Three Tips for Physicians Saving for Retirement

January 5, 2015
Steven Podnos, MD, CFP

,
Rachel Podnos, JD

Although investment returns rarely are consistent year by year, we can make assumptions based on annualized returns over a period of many years.

Albert Einstein once declared compounding interest to be the most powerful force in the universe.  Anyone who has seen what compounding interest can do for their savings over time would probably understand what he meant by that.  In previous articles, we have discussed the importance of saving early in your career.  Let's spend some time on this issue to understand its importance.

Although investment returns rarely are consistent year by year, we can make assumptions based on annualized returns over a period of many years.

A balanced portfolio of 60 percent stocks and 40 percent bonds has provided an annualized return of 6 percent to 10 percent in general over the last 70 years (depending on the 10-year plus time period in question).  Let's take an annualized return of about 7 percent a year as your outcome on early savings.

There is the rule of 72 (divide 72 by the given interest rate), which approximates the number of years to double your money at any given interest rate.  If we are taking a long-term annualized rate of return of 7 percent, it would take a little over 10 years to double our money.

So, one dollar deposited on year one of your savings would double every ten years.  If you start at 25, that dollar would become 16 dollars when you turned 65 (assuming no taxes, such that it was put into an IRA or retirement plan).  Proportionally, $10,000 would become $160,000!  Money deposited in year two would be very marginally less, but would be expected to total the same at age 66.  On and on this goes. 

Conversely, if you start saving just 10 years before retirement, your money will have grown at a doubling rate instead of 16-fold.  Truly, your money is doing a great deal of work for you just by sitting in an account and letting the powerful force of compounding interest do it’s thing.

How much money you have for retirement is very closely correlated with how much you save annually and for how long you have saved.  How much you earn on the investments themselves is rarely a major factor (assuming you don't make severe investing mistakes). A good tip in this regard is to save half of any raise or increase in income you get.  If you do this over the long term, you will end up saving a significant amount of money while still enjoying the benefits of increased funds for enjoying life and paying expenses. 

Saving early also has the benefit of keeping your lifestyle expenses lower than if you spend most of your income.  This too is a powerful way to have a financially successful retirement.  If you are used to spending 95 percent of your income, you will have to have much more saved to provide this lifestyle from savings.  Conversely, if you have learned to live on 75 percent of your income, your goals will be much easier to reach. 

The bottom line is this: Saving for retirement really comes down to three simple things: saving early, saving continually, and letting compounding interest work its magic.