I gave a presentation to a large group of dentists at a state convention this Spring. After I finished, a few dentists came up to chat, and I couldn’t help but smile because they all had more or less the same question. Not surprisingly, it was also the most commonly asked question at our booth:
“How much money do I need to save before I can retire?”
It’s the golden question everyone seems to be asking, and the answer is surprisingly simple. But to get it right, you first need to understand one thing.
What Are You Spending Now?
The first step in calculating your retirement nest egg is knowing how much money you currently spend. As you might expect, some dentists need a lot more money than others to retire comfortably, based on the lifestyle they’re accustomed to living. Avoiding this exercise is one of the biggest mistakes dentists make during their career.
Most people tend to just estimate a retirement budget, but that doesn’t work well because it relies too heavily on memory. It also doesn’t take into account large, irregular expenses— like vacation spending, vehicle purchases, and other lifestyle expenses.
We recommend factoring an average of your spending over a three-year period to give you an accurate, true measure of a comfortable lifestyle, based on how much money you actually spend.
Today’s Spending vs Tomorrow’s Spending
With my own retirement planning, I don’t try to make complicated guesses about how much less I think I can live on in the future. I simply assume I’m going to spend a similar amount of money down the road as I am spending today. Your expenses will transform over time, but they won’t drop as much as you might think.
For example, costs for kids become costs for grandkids (flights to see them, gifts, or even college assistance). Your mortgage payment is replaced with expenses for a new roof, significant remodeling, or maybe even a second home. Your current student loan payment becomes increased healthcare costs.
Simply stated, it’s more reasonable to plan for the future based on what you’re currently spending. This is how you would ideally envision retirement— less financial pressure, more flexibility, a personal legacy, and true independence. Why would you shoot for anything less? It’s true, some costs will decrease as you age, but if you plan for post-retirement spending to be similar to your pre-retirement spending, you’ll simply have a little more flexibility and peace of mind.
Tracking Your Spending with Technology
The good news is that tracking your spending is easy to do using technology. You can connect all of your accounts, and your spending will automatically be tracked without lifting a finger. You can use tools like Mint.com or commission someone to do it for you using a collaborative tool like EMoney Advisor.
As you earn more and spend more, it becomes more difficult to track everything and make an accurate prediction. That’s where a competent financial advisor can really make a difference in preparing for your future. A simple miscalculation of five hundred dollars per month can affect your retirement projection by hundreds of thousands of dollars. A miscalculation of +/- a few thousand dollars per month (which is very common among business owners) can affect your retirement goals by millions.
When it comes to predicting your financial needs in retirement, guesses make messes.
If you track your spending over a 3 to 5 year period and categorize each expense in an organized way, you’ll get a really good handle on your preference for spending money on food, vehicles, clothing, entertainment, vacations, etc. You’ll know how much money you’re spending annually, and on what, so you can be absolutely sure you’re improving, or at least maintaining, your standard of living in retirement.
The Golden Question: How Much Money do I Need?
Here’s my best shot at making this simple for dentists to calculate: you will need somewhere between 20 to 30 times your annual spending. The older you are, the lower you can go on this spectrum. The younger you are, the higher you’ll need to be on the spectrum.
That’s easy enough, right? Just take what you spend annually and multiply it by 30. This figure will represent how much money you need for an uber-successful retirement portfolio.
Here’s what I mean by “portfolio:” your portfolio is the total of all your assets, excluding the equity in your primary residence. We don’t count the equity in your home because most people don’t want to have debt on their house when they retire. Sometimes we’re forced to count home equity if someone can’t retire without tapping into it, but that’s not ideal.
To determine the sum of your portfolio, add up all your cash, investments, practice real estate equity, and practice equity.
For example: $100k cash/investments + $500k practice equity + $400k real estate equity = $1M.
Next, divide it by how much money you spend each year.
If you spend $100,000 per year, then your portfolio is 10 times your annual spending, because $1M / $100k = 10. In other words, you could live off the funds in your portfolio for 10 years. We call this number your Total Term or Tt™.
So what is your Total Term? Are you on the way to hitting a 30, or have you been stuck at a 10 for 10 years?
Where Are You on Your Path to Retirement?
I will often ask my team, “What is Dr. ‘X’s’ Total Term? What was it last year? How much progress is he making each quarter?” We measure someone’s overall retirement health based on this metric. If someone moves ahead +1 year for every year they work, we call this a 1:1 client. Some dentists are 2:1 clients, meaning they get ahead 2 years for every one year they work. It’s an important indicator we monitor, and it should be important to you.
Some dentists in the latter stages of their career are a 3:1 or even higher— especially if their investments experience periods of large growth. Of course some dentists experience really difficult years where they move backwards. This can happen when your investments decline in value or when you take on a lot of debt for equipment or tenant improvements. It shouldn’t happen often, but when it does, you should know why.
One of the biggest challenges to financial planning is defining the goal you’re trying to achieve. Your portfolio (cash, investments, practice equity, non-residence real estate equity) needs to be 30 times your annual spending in order to retire comfortably. Keep this target in mind, and you will get there.
This is a challenging goal, but I’m speaking to an audience that CAN accumulate 30 times their annual spending. Even GPs in tough, competitive markets will earn enough to make this happen if they start early, watch their personal spending, and plan carefully.