As usual with financial questions, there is no one-size-fits-all answer. However, there are steps you can take to figure out how much money you will require, and some financial protections you can invest in to add some certainty to that projection.
The amount of money you need to fund your retirement depends on your lifestyle. A doctor may not necessarily need more money than anyone else to support themselves and their family. However, it’s likely you earn a high income. Given that the way people live tends to expand based on take-home pay, you probably have become accustomed to a few more comforts and luxuries than those who are lower on the economic spectrum. Once you have adapted to an upscale way of life, it’s hard to backtrack. Because of this reality, you may need more funds in your retirement account than the average person.
To determine what your way of life will cost, start by looking at how much you are spending today. To do this, you will need to track your expenses. There are many apps to help you with this task.
Next, figure out what will change when you retire. For instance, will you have paid off the mortgage? Do you plan to relocate to a geographic region where property and income taxes are lower than where you currently live?
While some costs will decrease, others will increase. Some people, for example, are surprised to find out that as retirees they spend more on entertainment and vacations than they did when working. Those increases are natural, however, given that they have more time on their hands to enjoy themselves.
You also need to know how long you will be living on your retirement funds. That means determining when you want to retire and, the tricky part, estimating how long you will live. To get a feel for your life expectancy, consider how long your close relatives have lived, such as parents and grandparents. Also, as a doctor, you know that a healthy lifestyle and personal health issues will impact your lifespan. So you also have to factor in the following:
- Are you getting enough fruits and vegetables?
- Have you ever smoked? Do you smoke now? How much?
- Do you consume too much alcohol?
- Do you exercise regularly?
- Do you have any existing health problems, such as high blood pressure?
Given all the variables, it may not be an easy exercise. Thus, many people turn to some of the online life expectancy calculators. If you are concerned about privacy, however, before using a calculator, review how the app creator might use the information you provide.
Now that you have estimated your annual budget and how many years it needs to last, you need to round up your income sources. In addition to your private retirement funds, you may have a pension from an employer. Also, you have Social Security. Finally, add any additional income, such as royalties from a book you may have written or rent from property you own.
Calculating how much money you need to retire is a little complicated because of two variables — inflation and the earning power of your investments. So it may be worth taking all the information you have gathered so far to a financial advisor. They will forecast your future income from investments and your annual expenses. To estimate cash inflows, they’ll likely use a variety of market growth assumptions based on their models of current and historical data. They should provide most-likely, best-case and worst-case scenarios, so you can gain a good picture of whether your financial plan is sound. To estimate cash outflows, they will include estimated inflationary rates.
Your financial forecast may assume that life goes without any significant financial bumps along the road. Since you cannot guarantee smooth sailing, it’s best to protect yourself financially where possible. If you want to eliminate risks in your retirement funding calculations, homeowners and auto insurance alone may not provide enough protection.
While you are still working and building your nest egg, you should look into investing in disability income insurance. It will protect you financially if you have a health issue or experience an accident that prevents you from doing your job. To safeguard your loved ones, you should also consider buying life insurance. Finally, since nursing home care can cost more than $8,000 a month,[i] long-term care insurance is a good idea as well. It can shield you from some of the financial risks you may face in later years.
Calculating how much money you need for retirement requires some fact finding about your expected expenses, length of retirement and income sources. Once you have the information, it’s worth talking with an advisor who can project your financial future using models for market performance and inflation. To add more certainty to what they see in their crystal ball, consider investing in a variety of insurance products.