One of the most common questions graduating residents ask is how much they should be saving for retirement. They are about to grow into a salary 3-6x their resident salary, and they know they need to start saving.
I’m a big proponent of the financial fellowship, where you spend the first few years of your post-residency life living as you did as a resident, or very close to it. You can often pay off your student loans in that short period of time. By saving a lot of money early in your career, you can afford to save less later. The savings race should be treated as a sprint, not a marathon.
But for simplicity, let’s see if we can calculate a single savings rate (percentage of gross income) that will be suitable for a typical physician who has student loans, doesn’t desire to retire early, and wants to be able to achieve his or her goals even with below-market returns.
Using my simple retirement calculator, let’s plug in the numbers for our newly-graduated resident:
- Starting Net Worth: -$200,000
- Gross Income: $300,000
- Net Income: $210,000
- Savings Rate: ??? This is what we want to calculate
- Spending: Whatever is left over
- Market Returns: 2% (to be conservative)
- Retirement Age: 65
The Typical Physician
For this default scenario, this physician will need a savings rate of 25% ($75,000/$300,000) in order to retire by age 65, assuming a 2% market return.
The High-Paid Specialist
What about a high-paid specialist making $500,000 a year? This physician will need a savings rate of 23% ($115,000/$500,000).
The Primary Care Physician
And what about a primary care physician making $200,000 a year? This physician will need a savings rate of 25% ($50,000/$200,000).
Saving 25% of gross income throughout your career is reasonable for most physicians across the income spectrum. Unfortunately, many physicians save far less than this, and the savings rate for all Americans hovers around 3.80%. A 4% savings rate is not enough for retirement, especially for physicians, who have a lifestyle that would far exceed what could be supported by Social Security. Most physicians are also not in line for a pension, either. With such a low savings rate, they will either need to work longer, cut back their spending in retirement, or hope for above-average returns in order to have enough money for retirement.
Certainly, you don’t need to save at a constant rate of 25% year after year. Ideally, you would frontload your savings early in your career, and be able to save less or retire early later in your career.
But a savings rate of 25% of gross income will put most physicians on track for retirement in their 60s, even in a conservative market returns scenario. If the market has average returns, a savings rate of 25% of gross income will allow a physician to be financially independent in their late 50s, allowing them to retire early if they choose to do so.
Run the numbers yourself
Everyone’s situation is different, so plug in your numbers into the calculator below and see what savings rate is best for you.
(If you’re reading this on your phone, it’s best to turn your phone horizontally and view the spreadsheet in landscape mode.)
If you want to play with this spreadsheet offline, I can send you an e-mail so you can download it. You’ll also get new post notifications and the WSP newsletter.
What do you think? What is your savings rate? Do you think a constant 25% savings rate is too low, too high, or just right for a graduating resident?
I think 25 is good point for most people. Some will be far above, which is definitely achievable. But not all higher income physicians necessarily want to retire early. For them twenty five seems to be a good compromise of ensuring they can retire and saving to the point that they get discouraged and stop saving. It’s a balancing act with different tipping points based on the person but with a fairly hard lower bound due to health statistically somewhere around age sixty five.
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I front loaded my savings and work has been optional for me for some time. Your 60 year old self will thank you.
I have saved 25 to 40 percent since I started tracking it in 2014. Not too bad but I wish I could flex my muscles and save more. If I did I think my wife would give me a friend face emoji. You only live once right?
Happy wife, happy life.
Let’s hope that we don’t have a 2% return on the stock market. That would be like we had only invested in treasuries our entire lives
The assumptions are 2% after inflation and taxes, so not necessarily 2% nominal returns.
I was playing with the spreadsheet. Starting at age 31 with net worth -70K. Making 300K and spending 140K leads to retiring at age 60 with 3.5M. Knock down the spending by only 20K. That is 10K/mo or 120K. Then retirement can be at age 53 with 3M. Wow. What a difference a little saving makes, eh?
A little saving, as well as a little less spending as well!
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