Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode. Hey guys, hope you're having a great day. I, uh, I've been covering a couple of questions that come up quite often in our meetings with clients. And I think this is another biggie that we're going to talk about today, and that is, am I saving enough for retirement? So we talked about, uh, education savings, um, in episode prior, but today we're gonna talk about retirement. This is kind of like the biggie typically for most people is, is, um, am I on track for retirement? And am I saving enough at this point in time? So we'll talk through what that might look like and some ways to kind of think about, uh, how to measure, how you're doing there and, um, hopefully give you a better idea of the answer.
Speaker 1 00:01:08 It's not a straightforward, uh, answer typically. It's, it's, it's complicated. So we'll also talk about why that's the case and, uh, hopefully you come away with some, um, some added clarity on that. Okay. So we'll start, I think a good starting point is talking about some of the rules of thumb that maybe you hear, uh, in regards to this question. Cause that's, that's sometimes a lot of, a lot of times where people start. And so I think, so the question being, am I saving enough for retirement? So sometimes people say, I think the most common ones I hear are percentages of income, uh, or gross income like before tax. So you think, you know, maybe your salaries couple hundred thousand a year, so maybe people have, maybe you've heard that, uh, you ought to save 10% of your income or 20% of your income. I've heard people throughout 20% of your income as a good rule of thumb.
Speaker 1 00:02:05 Another one that comes up a lot of times is a rule of thumb of, you know, looking at your future number, like based on what I'm saving now, what's my number going to be and is that enough? And so a common rule of thumb is like the 4% rule. So this is usually used for people that are kind of like later nearing retirement or financial independence. And so the rule of thumb is that you can typically live off 4% of your wealth. So for example, if you have, um, you know, a million dollars and you that's, your only source of income is just an investment account, worth a million dollars. You have no other income outside of that. You should expect, you could expect that to generate $40,000 a year, uh, of income. And that's where that the 4% rule comes into play. So that's another rule of thumb that the problem with these is none of them really work.
Speaker 1 00:03:07 So let me expand on that. If you were to say like, you know, you save 10% across the board, like that would imply that all of you have the same goal for retirement. And, and there's really even more to that. Like w it would assume all of you have the same tax bracket, the pay, it would assume you have all the same values and priorities and, and, um, circumstances and, you know, family circumstances and that sort of thing, and, and lifestyle changes, and all these factors that come into play for a rule of thumb, you have to assume something. And what I I'm sure you realize, as I say this, like these are sorts of things that we we're completely different on everybody's different. So the, the reason rules of thumbs don't work is because it's extremely personal and extremely dependent on circumstances and what you have going on.
Speaker 1 00:04:01 And so everybody's going to have a different target here. It's all going to be different. Each person has a different rate of savings. Um, in order for them to be on track, you might be saving 20% and your neighbor might be saving 20% and they might be completely off track, and you might be on track the way to figure it out is you get to look at the situation. So that's where it starts to get personal. And that's what we're going to talk about today is, is, uh, you know, ideas to think about ways to kind of potentially run these numbers. So what it comes down to, I think is it's, you gotta always bef you know, before you start to say whether or not you're on track for something like retirement, like a long-term goal, like this is, you got to consult your financial plan first.
Speaker 1 00:04:49 And I've talked about this a lot before if you've listened to other episodes, but that's, I mean, that's really what it comes down to is what is your plan? And so when I say your financial plan, what I'm talking about is what are your values? What are your goals like what's most important? What are the resources you have available, um, like income and assets and even debts. And, um, what are the blind spots that might throw you off track and ultimately, like, what are the priorities actions that you need to take? So, um, you got to consult your financial plan first. That's what a financial plan is like, that's what it is. It's like taking all these random, you know, things in life and pulling them all together and starting to come up with like a priority list of what you need to do to be feeling like you're on track, including like saving for retirement.
Speaker 1 00:05:43 So you always have to consult your financial plan first. So a lot of people are like, well, I don't have a financial plan. So there you go. That's your starting point is first before you can really start to think about answering this question. You have to have a financial plan. You got to work through the exercise of identifying what's most important and where you want to take this and prioritize and look at the resources available. And then you get to this point of saying, you know, I am on track for retirement. So that's, that may not be the answer you want. Um, I'm the same way I want to, I like the easy answer. Like I'm looking for like the most efficient, fastest route to a question. And so I'm sure many of you are thinking, well, you know, like it doesn't have to be that complicated, but I'm telling you that for a reason, it is, um, it is a process and it it's the way you got to go through these things.
Speaker 1 00:06:40 Um, in order to have the best outcome is you have to work through that process. And then you now have this guiding, you know, overview or plan to help you sort through all these biggies in life. So once you have, or let's say you have a financial plan, or you work with a financial planner like us, that helps you have a financial plan. So let's say you have that. And so you've got your priorities ironed out and, you know, kind of like what this looks like for you and how it fits in to the mix of all the other stuff. So that's the key with retirement is what does it look like for you? How does it fit into the mix of all the other stuff in life and what are those resources and resources you have available and circumstances around those? And so at that point, it's actually fairly simple, straightforward is probably a better word, uh, as far as how to figure out the answer to this question, I think where people get hung up is typically in the, that process, the financial plan, the pro the process of looking at, you know, what do I consider most important, or what are my future goals, or what is, what are my resources like?
Speaker 1 00:07:56 I'm not even exactly sure what my net worth is, and I don't even, I'm not sure exactly what I'm spending versus saving and those sorts of things. I think when I, in working with people, I see that being typically a bigger hurdle is like, you're not even sure exactly where you're at and what's most important and where you want to go. And so that's why you got to kind of take a step back. As I said, got to do the financial plan. We covered, uh, a lot of that in some of the financial vitals, uh, episodes. I did a while back. And so you can check out those, if you're kind of feeling like you're not quite there yet on having, you know, a good plan or where you're not sure exactly where you're at. Um, I think that'll help if you're working with us, like as a, if you, if you're working with us or if you have another, uh, financial planner that you work with, that's a question for them, you know, ask them if let's look at the financial plan and say, okay, where are we at with this?
Speaker 1 00:08:55 Or, you know, do we need to do a refresh on the financial plan, but once you have it all ironed out and you've gotten through the hard stuff and you kind of have a good game plan that you feel good about, then it really comes down to running the numbers. And like I said, this is the more straight forward aspect. Um, it's logical, you can use reason, but, uh, there's a few different ways to, from the numbers. I'll talk through a couple of the different ways and kind of talk through what, what the differences are in those. So you got to understand these different options, as far as running the numbers. If you're doing it yourself, you gotta do it. Now, if you're working with a planner, like I said, you can kind of lean on them and say, how about you run the numbers and, you know, show me the results.
Speaker 1 00:09:39 Um, so if you're working with us, you know, you don't need to worry about the running the numbers aspect as much, but, um, definitely if you're doing it yourself, it's important to know these, or if you're curious of how they work, it would be good. So anyway, first way to run the numbers, um, I already mentioned rules of thumb. Those don't work, don't use rules with them when we're talking about retirement savings. So we already got that one out of the way, second way to run the numbers is to use like a linear return method. And so basically what that is, is to say, okay, let's look at a, an average return, uh, investment return. When I say return. I mean, investment return, let's look at a historical average investment return, or sometimes you may do like a, you know, an a, a predicted a future return.
Speaker 1 00:10:30 Uh, most of the time it's based on historical averages, like long-term historical averages of investment returns and use an average of that time. And then you also use an average inflation rate. So return minus inflation, that's a real rate of return. So linear return projections are based on using those average returns and average inflation numbers. And it's really a pretty straightforward analysis. You're just taking your investment balances today and your savings rate today, and calculating what the investment balance is going to grow to over time, based on these average returns and average inflation, and then projecting forward, whatever the retirement date is looking at, okay. Say my balances, you know, a million dollars, then 4% rule of thumb. You can use this straightforward, simple. It says, okay, $40,000 is going to come out. Is that enough? This is a, a kind of a slight step above using rule of thumb.
Speaker 1 00:11:37 Like I said, rules, rules of thumb there. They're not going to work. It's not the best way to do this. Um, this is a little bit better because we're getting, um, you know, we're, we're starting to personalize this a little bit more and say, okay, we're looking at your actual balances. We're looking at, um, you know, somewhat reasonable returns and seeing how that grows over time, if you've ever seen on like your tire moment, a lot of the retirement plan, uh, tools on your 401k login, we'll have these sorts of, uh, analysis, uh, provided as part of it. They'll do just a linear calculation of what your balance is in your 401k and how much you're contributing and they'll, or they'll say like you're on track or not on track. A lot of times they're based on this linear analysis. Um, and there's a million calculators online that do linear return, but it's a good way to do this.
Speaker 1 00:12:32 It's not, it's definitely better than just using a straight up rule of thumb, like, you know, 10% or 20% of your savings. Um, but it's not, I would, it's definitely not the best way. So the third way of calculating, uh, or running the numbers on this, um, and I would say this is, is definitely the better way to do it is to use a money Carlo analysis. All of that is, is basically just running a wide, uh, varying return, a bunch of different analysises with varying return and varying inflation assumptions. So basically instead of running the one average return scenario, you're running like a thousand, like, you know, all sorts of different return scenarios. So, um, it's meant to kind of go through a lot more, uh, best case, worst case. You know, let's look at the average, best case, worst case, and then everything in between and run the numbers on all these different varying scenarios.
Speaker 1 00:13:35 And then it's gonna come up with like a probability score or like, uh, how many of these scenarios. So if it runs a thousand scenarios, it's going to say, well, in a, you know, 900 of them, you, your retirement looks great and you have plenty and you can live a long life and still be fine and not run out of money. And then in a hundred of them, you run out of money. So that's a reason. I think that's a better analysis is it's running varying returns. It's more, um, considering of varying circumstances instead of just being linear with it and cover it. It's a much more, um, comprehensive and, uh, situational, because at the end of the day, the averages don't, you know, they don't always shake out exactly. Uh, actually they never do. I mean, it's never the exact same return every year.
Speaker 1 00:14:23 So the average return scenario is just not gonna happen that way. Um, the other thing, the money Carlo will do kind of like the terrible return the year before you retire scenario, that's kind of like one of those scenarios built into that sort of analysis. And so that scenario is just similar to the rate of average return scenario in that you plug in your current assets balances for your investment accounts, and then you plug in how much is going into those accounts and, uh, push that forward and then have the software or the tech technology or spreadsheet and run the numbers, uh, and kind of calculate what the results look like. So I would say this is this sort of analysis and much less commonly, uh, calculator online and more of like a technology tool that you might have to gain access to or purchase, or that sort of thing.
Speaker 1 00:15:18 Like it's the tool that we use to run projections for people is the money Carlo analysis. And so it's, it's definitely a more complicated calculation and it it's, like I said, it's the best, uh, of, of the, these running the numbers options, definitely the more, most comprehensive and best option, but it is complicated. And so if you're doing it yourself, um, you know, I, I think it's okay to do the linear return, uh, analysis. It's definitely simpler. Uh, but you have to understand the limitations of it. And like the, just one example, like the big limitation of the average return is that it tends to be, you know, it, it doesn't ever play out that way. And so it doesn't really consider the, these kind of like worst case scenarios and, or high inflationary times, or, you know, retirement accounts tank right before retirement, uh, scenarios.
Speaker 1 00:16:14 And so, but it does give you a good idea of whether or not you're saving enough. So I think the biggest thing though, of all these, um, especially of the longer-term projections is a lot of people say, okay, well, I just need to know if I'm saving enough and be done with it. And that's a common thought process. I see. And it makes sense. It's like, run the numbers, tell me what I need to save. Am I saving enough? Okay, good. I can check it off my checklist. Uh, but the problem with that is like, nobody can predict the future of investment returns. I mean, like, you're not gonna, we don't know the future of investments, even though we have a lot of history, like at the end of the day, we don't know the future who knows what inflation is going to do, who knows what your situation, how it's going to change all this stuff changes over time.
Speaker 1 00:17:07 And so these scenarios, I'm the first to say, like people in my profession like financial planners, we love to look at like these longterm projections, but they're pretty much always going to be incorrect. The idea is to get kind of a good idea and beyond like a trajectory on the right trajectory. But when it comes down to it, it's gonna, you're going to have to tweak it over time. And so as much as I would like to say, like, you just run the numbers and be done with it, it's the best way to do it is to run the numbers and then adjust over time as life changes and as external factors change. And that way your, you know, doing small tweaks. Uh, so what'll happen is you run the numbers today and it's like, okay, your savings rate, maybe it needs to be like 20% of your income.
Speaker 1 00:18:01 And it's, you know, that's what it needs to be for your goals at the time. And, you know, we run the Monte Carlo analysis and it's like, yep, that looks good. You're at like 80% probability, which is pretty solid. Cause you're young a couple years go by income changes. You have kids, lifestyle changes, you know, priorities, change tax, brackets, change, everything changes. And so maybe the number goes up to 23% just because your tax rate is higher. And so that'll that one little factor alone and bump that number up. Uh, but then the challenge happens, you know, you got kids and life's crazy. And so it's like, but there's less money to go around. And so lifestyle is actually going up, which also is demanding a higher percentage. So maybe it bumps up to 25% just because you have to save more to save for a higher lifestyle.
Speaker 1 00:18:54 And so the key, the point I'm trying to emphasize is I think the best way to do this is to get to, to be, have a good answer to this question. So run the numbers today and have a good answer to this question. You want to feel on track for this sort of thing. And then look at it every couple years. I think every one to two years is a good kind of cycle for looking at the sorts of, for the retirement analysis or looking at how you're saving for retirement and making sure that percentage looks good. I think that's a good kind of routine and making sure you're revisiting that every couple of years, that's key because life's going to change. Tax brackets are going to change. Your situation is going to change. Heck they're going to change the tax brackets probably like three or four times over the years.
Speaker 1 00:19:43 And so you got to keep tweaking it and that way you can fine tune it. So that's where the fine tuning comes in. It's like every couple of years, you know, the adjusted to 22% adjusted back down to 20 or, you know, whatever you gotta do based on the changes and ideally your, you know, over time saving enough, because what I've seen is even people that do that one time exercise and they say, okay, 20% is my number. I am saving enough inevitably, you know, five years hat happen and you've kind of forget about it. And all of a sudden start thinking about it again. You're like the question comes back up and you're like, am I saving enough? Am I sad? I don't know. Maybe it's been awhile. Even if that was a rock solid analysis, you start to kind of just think, well, maybe it's not.
Speaker 1 00:20:30 I wonder if that's still true because I just haven't looked at it in awhile. So this is definitely something that you gotta tweak over time. And you know, a lot of times it's going to be kind of a changing aspect or changing target, you know, over as your life changes and everything else changes on top of all that once you kind of get to that point of having a good, your consulting, your financial plan and your looking at the numbers, you know, whether you're using a linear return or a Monte-Carlo return, you're looking at the numbers every year or two. The other big thing, you know, at that point is just efficiency improvements. Like, are you being efficient with your resources? So what I mean by that is like, are you getting the best return given the circumstances? So, and when I say return, um, I mean like net of expenses.
Speaker 1 00:21:25 So when you invest for the longterm, you know, there's going to be expenses. And when I say expenses, I also mean taxes. So are you, um, minimizing expenses, including taxes? So one really easy way to improve efficiency is to make sure you're maxing out all the possible tax shelters. This is definitely the easiest way to improve that efficiency. You know, we've talked in past episodes about backdoor Roth IRAs. The reason that's such a home run is because it's a tax it's going to lower that tax costs. And it's a big cost when we talk about long periods of time. And when money in a Roth IRA will improve your results. And so basically it puts, uh, so like if you have money in a Roth IRA, versus if you have money just in a taxable investment, I know it's going to, uh, yield better results just because taxes are less.
Speaker 1 00:22:24 And so going back to the original question, am I saving enough for retirement? Well, it also depends on what kind of accounts you have. Like if you have a whole bunch of Roth IRA, well, that's a better situation than if you have a whole bunch of taxable. And so, you know, all things being equal. Uh, so the, the, the tax sheltering aspect will allow you to gain efficiency, which will basically make your dollars go further and allow you to save less all things being equal. So that's a huge deal. You gotta make, make sure you're maxing out those tax shelters, backdoor, Roth, IRA. Like I said, I've talked about it a lot and that's an easy one, maxing out 401ks. We talked about the plan limits before. And are there any other special tax shelter plans out there that are available to you at work?
Speaker 1 00:23:13 Or if you're, self-employed, there's all kinds of different tax sheltered vehicles that are available to allow you to kind of max out, uh, these tax shelters. The other thing is having just a solid investment plan and investment plan. Um, so this is not as much about like maximizing or finding the best vehicle. It's more about like, not being inefficient with your investments. So an example that comes to mind, like, let's say you too conservative with your investments for retirement. So when I say too conservative, I mean, not enough, like, you know, stock say for example, so let's say you have too much cash and bonds and those kinds of safer investments. And so the expected return is lower. You're not taking as much risk as you would, should be really taking. And so that allowed, or that results in a lower return. Whereas you had just worked through the process of coming up with an investment plan.
Speaker 1 00:24:18 You would have looked at your time horizon. He would have said, okay, well, I should be taking quite a bit more risk and that's going to allow me to have more return. So having that's an investment plan, having a solid investment plan. That's huge. Um, I talked about the investment plan and the financial vitals. That's a big deal. Also debts like interest rates, I guess, in general, minimizing or minimizing the interest you pay on debts as much as possible as big, because that frees up dollars. So if you can, so student loans, a lot of you have student loans once these rates kick back in, you know, if you can go from a 6% rate down to a two or 3% rate that frees up more dollars to be able to invest, uh, for these sorts of things. And then there's, you know, some other efficiency improvements that that can help, you know, maybe it's working longer.
Speaker 1 00:25:05 And this is, uh, something to be careful, uh, about what I mean by that is like, you know, finding the job or a profession or work that you love so that you, you know, that you're in a career field, that you're more likely to continue into a long later stage in life that can kind of change the game of retirement and make it much less pressure on those savings so that your retirement looks much better, but the key is getting into a career or a position that you enjoy more. Also, you can make more or spend less. Of course, those are always efficiency improvements. I would say definitely caution on, I would exercise caution on those because that can kind of get you into a little bit of a pinch. And ideally you don't have to, you know, work more, ideally you can earn more in the hours that you do work.
Speaker 1 00:25:57 So that's definitely the better of the two, but, um, anyway, this is kind of high level. There's a lot we can dig into. I'll let you guys throw out ideas. If you want to dig into this question more, or the areas within this question, like, am I saving enough for retirement? I'm happy to kind of dig further into this topic, but, uh, please let me know if you have specific topics within this that you want to explore further, but yeah, hopefully we hit the high points of, um, you know, the question, like I said, reach out with questions and look forward to talking again. Next time. Hope you have a great rest of your day as always. Thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
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Speaker 1 00:26:44 See you next time. Finance for positions is not an investment tax legal or financial advisor. All content included in this podcast is for informational purposes only and should not be considered financial tax or legal advice. Material presented is believed to be from reliable sources and no representations are made by finance for physicians as to another party's informational accuracy or completeness, all information or ideas provided should be discussed in detail with an advisor accountant or legal counsel prior to implementation. You don't have an advisor or like a second opinion. Feel free to check out our website for recommended advisors.
