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How Much Is Enough?

Every time I meet with any dentist of any age I always ask: How much is enough for you to feel financially independent, and how long do you want to practice? Evidently there are no dentists that have actually considered the how much is enough, because I continually get calls from doctors who are faced with absolutely no options to ever retire. I know, you’re the exception. But I bet you have no idea of how much is enough for you and your family and this is huge in determining your lifestyle and financial life decisions.

Wouldn’t it be nice to have a simple rule of thumb to measure whether you are saving enough?

Last month, Fidelity Investments tried to do just that by offering up “eight” as the magic number: Typical wage earners (which you are not) should aim to save at least eight times their final annual pay to be sure they can afford basic living expenses in retirement. The key here is “typical wage earners” and “basic living expenses”. As a dentist, you will have millions of dollars pass through your fingers and not save anywhere close to enough money to replace your yearly earning capacity with savings to guarantee a future of financial independence. In addition, the number “eight” refers to basic living expenses, which is as far as East is from West when we look at how dentists squander their income.

In addition to the eight times your final annual pay in savings, Fidelity also created a timeline. By age 35, your goal is to save an amount equal to your annual pay or for the dentist his/her annual production. So if you’re doing $600,000 a year in production, you should have that much saved by age 35. By 45, you will want to have saved about three times your salary, rising to five times your salary by 55.

There is, of course, a catch: Most of you reading this are not typical. And for above-average wage earners, those numbers might seem daunting and be way too low. To come up with the formula, Fidelity had to make numerous assumptions. Its “typical” worker began saving 6% of his earnings at age 25, gradually increased that to 12% after six years and continued saving that amount each year until retiring at age 67. He earned about $40,000 in today’s dollars initially and retired with annual pay just under $74,000.

In addition, the savings grew 5.5% per year every year or 3.2% after inflation, which is impossible in the volatile real world where investments can soar one year and shrink another.

Last, the model assumes the saver will start retirement by withdrawing about 5% of savings, a higher drawdown rate than the 4% usually recommended.

The Vanguard Group recommends putting away at least 12-15% of your income every year.
So how much should you save?
• The more you make the more you need to save, not just in dollars but as a multiple of your final salary. The reason: Social Security payments will provide a smaller percentage of your desired income than it will for Fidelity’s typical worker, so you will have to provide more. If you are taking home $150,000 per year (if you’re not earning at least this amount, you should call Summit today) you will need to save 12 to 15 times that to maintain your standard of living. Think about it this way: At $150,000 per year in take home, you should have saved three times that by 45, and 10.3 times that by age 65.
• If you plan to retire early, you will need to save more, and you might not have a choice in the matter. According to the ADA, almost 50% of dentists left the profession early because of unexpected health, emotional, or business reasons.
• Your lifestyle matters. Fidelity assumes you need to replace at least 85% of your final pay, since you will save on payroll taxes, you won’t need to add to your 401(k) and work related expenses are eliminated.

Bottom line: Consult a financial planner or experiment with online calculators to figure out the number you need to support the retirement you want. With the many variables needed to accurately project the exact number, the best you can hope for is a high probability that you won’t outlive your money.

(Special thanks to Karen Blumenthal, Fidelity Investments, Vanguard Group, and the Employee Benefit Research Institute.)

Michael Abernathy, DDS
[email protected]