The Concept of “Being Done” Saving for Retirement

lucidityI’ve been thinking about writing an article on the beauty of being done saving for retirement. I wonder if I came up with it on my own coincidentally or if I came across this post years ago and it left an impression on my subconscious mind.

Either way, I’m happy to share Dr. Jim Dahle’s take on what it means to be done saving for retirement and what it takes to get there.

As is his style, he uses easy-to-understand math to help you figure out what it might take for you to be done saving for retirement. What do you after that? That’s for you to decide, and perhaps that’s something I’ll address when I write a post of my own on the topic.

This post originally appeared on The White Coat Investor.

 


 

The Concept of “Being Done” Saving for Retirement

 

The idea behind this post was triggered when my cash balance/defined benefit plan limit was increased one year from $15K to $30K (thanks, actuaries!). My wife and I were adding up what we expected our tax-advantaged savings opportunities to be at that time.  Here was the total we came up with (note this was 2014):

  • $401K/Profit-sharing plan: $52K
  • Defined Benefit/Cash Balance plan: $30K
  • Backdoor Roth IRAs: $11K
  • HSA: $6,450
  • Individual 401(k) for The White Coat Investor: ~$40,000 (might be optimistic but book sales are going well)
  • 529s: $11,160 (that’s just the tax-deductible amount in my state for the three kids)

Total: $150,610

We were also considering some unique taxable investments for perhaps another $20,000, which brings the total to over $170K, more than the gross salary of some primary care doctors.

As I’ve written before in Enough is Enough, I don’t see saving/investing as a hobby to be done in its own right. It’s serious business for me. I’m saving because I plan on spending later. Spending a lot of money really isn’t that hard for us (We’re No Mr. Money Mustaches as we contemplate $83,000 in home upgrades and buying a fancier boat while planning a trip to Europe).

So while I want to be financially secure and comfortable and never worry about running out of money, I have no desire to have an estate tax problem some day.

 

Am I Done Saving?

 

While running a trail around the lake near my house, I started thinking about whether it was possible to be “done” saving for retirement. You can be done when saving for lots of goals. When you want to buy a $30,000 car, you save up $30,000 and then you’re done and you go out and buy it.

It’s a little harder for a goal out in the future. But let’s consider one, like college. Our goal was to have in a 529 the equivalent of 4 years tuition at our alma mater for each of our kids.

Well, there’s $17K in there right now for each of them. Tuition is currently $5,000 per year, so we’ve almost met that goal. But you also have to take into consideration the time value of money. If we assume we can make 5% real on that money between now and when the money is spent (8-15 years from now), then we’re anywhere from 25% to 75% overfunded already, depending on the child.

At this point, we can either stop saving, expand our goal (perhaps 4 years tuition at a more expensive school, perhaps tuition and living expenses, perhaps enough for grad/professional school etc), or take less risk with the portfolio.

 

 

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How Much is Needed to Be Done Saving for Retirement?

 

Well, let’s apply this same line of thinking to retirement. If I want to retire at age 70 with the equivalent of $2 Million in today’s dollars, how much do I need NOW (at age 39) in order to be done? Let’s assume a 5% real return. About $441,000. Well, I have more than that already saved for retirement, so I guess I’m done. Now I can spend everything I earn without fear for the next 31 years.

CMGAlternatively, I can keep saving and either live higher on the hog in retirement, take less risk with the portfolio, or retire sooner. At this point, I’m no longer saving for retirement, I’m saving for early retirement. Let’s say I’ve got $750K in retirement assets and don’t want to save anymore. At what age can I retire with $2 Million in 2014 dollars? The answer turns out to be age 60.

Truthfully, those who start early and keep the pedal to the metal throughout their careers are going to have gobs of money in retirement. Imagine, for instance, a 40-year-old with $1 Million already in retirement who saves $100K a year toward retirement then works until he’s 67.

At 5% real he’ll end up with $9.5 Million, or enough to provide a retirement income of $375,000 indexed to inflation for the rest of his life. Now I’m pretty good at spending money, but I’d have to work awfully hard to blow that much money in retirement after kids are gone, house is paid off, and retirement saving is accomplished.

Here’s a chart that demonstrates how much you need to be done. It assumes a 5% real return on your portfolio (that’s after taxes and expenses, of course) and that you need $2 Million to retire. This is all easily generated using the “present value” (PV) function in a financial calculator or your favorite spreadsheet. Don’t like my assumptions? Make your own chart. It only took a couple of minutes.

 

How Much Do You Need Now To be Done Saving?
Retirement Age
Current Age40506070
30$1,227,827$753,779$462,755$284,091
40$2,000,000$1,227,827$753,779$462,755
50$2,000,000$1,227,827$753,779
60$2,000,000$1,227,827

 

As you can see, the younger you are, or the later you plan to retire, the less you need now to be “done.” A 30-year-old who plans to retire at 70 can be done with as little as $284K. On the other hand, if you want to retire at 60 and you’re already 50, you’ll need over $1.2M stashed away before you can say you’re (probably) done.

We can also look at it a little bit differently using the “payment” (PMT) function. Let’s imagine you need $3 Million to retire and you have $500K and can average 5% real on your portfolio. How much do you need to save every year to reach your goal? Again, it depends on your current age and the age you plan to retire at.

 

How Much Do You Need To Save Each Year Given Your $500K Portfolio?
Retirement Age
Current Age40506070
30$165,487$48,197$12,027($4,100)
40$165,487$48,197$12,027
50$165,487$48,197
60$165,487

 

If you already have $500K, and you want to retire in 10 years, you need to save $165K a year. If you have 20 years, you need to save $48K per year. If you have 30 years, you need just $12K each year. If you have 40 years, you can actually take $4K out each year and still reach your goal.

 

Related: How Much Money Does a Doctor Need to Retire?

 

A Word of Caution

One issue with declaring yourself “done” saving for retirement and now spending more money is that you and your family will get used to a more extravagant lifestyle, which to maintain, means you’ll need to save more money.

DDQ$2 Million might be plenty of money given your current lifestyle, but if you then start spending $300K a year, you’re going to have a tough time transitioning to the $80K a year, plus Social Security, that you’ll get in retirement from a $2 Million portfolio.

Also, it should go without saying that you should beware of your assumptions. If you assume 5% real, and only get 4% real, or if the high returns come early and the low returns come late (the sequence of returns issue), you may need a little more. So monitor things as you go along and make adjustments.

2018 Update

 

We updated this post for 2018, just before republication at Physician on FIRE. It’s pretty interesting to go back and read it given how our income (dramatic increase), investing account structure (another 401(k) for my wife but most investments now going into taxable account), and spending (increased as noted in the “One Thing to Beware Of” prophesied) have changed over the last five years.

Are we now done saving? Probably not, but a higher percentage of what we’re saving is definitely going to be used for charitable contributions and our heirs!

 


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What do you think? Are you done saving for some of your goals? Which ones? How did you decide you were done? 

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11 comments

  • I don’t think I’ll ever be “done” since I’m pretty sure I’ll always be making money from something I’m passionate about. As long as I enjoy it and it’s how I choose to spend my time, then income from passion projects should keep padding my stash. And I get to have the retirement police on my case as well, which is nice.

    • Joe Foster

      Dave. Absolutely. Left corporate on my terms at 53, making good money. Now 2.5 years into this new life, I’m creating double the income of corporate from something for which I have more passion. Our savings was a very large percentage of Corp salary. We live off of about 10% of the income, before uncle Sam takes his share.

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  • I think I am too conservative by nature to declare I’m done until I actually pull the plug and retire from medicine completely.

    That money I plug into my retirement accounts never hits my checking account so I am not used to spending it, plus right now my living expenses are so low compared to my income that I am already throwing gobs of money into investments as is.

    I’m okay with having too much at the end because it’s not like any extra money will be thrown away, it will be given to people I love and care about and hopefully set them up for a better future.

    The big variable, as was mentioned, is your actual year to year returns. 5% real return may be spot on, or it may be way too high for the future economic outlook. A % off here or there can really impact end numbers. Of course we have the ability to adapt which is a great tool in our favor. It would be a no-brainer if I know exactly what the % real return is and plug it in, but since I don’t, I remain conservative.

  • VagabondMD

    As long as I keep earning, I plan to keep saving for retirement (or the vague unspecified future).

    1. I live in fear of not having enough.
    2. I benefit from the tax deferment, though perhaps not as much as I 🤔.

  • Lynne

    I’m with VagabondMD. I have a fear of not having enough after all, and when making retirement plans we are always working with a “best guess” forecast of market returns that are not guaranteed. Life has a way of throwing a wrench in your works when you least expect it.

    For me the other worry is health care, I am only 60 now and a lot may happen to the health insurance market before my Medicare kicks in. I’d hate to get some medical condition that insurance doesn’t adequately cover that ends up bankrupting me. I don’t want to end up like my best friend’s husband, who opted to not even try any additional treatment for his Stage IV thyroid cancer. He’s dying. A drug was approved earlier this year that might have bought him more time but it’s horrendously expensive (Tier 4), and his insurance won’t cover it. They just don’t have the $16K a month to buy this drug… yes $16,000 a month.

    Therefore even though I am FI, since I’m working part time I am fully funding my tax advantaged retirement accounts and will be investing the excess that’s left over after I do some home repairs and fund a one or two year spending account. I’m not a physician, but was making low 6 figures before I left full time work. Thankfully I happily live on far less than I make.

    • billy

      Lynne,
      Just as an aside, if its not too late for your friend, sometimes contacting the pharmaceutical company itself can lead to getting the drug for free for the pt. I know someone with a deadly cancer who wrote to Merck and they gave him Keytruda off label for free. He’s now 2 years cancer free due to it. Without it, chances are he’d be dead by now.

      • Lynne

        Thanks for this info. The manufacturer said they’d cut the cost of first month to $4,000 but after that it’s $16,000 – but that’s just their standard promotion. I’ll suggest she send the letter. She/he doesn’t have much to lose by doing so.

        That’s really great about your friend’s outcome.

  • This post had interesting timing. I just published a similar post two days ago about what happens if you have crossed the finish line and already have that amount you wanted to save in the bank. It makes a nice companion read :

    https://drcorysfawcett.com/stop-putting-money-in-your-retirement-plans/

    Dr. Cory S. Fawcett
    Prescription for Financial Success

  • Gasem

    Let’s face it you are “done” when you start deflating the portfolio.

  • JSA

    This is an interesting thought in the context of going part-time. Could someone go part-time if they have enough in their portfolio to let compounding go until retirement age, and just earn enough to meet their expenses? Would it be too risky to rely on market returns so much? Would it be risky to not make hay when you can? Or is it worth the risk for the sake of better work-life, more free time, less stress, etc.?

    • Lynne

      You bring up a good list of questions. For me, I felt staying at my FT job beyond their early retirement offer was risking getting canned anyway without the severance package, and I was burnt toast anyway, so I took it. It’s a good thing I did, since the company went on to get rid of most of their older workers and hired a whole lot of 20-somethings.

      Now without selling my house/farm I feel my retirement savings aren’t in that “can’t lose” territory, no matter what my advisor says, so I’ve opted to work part time when it’s offered and keep the farm income stream, as lousy as it is, going so that I can cover living expenses and delay any draw on retirement accounts. This year I made far above expenses, so I added another $31K to retirement accounts and $30K to cash. My goal is to hang onto 1-2 years of living expenses in cash so that if the market takes a sudden dump, I’m not drawing on accounts that have just lost a significant amount of value.

      I am less than 7 years from Social Security’s FRA, so for me I think I’m fine. Selling my farm and equipment will increase my total savings by about 50%, so when that happens I feel there is no reason to have to work at all. Those that retire far younger and still have dependent kids and/or debt should have a pretty fat nest egg in order to be comfortable weathering any storm the economy throws at us. They simply have many more years of uncertainty to deal with than I do.

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