There’s a saying we love when it comes to the process of improvement (in any area of life), and that is “What are you doing to get 1% better today?” The reason this is such a great saying is that it’s extremely simple, but also extremely powerful. If you truly were able to get 1% better at something each day, over the course of a year you would get 3,778% better at whatever that thing is.
This illustrates the immense power of compounding, which is directly relevant to the process of saving, investing, and building wealth. When looking at longer periods of time, such as the period from starting your career until retirement, seemingly small differences in things like how much you save or when you start saving have a huge impact as they compound over many years. In this post, we’ll give you perspective on how much of a difference these things make and show you how, even as an academic physician, it’s possible to accumulate a million-dollar investment portfolio at a relatively young age.
Physician #1 (Early Start):
Let’s start with a simple example of a physician who finishes training at age 30 and starts working at an academic institution earning an income of $200,000. This doctor immediately starts saving and investing to his or her retirement accounts and earns roughly the historical average annual return for stocks*. In the following table, you can see the projected value of the portfolio at different ages based on different annual savings amounts.
|Annual Savings||Age 45||Age 55||Age 65|
Physician #2 (Late Start):
In this second example, instead of starting to save immediately after training at age 30, this physician waits 10 years until age 40. Perhaps this doctor just isn’t focused on retirement, has other purchases that he or she has been waiting to make (like a new car or a bigger house), or is putting most available money toward paying off student loans (if paying them back rather than going for Public Service Loan Forgiveness). In the table below, you can see what a difference it makes in terms of how much this physician’s portfolio is projected to be worth at different ages.
|Annual Savings||Age 45||Age 55||Age 65|
So, What Are the Key Takeaways?
The two biggest messages are:
1) The importance of starting as early as possible.
2) What a big difference seemingly small differences in annual savings amounts can have.
Starting early – As you can see in the numbers, the physician who starts saving and investing 10 years earlier doesn’t just end up with slightly more money at age 65, he or she ends up with more than twice as much money. This is a difference of potentially millions of dollars at the $40,000 annual savings amount. The sooner you are able to start saving, the more opportunity your money has to work for you and compound.
Savings amounts matter greatly – The difference between saving $10,000 annually and saving $20,000 annually might not seem that big, but for the physician who starts saving at age 30, this ends up being the difference between a $1.5 million portfolio and a $3.0 million portfolio at age 65. So, do what you can to make sure you are saving enough of your income each year.
A Quick Note on Savings Amounts
Don’t forget to include any contributions that your employer makes to your retirement accounts. Many employers match your contributions up to a certain amount, and money contributed by either you or your employer all counts. For example, the University of Michigan is a large employer of physicians in our area and it offers a 2-for-1 match up to 5% of an employee’s salary. Therefore, a University of Michigan physician who earns $200,000 and contributes just $10,000 of their salary (5%) to their retirement plan ends up saving $30,000 annually because their employer contributes another $20,000 as a match.
It can be difficult to think about saving for retirement early in your career, especially if you have competing demands from things like student loans, a growing family, or the delayed gratification of having spent so many years in school or training. However, it’s important to understand what a huge difference it can make down the road if you are able to start saving enough of your income early on. And, while it may seem weird to think about retirement within the first decade of your career, with the growing prevalence of burnout, it’s nice to have flexibility down the road if you do want to cut back or make a change. So, when it comes to saving and investing, ask yourself what can you do to get 1% better today?
Disclaimer: It’s worth noting that this is an extremely simplified example and should not be relied on as any type of guarantee. The calculations use a 7% annual real return and compound it on a straight-line basis. There is no guarantee that future returns will be similar to past returns.
About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.