Debunking the 'rules' of retirement planning

Aug. 14, 2014
Today's economic landscape is changing at an ever accelerating pace. Doctors have witnessed this progression firsthand in both their dental practices and personal lives.

By John K. McGill, JD, CPA, and Brett S. Miller, CPA, CFP

Today's economic landscape is changing at an ever accelerating pace. Doctors have witnessed this progression firsthand in both their dental practices and personal lives. Yet, why have many of the established "rules" of retirement planning remained static? Certain rules, such as paying yourself first, developing a financial game plan, dollar cost averaging, and others, still hold true as proven methods of effective retirement planning. However, other rules must be challenged and adjusted to remain current with the evolving nature of retirement planning.

The 10% to 15% savings rule

How much should I be saving for retirement? This is one of the most common retirement planning questions doctors ask. Many are familiar with the 10% to 15% rule, which suggests a savings rate of 10% to 15% of pretax income on an annual basis. Unfortunately, recent studies demonstrate this figure to be woefully insufficient.

In a 2011 study published in the Journal of Financial Planning, economist Wade Pfau used historical market data to quantify a safe rate of retirement savings. Pfau's research determined that an investor's savings rate depends on a combination of four independent factors – savings period, distribution period, income replacement, and investment returns. Based on these four factors, Pfau concluded the average investor needs to save between 15% and 27% of their annual pretax income when saving for a period of 30 years and planning to live off the savings for 30 years of retirement.

This represents a deviation from conventional planning wisdom and a significant increase in the targeted savings rate. While all four factors impact the savings rate, we believe that the savings period carries the most weight. If doctors could start saving in their 20s and save for a period of 40-plus years, the 10% to 15% rule could still be applicable. However, most doctors have many priorities early in their professional careers that delay retirement savings. The result is a loss of compounding growth, which forces doctors to play catch-up and accumulate more savings in a shorter period of time. As such, most doctors need to target saving approximately 20% to 30% of their annual pretax income in order to reach financial independence.

The 4% retirement distribution rule

Many doctors nearing retirement find themselves struggling to determine a safe withdrawal rate. William Bengen developed the well-known 4% rule, where he used historical market returns to determine that retirees could withdraw an amount equivalent to 4% of the portfolio value on an annual basis, and feel comfortable the assets would last through a 30-year period. Once again, a team of economists have emerged to challenge this established rule.

Wade Pfau, Michael Finke, and David Blanchett recently released a study entitled "The 4% Rule Is Not Safe in a Low-Yield World," and concluded that Bengen's original theory, based on a portfolio of 50% stocks and 50% bonds, resulted in an acceptable failure rate of only 6% when run through a Monte Carlo simulation. Yet, when adjusting the historical returns to reflect today's low return and low yield bond environment, a 4% distribution rate increased the failure rate to one in three.

Similarly, many doctors approaching retirement are invested more conservatively than a 50/50 allocation due to concerns regarding investment volatility over the past decade. Doctors are also living longer, resulting in forecasted retirement distribution periods in excess of 30 years. As a result, we believe that a 4% distribution rate in retirement is likely too high, and doctors need to realistically estimate a distribution rate of closer to 3% to ensure the duration of their retirement assets.

Doctors need to take a close look at the rules they apply to configure their retirement game plan. With new studies suggesting that most doctors' savings rate is inadequate during their careers and overspending in retirement, the risk of a miscalculation is simply too high to ignore. All doctors should take the necessary steps to review, adjust, and update their financial game plan to ensure retirement success.

John K. McGill provides tax and business planning through John K. McGill & Co., and Brett S. Miller provides investment advice through McGill Advisors, Inc. (RIA). Both are members of the McGill & Hill Group, LLC, your one-stop resource for tax/business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit

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