Am I Saving Enough for Retirement (with only a Solo-K)? Live Case Study!

Today’s topic is an important one that many of us often ponder: “Am I saving enough?” This question came from one of our WealthKeel Weekly readers, submitted via our Google form. It’s such a valuable question because it resonates with so many people. To explore this, I’m excited to share a live case study and walk you through the numbers, calculations, and assumptions using a practical example.

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Introduction to the Case Study

The question of whether you’re saving enough for retirement is a common one, especially among high-income professionals like doctors. Today’s scenario revolves around a locum tenens physician who wants to simplify their retirement savings by focusing solely on maxing out their Solo 401-K contributions. So, can you rely solely on a Solo 401-K? Let’s break it down.

The Main Question: Solo 401-K Focus

The physician’s primary goal is straightforward: “If I just max out my Solo 401-K contributions every year, am I on track for retirement?” While maxing out a Solo 401-K is a robust strategy, the overarching question is whether it’s enough for a comfortable retirement.

Solo 401-K Overview

A Solo 401-K, also known as an individual 401-K, is a retirement plan designed for self-employed individuals or small business owners without full-time employees. The contribution limits are more generous than other plans, making it appealing to high earners. In 2024, the contribution limit is $69,000. In 2023 (the year of this case study), the limit was $66,000.

Case Study Methodology

To answer our reader’s question, we employ a popular Excel spreadsheet that uses the concept of a “spending multiple.” The idea here is simple: multiply your annual spending by a factor to determine the total amount needed for retirement.

Retirement Savings Goal Calculation

For example, if you plan to spend $150,000 annually in retirement, you would multiply this by 30. This will give you a retirement goal of $4.5 million ($150,000 x 30).

Investment Assumptions

We’ll also need some assumptions for our calculations:

• Rate of Return: We’ll use a conservative estimate of 6%.
• Inflation Rate: We’ll assume 3% inflation.
• Real Return: Calculated at 3% (6% rate of return – 3% inflation).

The Runway Concept

“Runway” refers to how much time you have to save and grow your investments. The longer the runway, the more time you have for your investments to compound. For physicians, this varies, especially considering the length of their training and potential student loan debts.

Analysis of $66,000 Annual Contribution (2023 Limits)

Given the physician’s commitment to maxing out their Solo 401-K at $66,000 annually (2023 Limit), we first need to compare it to our required savings. If $4.5 million is our goal and considering our $150,000 annual spending:

• Required Annual Savings: $57,000
• Annual Contribution: $66,000

With a $66,000 contribution, they have a wiggle room of about $10,000, assuming a 30-year runway.

Impact of Runway Length

Let’s look at multiple scenarios based on the length of the saving period:

30-Year Runway Scenario

In this scenario, our physician will comfortably meet their target with an extra buffer, given they are saving $66,000 annually.

40-Year Runway Scenario

With a longer runway, the contribution requirement decreases, suggesting even greater ease in reaching the $4.5 million target.

20-Year Runway Scenario

This more limited runway presents a challenge. Here, the physician would need to save significantly more than $66,000 annually, indicating they might fall short.

Higher Spending Scenario

What if the physician’s annual spending is higher, say $200,000? The new target becomes $6 million (200,000 x 30). In this case:

• The $66,000 contribution falls short, even with a 30 or 20-year runway.
• An annual shortfall would be more noticeable, making the strategy inadequate for higher spending levels.

Lower Spending Scenario

Let’s consider a more modest lifestyle with an annual spending of $100,000. The target now is $3 million (100,000 x 30). This brings the required annual savings significantly lower:

• At $100,000 annual spending, the $66,000 contribution more than suffices, leaving ample room for even unexpected expenses.

Tax Considerations

One concern is the tax implications of concentrating entirely on pre-tax contributions via the Solo 401-K:

• When you retire, withdrawals from pre-tax accounts are taxable.
• If your retirement accounts are solely pre-tax, you might face a higher-than-expected tax burden.

Roth Conversion Strategy

Diversifying your tax exposure through strategies like Roth conversions can mitigate future tax risks:

• Perform Roth conversions in lower-income years, typically after retirement but before Required Minimum Distributions (RMDs) start.
• This tax diversification can provide more flexibility in retirement.

Backdoor Roth IRA Recommendation

Consider complementing your Solo 401-K with a Backdoor Roth IRA:

• Contribution Limits: For 2024, the limit is $7,000 or $8,000 if you’re over 50.
• Using a Backdoor Roth IRA creates a tax-free bucket, adding flexibility in retirement.

Defined Benefit Plan Option

Another advanced strategy is setting up a Defined Benefit Plan, particularly if you have substantial 1099 income:

• Despite being more complex, cash balance plans can significantly boost retirement savings.
• This counteracts the effort to keep things simple but can be highly beneficial.

Importance of Retirement Spending Estimation

Estimating your retirement spending is crucial to understanding your saving needs:

• While it may be challenging early in your career, having an idea helps gauge if you’re on track.
• Adjustments can then be made to align savings with your retirement goals.

Customizing the Spreadsheet

Our case study is based on simplified assumptions, but you can customize the provided spreadsheet:

• Adjust spending levels, runway periods, and investment returns to better match your situation.
• Personalizing these numbers will give you a more accurate picture of your retirement readiness.

Limitations of the Case Study

While our analysis offers a good starting point, remember it’s simplified:

• Comprehensive financial plans consider multiple factors, including employment changes, market fluctuations, and personal goals.
• Typically, these plans take months to build, whereas our case study provides an initial snapshot.

Key Takeaways

The primary conclusion from this case study? It depends:

• Multiple factors influence whether your savings are sufficient, including spending levels, runway length, and investment returns.
• Individual circumstances play a critical role; personalized planning is essential.

Solo 401-K Advantages

Let’s recap some of the benefits of using a Solo 401-K:

• High Contribution Limits: Allows significant savings in a tax-advantaged account.
• Simplicity: Easy to manage without dealing with additional complexities.

Solo 401-K Disadvantages

Now, some potential downsides:

• Tax Diversification Issues: Heavy reliance on pre-tax contributions can create future tax challenges.
• Future Tax Burdens: High balances in pre-tax accounts can lead to significant taxes upon withdrawal.

Importance of Starting Early

Starting your savings early unlocks the power of compound interest:

• The earlier you begin, the more time your investments have to grow.
• This can significantly reduce the amount you need to save each year.

Inflation Considerations

Inflation impacts future spending needs:

• It’s crucial to account for this in your long-term plans to maintain your desired lifestyle.
• Even conservative inflation estimates can significantly affect your retirement budget.

Social Security and Pensions

While we didn’t include Social Security or pensions in our case study calculations, consider their potential impact:

• Many financial plans include these income sources, affecting how much you need to save independently.
• Excluding them provides a more conservative estimate, ensuring you’re prepared even if these sources fall short.

RMD Considerations

Required Minimum Distributions (RMDs) are essential to consider:

• Once you reach age 72, you must start withdrawing from tax-deferred accounts.
• RMDs can significantly impact your tax situation in retirement.

Tax-Efficient Withdrawal Strategies

Utilize tax-efficient withdrawal strategies to maximize your retirement savings:

• Pull from tax-free accounts first to minimize taxable income.
• Strategically time withdrawals to stay in lower tax brackets.

Investment Return Assumptions

Adopt realistic investment return assumptions:

• Our case study uses a conservative 6% return, ensuring we don’t overestimate growth.
• Align assumptions with your risk tolerance and market expectations.

Risk Tolerance Considerations

Your risk tolerance should guide your investment strategy:

• Younger investors often afford more risk, benefiting from higher returns over time.
• Adjust your portfolio as you approach retirement, focusing on preserving wealth.

Lifestyle Inflation

Be mindful of lifestyle inflation:

• Physicians and other high earners may face pressure to increase spending.
• Keeping this in check ensures you don’t outpace your savings.

Career Longevity

Consider working beyond the traditional retirement age:

• This can reduce the amount you need to save by allowing more years of contribution.
• It also shortens the period you’ll rely solely on your retirement savings.

Debt Considerations

Don’t forget about existing debts:

• Student loans are common for physicians, affecting your ability to save.
• Factor these into your financial plan to ensure you’re not overextending yourself.

Spousal Income and Benefits

Consider spousal income and benefits in your planning:

• A spouse’s income can significantly bolster your savings potential.
• Coordinate benefits like health insurance and retirement accounts for maximum efficiency.

Health Care Costs in Retirement

Plan for healthcare expenses:

• Medical costs can be a significant part of your retirement budget.
• Include these in your long-term planning to avoid surprises.

Long-Term Care Planning

Think about long-term care:

• Costs related to long-term care can be substantial.
• Consider insurance or other planning methods to cover these potential expenses.

Estate Planning Considerations

Don’t overlook estate planning:

• Ensuring your assets are managed according to your wishes provides peace of mind.
• This ties into your broader financial strategy, impacting how you save and spend.

Risk Management

Incorporate risk management into your plan:

• Insurance for health, life, property, and disability is essential.
• Protect yourself from unforeseen events that could derail your financial stability.

Tax Law Changes

Stay informed about tax law changes:

• Changes in legislation can impact retirement savings strategies.
• Regularly review your plans to ensure compliance and optimization.

Geographic Considerations

Factor in the cost of living:

• Different regions have varying costs, impacting your retirement savings needs.
• Choose a location that aligns with your financial plan.

Retirement Lifestyle Goals

Define your retirement lifestyle goals:

• Knowing what you want helps tailor your savings strategy.
• It ensures you’re saving enough to meet those specific objectives.

Phased Retirement Options

Consider phased retirement:

• Gradually reducing work hours can ease the transition into full retirement.
• It extends your earning period and reduces financial strain.

Charitable Giving in Retirement

Integrate charitable giving into your plan if it’s important to you:

• Charitable donations can have tax benefits.
• Plan how this fits within your overall financial strategy.

Business Exit Strategy

For locum tenens physicians, have an exit strategy:

• Transitioning out of your practice can impact your retirement timeline.
• Plan how and when you’ll retire from your professional duties.

Continuing Education and Licensing Costs

Account for continuing professional costs:

• Even in retirement, some ongoing costs like licenses can exist.
• Budget for these to ensure they don’t impact your savings.

Practice Overhead Considerations

Include practice overhead in your savings plan:

• Any ongoing costs related to your practice should be planned for.

Malpractice Insurance in Retirement

Plan for potential malpractice insurance costs:

• Even retired physicians might need coverage.
• Account for these expenses in your planning.

Professional Association Fees

Don’t forget professional fees:

• Memberships and association fees can persist into retirement.
• Include these in your retirement budget.

Travel and Leisure in Retirement

Plan for leisure activities:

• Travel and hobbies are common in retirement.
• Budget appropriately to make the most of your golden years.

Technology and Aging in Place

Consider costs related to technology and age-related adjustments:

• Home modifications and tech aids can enhance your quality of life.
• Plan for these investments in your retirement strategy.

Family Support Considerations

Factor in potential family support:

• You might need to support children or elderly parents.
• Plan how this impacts your financial strategy.

Emergency Fund in Retirement

Maintain an emergency fund:

• Even in retirement, unexpected expenses arise.
• Keep a liquidity cushion to handle these surprises without disrupting your plan.

Retirement Account Fees

Be aware of retirement account fees:

• High fees can erode your savings.
• Choose low-cost options to maximize your growth.

Regular Financial Check-ups

Conduct regular financial reviews:

• Frequently reassessing ensures your plan stays on track.
• Adjust as needed based on changes in your life or goals.

Resources for Further Learning

Keep educating yourself:

• Utilize various tools and resources to enhance your financial planning.
• Stay informed to make the best decisions for your retirement journey.

Remember, your financial journey is unique, and it’s essential to customize your strategy to fit your specific circumstances.

 

Looking for a more thorough all-in-one spot for your financial life? Check out our free eBook: A Doctor’s Prescription to Comprehensive Financial Wellness [Yes, it will ask for your email 😉]

Disclosures