Financial Planning

How Much Do I Need in Savings to Finance $150,000 in Spending?


Mark McNulty


November 22, 2017

November 22, 2017

An Orthodontist recently called me. I did not know him before, but his colleague is a client. He said he needed to know, A.S.A.P., how much in savings he and his spouse needed to live off $150,000 (after-tax), without eating into the originally saved principal. Good question, but why the urgency? I asked but I already knew the answer.

Dentists are facing greater and greater competition. You have more non-clinical and practice management responsibilities than ever before. And now, with the Liberals’ tax plan you are taking home less money than you have in decades.

The good news? Your practice value remains at an all-time high. As such, we are experiencing an increase in dentists contacting us and saying, “I’m ready to sell my practice. If I do, how much can I spend in retirement?”

To be clear, many dentists that decide to sell their practice continue to work on a reduced basis. I have clients who sold their practice and have been associating for years. Whenever I ask these dentist, “when are you going to retire?” The typical answer is, “I’m associating two days per week with two months’ vacation. I am retired.”

That being said most like to look at their associate income as a safeguard in addition to what we can help them with from their savings.

So, the question remains: how much in savings do you need to live off $150,000 (after-tax), without eating into the originally saved principal? The answer depends on numerous factors, so it is challenging to provide one number that will be correct for everyone. That said, we do have many examples of dentists who have actually been retired for years, living off the income of their portfolio, and now have more than their original saved principal.

How they did itTake Dr. John and Mary Doe as an example. On December 31, 2010 they had a portfolio with us of $5,012,695. Every year they withdrew just under $150,000 after-tax and at the end of 2016 their portfolio was worth $6,216,371. They spent $150,000 after-tax in retirement and their portfolio grew.

Another family who joined our firm in 2012 started with a portfolio of $5,574,518. They withdrew an average of just over $260,000 annually. Today their portfolio is worth $5,893,549. They enjoyed $260,000 in retirement spending after-tax and still their portfolio grew.

Many dentists we meet have a history of what we call “bar napkin planning”. For example, they say if I sell my practice and bring my total savings to $5 million, earning an investment return of five per cent should allow me to spend $250,000.

Here is the problem with that line of thinking – this equation doesn’t account for:

  1. Income tax: if you are like most professionals we work with, you have money saved in RRSPs, corporations, etc. When you withdraw this money to fund your lifestyle, there are taxes to pay. In the case of the corporation, the investment income you earn is taxable as well. Further, sometimes the timing of when you need to pay these taxes can be challenging. If you were like this case, making a five per cent investment return on $5 million, then you will owe tax on your $250,000.
  2. Inflation: $1,000 today will not be worth $1,000 in 10 years.
  3. Variability of investment returns: while you may assume an average return of five per cent, the reality is this will not happen every year. In 2008 your portfolio might have been down 10 per cent percent, so then what happens?
  4. Reality: there is a big difference between talking about how you are going to fund your retirement and doing it. In other words, one day you actually have to retire. Properly managed means you will get a steady paycheque into your bank account from your portfolio the day you retire. This requires much more planning and organization than what happens in “bar napkin planning”.

In conclusionIf you are planning on living off of just the income in your portfolio it needs to be a calculated approach. For these clients we created a system called The Portfolio Paycheque. The first step we took in developing this system was to recognize there are too many variables (one through four mentioned above) to guarantee a cash flow for a long period of time (your retirement). Therefore, this is a calculation that needs to be run every year. We look at all the variables that go into the calculation and investigate probable outcomes. We determine cash flows with which there is a high level of certainty and put risk protocols in place to minimize the volatility of cash flows that have a lower level of certainty.

The result can be a great retirement – or at least a start.