate Retirement Savings

December 22, 2024

It’s the start of the new year, and time for a financial check-up.

I’m now 12+ months into attendingship, which feels like a good time to figure out if I’m on track to hit my financial milestones.

The plan? To complete a comprehensive financial boot-camp in 2025, starting with retirement savings.

Here’s how I’m doing it, based on everything I’ve read from a half-dozen personal finance books including I Will Teach You to Be Rich, The White Coat Investor, and The White Coat Investor's Financial Bootcamp.

Step 1: Estimate needed retirement expenses

First, I estimated annual retirement expenses using some back-of-the-napkin math. A common rule of thumb is that retirees need 70-80% of their pre-retirement income during retirement. For high earners, like physicians, the true number is likely much less. Of course, this depends on individual circumstances, but wanting to be conservative, I opted for the higher estimate. After all, it’s easier to relax savings later in life (or just retire sooner) than vice versa.

So, using a median salary of $350,000, that’s $350,000 x 0.08 = $280,000 in annual retirement expenses.

Step 2: Estimate needed retirement savings

Once we have the estimated retirement expenses, we can calculate the retirement savings needed to bankroll that lifestyle. Another common rule of thumb is that retirees can withdraw 4% of their savings safely, without lessening the principal. This is referred to as the “4% rule.” In other words, someone with $1,000,000 in savings could withdraw $40,000 per year without being at risk of running out of money.

So, to fund annual retirement expenses of $280,000, we would need $280,000 / 0.04 = $7,000,000.

Step 3: Calculate anticipated retirement savings

Now that we know how much money we will need in retirement to fund the lifestyle that we want, it's time to figure out if we’re on track. For this, I used the savings calculator at nerdwallet.com. The calculator assumes an initial balance of $250,000, with annual contributions of $50,000 compounded annually at 7% interest over 30 years. These are numbers based on my current status quo, but if you're following along, adjust with your own!

Based on this, if I continued with my current monthly contributions, I would have $7,265,736.99 at 65 years of age. Not bad. But this assumes a 15% savings rate, whereas most physician-focused personal finance books recommend 20%. So, if we increase our annual savings to $70,000 (20%), we get the following:

That’s a difference of around $2,000,000, which would mean an extra $80,000 per year in retirement allowance or, alternatively, the ability to retire 4-5 years earlier.

Conclusions