Hey everyone, it’s Finance Fridays again. Some of you may have read my What is “Your Number” post I wrote awhile back. Today I want to kind of reflect on “Different Numbers for Different People“.
Different Numbers for Different People
This is kind of my version of “different strokes for different folks” when it comes to retirement.
If we look back at my other post What is “Your Number” and add in my more recent post of Windfall Management Exercise, you might see some similarities between them. They’re both kind of designed to have you look at your retirement in a different way. I think some people relegate “retirement” to this “far off” thing that happens when you’re old and gray. The two above posts are designed to get you to think about retirement in the present, not 30 years from now.
In other words, it’s not this thing you can procrastinate and fix later, it’s a priority that you are actively are thinking about.
So let’s review:
That said, remember I said that “my number” for right now is broken down into two separate possibilities:
- $10 million – Pre-tax with all my current and future liabilities
- $6 million – Post-tax with no current or future liabilities
I think this number is pretty conservative when you compare it against my good friend’s number of $4 million. He never really specified pre or post tax, but I think he meant a mix of both in his retirement accounts. So let’s say it’s mostly $4 million pre-tax. For me, right now in my late 30s with my significant liabilities is probably not enough for me to retire. Even $4 million post-tax probably isn’t enough for me with my current liabilities/responsibilities.
I think people (especially when young) may underestimate how much health care will cost in retirement. Also, you never really can tell just how long you’re going to live either. Like I’ve explained before, if you’re going to leave medicine, you should make sure you won’t need to come back. It’s one of the major reasons I’m so conservative about my retirement number.
Additionally, people love to say they’re going “buy a bunch in investment properties and just rent them out”. In general, I think this isn’t unreasonable. However, it’s not a sure thing. Housing and rental markets can change pretty quickly. Also, fixing broken stuff in a house or apartment or apartment complex you own isn’t cheap. It’s just not that easy.
But you said “different numbers for different people” right?
I have a few friends who are radiologists that are single. Some of them may want to eventually get married and have kids. Others don’t have any plans for marriage or kids. Their numbers are significantly different. These numbers also change based on your liabilities. For example, if you have a ton of medical school debt still hanging around and own an expensive condo/house, then your number would be different if you were debt-free and renting a small, cheap 1 bedroom apt or studio.
Let’s compare two “other Walters”:
Walter – Spendy with Med School Debt (No Marriage, No Kids) aka Dr. Yoloswag
Let’s say I have $300k in medical school debt still, live in an expensive condo/house, and have an expensive car. My number to retire (and keep a similar lifestyle) will be pretty high. I’d need a pretty significant windfall to account for my current liabilities of med school debt and large mortgage. Only after that could we consider maintaining my life style. This particular “Walter” will likely need a similar number to retire than the real me. However, the difference lies in differences in liabilities/responsibilities. While Spendy Walter may have less liability/responsibility than real Walter, he makes up for the difference by spending more on his lifestyle.
Walter – Frugal with no Debt (No Marriage, No Kids)
Now let’s say I instead have no debt and rent a 1 bedroom apartment. Let’s also assume that monthly costs are relatively low because the majority of what I like to do is “free”, like going to the beach, playing tennis, and things like that. Just for a kicker, let’s say this Walter can cook (relatively inexpensively) and eats out really infrequently. This particular Walter’s number is very low. Honestly, this Walter could probably work for < 10 years, save that money, and retire early without too much problems.
I see, different numbers, different people.
For the most part, us doctors don’t have an earning problem — we have a spending problem. Let’s look at some numbers:
Walter #2 spends $1500/month on rent and utilities. On average, he spends $1000 on food and other expenses. So let’s say he spends $2500/month on average.
Does this sound familiar? To be honest, this sounds pretty similar to my expenses during residency. $2500/month x 12 months = $30,000 a year
Let’s say Walter #2 makes $250,000 a year. As a single guy, his take home is probably around $150,000 a year. So he spends $30,000 a year and is left with $120,000 in post-tax money. Just to make things easier let’s assume his job has a 401k with a match so it has $37,000 ($18,500 x2) a year. Then we subtract $5500 from the $120,000 for his Backdoor Roth IRA for $114,500.
Let’s do some math:
- $37,000 a year in a 401k
- $5500 a year in a Backdoor Roth IRA
- $114,500 post-tax dollars
So after 10 years he’d have:
- $370,000 in a 401k and $55,000 in a Roth IRA (excluding compound interest for both)
- $1,145,000 post-tax dollars sitting in a bank account
He’s now 45 years old, and plans to live till 95 – so another 50 years. Can he last?
Let’s assume his lifestyle is the same, costing him $30k a year:
$1,145,000 / $30,000 = ~38 years
So he’s able to last 38 years on the money he had in his bank account alone. If we add in just his Roth IRA, we’re up to:
($1,145,000 + $55,000) / $30,000 = ~40 years
Now then let’s add in his 401k, which is pre-tax. However, since he’d only be pulling out a little each year, the taxes on it would be pretty small, like 10-12%.
$370,000 – $37,000 (10%) = $333,000
($1,145,000 + $55,000 + $333,000) / $30,000 = ~51 years
So, with these very estimated numbers, he does last the 50 years before dying at 95 – with 1 year’s expenses left. Of course, this does not include compound interest (which is important), and also does not include inflation (also important). Also, he could also be getting some degree of compound interest if that post-tax money was in a taxable account rather than a bank account. There are lots of other ways to be more efficient and take more risk (for potential higher rewards). However, the major point of this exercise is to show that your retirement is primarily based on two things, not just one. Your “number” is important to help you identify a goal. The less you spend, the earlier you can retire. It seems so simple in principle, but it’s very difficult in practice. It’s hard to go back.
Saving more money is great, but spending less money is equally as important (or maybe even more important). You may not be able to change your list of liabilities/responsibilities. However, you can curb your spending habits. Make sure what you’re spending money on is worth it to you. Utilize the Value Cost Ratio. Trim the Fat. Get Back on the Wagon.
Money isn’t happiness. Things aren’t happiness. Only happiness is happiness.
The happiness isn’t from the material aspect of “buying LEGOs”, it’s from the experience, completion, and pride in one’s work.
Different numbers for different people.
In a different dimension, there is a Walter that is Single, Frugal, and has No Debt that retired at 45.
As for me, I’m the Walter that is Married with Kids, Somewhat Frugal, and Debt-Ridden that wants to have the option to retire at 55.
I’m happy. I hope the other Walter is happy too.
Money isn’t happiness. Things aren’t happiness. Only happiness is happiness.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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Dr. Yoloswag. Love it.
I’m somewhere between your two Walters, but have decided I value freedom over lots and lots of money. Radiology is a little bit different than anesthesia (my specialty) in that there is some ability to be location independent as long as you have access to a high quality PACS system and good internet. Telemedicine docs have even more freedom — all that requires is a laptop. I’ve gotten off-topic now. End comment.
Thanks for your comment PoF!
I also value freedom… give me a few more years and maybe I can be where you are, although probably not as early.