PTFO: Long-Term Goals and Initial Retirement Planning
In my last PTFO post, I talked a bit about budgeting as well as establishing an emergency fund and paying off my credit card. These were some of the short-term goals I wanted to knock out as soon as I could after graduating from residency. I also came up with a plan to pay off my student loans within five years, which is more of an intermediate goal. For this post, I wanted to talk about long-term goals and specifically focus on retirement planning.
The first step I took was to learn about the retirement savings options available to me. My physician group offers a 401k profit sharing plan through Charles Schwab. I learned that the plan allows me to save up to $53k a year pre-tax. I also learned about the various investment options offered through the plan. I took the time to learn about basic investment strategy (index fund investing, asset allocation, minimizing fees) so that I could manage my own account rather than pay someone else to do it for me. Given my income I could not contribute to a Roth IRA directly, so I learned about the backdoor strategy. Additionally, I have access to an HSA account as well as a defined benefit plan, which I’m not yet eligible for.
Financial Independence and the Magic Number
After gathering all of the above information, I figured out that I personally could save up to $61,850 a year for retirement using my available tax-advantaged accounts – $53k for the 401k, $5,500 for the IRA, and $3,350 for the HSA. Armed with this information, I wanted to figure out how long it would take for Random Gal and I to be able to retire. I first needed to figure out our magic retirement number. In other words, I needed to calculate the nest egg that would cover our living expenses for the rest of our lives. Most people in personal finance use the 4% rule to estimate the target amount for retirement. The “4% rule” is essentially a safe withdrawal rate that, if used, gives your retirement portfolio a good chance of lasting 30 years. You can even adjust the withdrawal rate for inflation and still have a good chance of your funds lasting through retirement. You can read about the origins of the 4% rule here and here. While there are some that think the 4% rule is not applicable in the current era of low interest rates, I do think that it provides a good starting point in terms of calculating your retirement nest egg. To find your number, you take your estimated annual living expenses and multiply that by 25 (or divide it by 4%). Using our rough monthly budget, I estimated that we would need about $75k pre-tax. I decided to assume a worse case scenario and did not include any potential Social Security or pension benefits into the amount. Using the 4% rule, we would need a nest egg of $1.875 million, which I then rounded up to $2 million.
Are We There Yet?
Next, I wanted to see how long it would take to get to $2 million using my potential annual retirement savings ($61,850). Using financial calculators, and futzing around with return rates, I found that it would take 20 years to reach the magic number using an annual rate of return of 5%. I would be 57 and my wife would be 53. Not terrible considering I joined the retirement savings party late at the age of 37. What’s more, I calculated that we could shave off a year if we saved an extra $500 a month, two years with an extra $1,000 a month. You get the idea… the more you save, the shorter the FI trip becomes.
It’s important to keep in mind that there are a few caveats in this post, the first being our household income. The fact that we have a dual-physician income makes aggressively attacking these goals possible. Although this is true, the underlying principles of spending less than you make, saving some percentage of your income every month, investing for the future, and paying off your debt as quickly as possible are universal. Another caveat is that I did not factor in any Social Security or pension benefits into my estimated annual retirement income needs. Will Social Security be around when I retire? Probably. Will my pension still be around? Maybe. I just didn’t want to be dependent on those incomes for my retirement. Also, I didn’t really want to work until the full retirement age of 66. I know that I am probably over-saving, but I’d rather do that than end up with a retirement shortfall. Finally, I did not include Random Gal’s retirement savings in the calculations. My wife actually has a pretty sweet pension plan, however she needs to work until she is 60 to qualify for the benefit. That would make me 64, and I just can’t picture myself working until that age. It’s reassuring to know that I won’t have to and that we should be OK if she doesn’t want to as well.
Thanks for reading what turned out to be a longer-than-intended post. In going through this exercise, it was reassuring to know that I could potentially retire early and that I wouldn’t have to work past 60. My goal is to be able to retire by the age of 55, or in 17 years. Anything earlier than that would be gravy. For my next PTFO post, I’ll give you guys an update on where I am in my PTFO journey. Until then, thanks for reading!