Retirement Savings for Young High-Income Earners- Why $6M is the New $1M Nest Egg

Welcome to Ewa’s finlit podcast. Ewa is a fee only RAA based out of Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. Welcome everyone today’s Finlit podcast, joined here by Jameson Smith. And today we’re talking about what a millennial couple needs to think about saving for retirement. Specifically, how much of a nest egg should someone in their thirties that’s a high income earning physician we’re gonna use as an example, save for retirement. So initially, you know, if we’ve rewind 510 years ago, there was a lot of talk around like, you know, the million dollar number.

Matt Blocki
00:56
Now inflation has really kicked in. And by the time someone that’s, you know, 35 now is 65, you’ll have lost about two and a half times your purchasing power. So obviously that million dollar figure, we need to recalibrate and educate people on what they should be targeting. So James, let’s talk about, you know, a physician family that’s making half a million bucks. So break down. What would they be taking home after retirement and taxes, what would they actually be taking out of their paycheck?

Jamison Smith
01:30
Yeah. So gross income 500,000. Obviously some taxes come out, probably maxing out retirement plans. Ends up being 23, 25 ish thousand a month. That range after taxes of income. And then. Yeah, let’s just talk. I would say like generally a lot of this depends on your spending. Let’s just say generally speaking, I would say most people in that range, it’s very similar. So, you know, maybe they have a mortgage, maybe they have student loans, fixed expenses, could be hap, could be 1012 thousand a month, half of that. And then there’s some discretionary spending. We’re really going to dial in. How much should they save to get to that? You know, that number of 65 to replicate spending?

Matt Blocki
02:14
Yeah. So the first thing we got to do is we got to figure out, okay, what, let’s fast forward at 65. A couple factors that they were used to spending their money on will be gone. Right? So their mortgage should be paid off. So let’s just say that’s 5000 a month. Now, they’ll still have property taxes. So let’s say that’s actually thousand. Yeah, but that’s 4000 a month. That’s no longer needed on the table. Let’s say they had school loans that both doctors had school loans, those probably are going to get forgiven in ten years. So their money temperature would, you know, definitely have absorbed that money. So we’re not going to take that out of the calculation because that would go to lifestyle after the school loans or go to savings.

Matt Blocki
02:52
And then, you know, you mentioned 23,000 a month net, so we’ll go with that. So we take 4000 off for the mortgage. So now we’re at 19,000. We’re going to say they’re saving. They have two kids who are saving for college, 2000 a month. Now we’re down to 17. We’ll say they’re saving. Yeah, insurance is some other savings. We’ll say another 2000. So let’s just arrive at 15,000 a month. And then we could go further and say they’re not going to need all that income because their kids are out of the house. So down to 13. But then when you go to retire, you have to realize first and foremost you have more time. The more time you have, the more money you’re going to spend. So we would go right back up to 15.

Matt Blocki
03:32
So I think 15,000 a month for a lot of people say you’re going to need 80%, 60%, 80%, 100%. So those are your 120% of income replacement. Now for physicians it’s really, you’re starting late. So typically you’re saving really aggressively and when you retire you don’t need to save money anymore. So you can back out a lot of these expenses. So we’re going to arrive and assume in today’s dollars, that’s 15,000 a month. So if this family is 35 years old, the husband and wife are the 35 years old and today’s dollars, 15,000 a month, we fast forward that to 65. That same 15,000 a month is equivalent to 36,000 a month. Just assuming a regular 3% inflationary increase. If inflation is higher, they’re going to need more. If inflation is lower, a little bit less.

Matt Blocki
04:19
So 36,000 a month is what this couple should be planning on spending in retirement at 65, which is the same thing as 15,000 would be today, a 30 year gap there. So that’s annualized amount of $432,000. So obviously, you know, the old age of like, I need a million bucks, that wouldn’t even be three years worth of income replacement. So. So right off the bat, you know, let’s say there’s, we can do this a couple of different ways. But out of the 432,000, what would you say Social Security will pay them.

Jamison Smith
04:55
We’re talking inflation, 180 to 100. Yeah.

Matt Blocki
04:58
Yeah. So, okay, so that leaves us with 332. And if we just assume a safe withdrawal rate of 4%, we don’t want touch principal. 8.3 million is what we would need to produce 332,000. That’s before taxes, though. So assuming you have a good mix of roth and pre tax, I think eight to eight and a half million is a good number. Assuming the safe withdrawal rate or guardrails approach, obviously the incomes continue to go up, some interest in dividends will need to be reinvested so the portfolio is bigger to support a bigger withdrawal rate. Okay, so you were working with a couple. That’s 35 jameson. You give them the hard news that they’re going to need eight to eight. Let’s just say eight and a half million bucks by the time they’re 65.

Matt Blocki
05:50
What are we going to recommend they do to get there? Dual income, two incomes of 250.

Jamison Smith
05:55
Yeah. So we can talk about this in a second. The breakdown. We’ll come back to this. The breakdown of pre tax Roth non qualified first. Obviously we’re gonna max out Roth 401 ks, 403 B’s. If they have a mega backdoor Roth option, obviously we’ll do that. Say they don’t.

Matt Blocki
06:13
Let’s assume. So. They’re each banging 23 into the Roth 401K.

Jamison Smith
06:16
So it’s 46 and that’s Roth.

Matt Blocki
06:18
And then they’ve got a match of, let’s just say their incomes are 250 each. So that’s 7003% of 250 would be 7500. So essentially, what is say, 30,000 per year is going into each 401K. So 60,000 total for the couple, that’s 5000 a month.

Jamison Smith
06:35
Yep. And then on top of that, obviously, backdoor Roth Iras. 14,000 a year.

Matt Blocki
06:40
Yep. So now they’re saving 6200 a month.

Jamison Smith
06:46
Okay.

Matt Blocki
06:46
Just doing the low hanging.

Jamison Smith
06:48
What is that? Just that. What does that get?

Matt Blocki
06:50
Yeah. In 30 years. So 6200 a month, assuming zero to start, like they’re fresh out of residence year fellowship, and they just, from zero, like, literally have nothing in the accounts. Start saving 6200 a month between the 2401 ks and the backdoor offs over 30 years, assuming a conservative, diversified asset, allocated portfolio, 7% compound and return at 65, they have $7.6 million.

Jamison Smith
07:14
So they’re close but not quite there.

Matt Blocki
07:17
Yeah. So we need to save basically an additional 800 a month. So we need a total of 7000 a month to get to 8.58 million. So basically to get to 8.6 million so this couple’s got to save 7000 a month. And the nice thing is the first five is going to happen before they even see the money. That’s going to happen before they see their paycheck, just naturally in the 401 ks. And the other two is what we got to help them save. Outside of the forward case, I’d say.

Jamison Smith
07:43
There’S a couple of things to add to. Number one, obviously we want to save more than 800 a month because a couple of things, there’s going to be things that come up pre retirement. Maybe they want to buy a vacation house. Maybe some of that money goes towards college. That’s not in 529s. Maybe they do a home renovation. And the second thing if they don’t. So let’s say 23 is coming in after the 401 ks.

Matt Blocki
08:06
Yeah.

Jamison Smith
08:06
And they save 800, say thousand. So they’re used to spending 22. Obviously there’s some college savings and the mortgage, but their money temperature may be higher than that 15,000 a month.

Matt Blocki
08:17
If they don’t, they’re gonna retire probably with 18 a month instead of.

Jamison Smith
08:20
So that’s the other thing that’s really important is we could get them on track. But if they’re used to spending 18, then that number, you know, at retirement’s gonna be even larger for sure.

Matt Blocki
08:31
So, I mean, sometimes saving, you’d save just to control your money temperature, because if you don’t, whatever you say, generally, rule of thumb, it’s going to get spent. All right, so let’s go granular. So 7000 a month. So someone’s bringing home 23, 7000 a month. And now this doesn’t always work naturally for a physician because maybe the first ten years they’re paying off school loans or they’re on like a ten year forgiveness program, or maybe they’ve. They’re done with three years and they have seven years to go. But other things we have to say for is college. And like you mentioned, if all they save is an account that they have access to, that thing’s gonna get blown up like every couple years. You know, they want to some kitchen or a new furniture or this house isn’t good.

Matt Blocki
09:14
So now we gotta buy this house and others transactional. The average person moves like, you know, eight or nine times throughout their lifetime. So just a financial plan. We can’t just assume a static, hey, they’re gonna save seven, most likely this couple. They’ve got to save close to ten. So again, five is happening before they get the 23 in their bank account and then out of that 23, I would say they got to save another five allocated towards, we’ll call it the blow up account, where they’re basically, it’s not saving a save to spend account, they’re saving towards college and they’re saving some extra towards retirement as well. So that would leave them with 18 a month. That 18 a month generally recommend.

Matt Blocki
09:52
Don’t have your housing costs, more than 30% of your take home, don’t have your car payments, more than 10% of your take home. So 4% of 23, I mean that’s about 9200 a month right off the bat. And then if we’re selling to save five, that’s 14,000. So they have another 9000 a month to do life to pay off their school loans into, you know, discretionary spending, pay utilities, et cetera.

Jamison Smith
10:18
Let’s talk about what are common, what are things that we see that blow this up. What’s coming to mind for me would be like overspending on a house. What have we seen go wrong at a half a million dollar income that makes this not possible?

Matt Blocki
10:34
Yeah, I mean, the reality is. So median net worth can just Google this age 65, I believe it’s under half a million dollars.

Jamison Smith
10:41
He’s like three. I just saw the update. It was like 320 something.

Matt Blocki
10:44
Maybe it’s like under 300,000. So the average net worth they say is around a million, but the median net worth is like under 300,000. And this is after you’ve had your whole life of saving. So I mean, life just happens. Yeah. This is showing median net worth of 410,000, average net worth of 1.8 million. Huge difference between median and average, though, because the average includes like the one percenters that could really skew that. The median is a more realistic example. So you know what blows us up? I would say an order. You mentioned house number one.

Jamison Smith
11:24
It’s probably an easy number one. Yeah.

Matt Blocki
11:26
Yeah. Because you buy a million dollar house, you’re making half a million dollars. You’re probably within the stress test because we either recommend two times gross. So two times 500,000 for a household would be a million or 30% of your net take home. So 30% of 23,000 a month would be 6900 a month. And that’s going to. Even with the high interest rates right now, if you put 20% down, you’re probably within that number.

Jamison Smith
11:52
A lot of areas of the country, though, now, like a million dollar house is not. It’s a big house, but it’s like Pittsburgh, obviously you can get a reasonable house. But there’s a lot of areas in the country where, especially if you’re a physician, you’re around a lot of high income earners. It’s very easy to push that even higher.

Matt Blocki
12:09
Oh, no question. Yeah, that’s number one. I would say number two is just like not having a dialed in reverse budget. So you see 23,000 a month come in your checking account, you think, okay, I can afford this and that. Those things add up so quickly. And without a reverse budget, there’s no accountability system. You’re just gonna keep hitting snooze on your plan and the spending’s just gonna add up. So I would say that’s number two. What would you say number three is?

Jamison Smith
12:41
Yeah, I would say just luxury purchases, buying a nice car, buying, like, things that are not totally necessary just to try to live a higher. Like you humans, by nature, we wanna fit into society, fit into the tribal instinct. So, like, if you know, if you’re around a bunch of rich people that, you know, they have a lot of nice things, you’re obviously going to want to do that too. So I would say that’s a big thing.

Matt Blocki
13:07
They kind of. That you become the average of the people you surround yourself with. Yeah, that’s big. Yeah, for sure.

Jamison Smith
13:13
Yeah. And then I’d say another one that could blow it up would be private high school for kids. That can be a significant cost.

Matt Blocki
13:22
Yeah, Private K through twelve is like a college tuition in a lot of places. Yeah, no question. No question. And then I’d say the other big one is just getting distracted with different investment ideas like these. Oh, my friends are doing this private investment and I’m going to put in a couple hundred grand. Well, you know, maybe one out of ten of those work out. But generally speaking, because we’ve tracked this, if you look at that, compared to just normal public diversified equity investing, the boring diversified equity investing through, like, low cost ETF’s is going to crush those private. And your friends are going to tell you about the one. That’s it. Big, not the other ten.

Jamison Smith
14:01
That one in seven businesses succeed.

Matt Blocki
14:04
So, same for any kind of private investor.

Jamison Smith
14:06
Yeah, one in seven chances.

Matt Blocki
14:08
Absolutely. Then I would say that the other big one would be divorce without having a prenuptial agreement. That can.

Jamison Smith
14:16
That may be number one, actually.

Matt Blocki
14:18
Yeah. Especially for physicians. I mean, that’s a big risk. If you’re marrying a non physician, make sure to have a prenuptial agreement in place. Cause that can really put you back significantly. And then, yeah, any others that you.

Jamison Smith
14:35
See as a big real estate kind of what you said, distractions like real estate. I would lump that into the private investments. Just like things that are gonna. That you think are gonna give you a really high return or an income stream, but they end up being a huge waste of time. Yeah, I’d say that’s pretty much it.

Matt Blocki
14:53
Yeah. I mean, it’s staggering to see how simple it is. I mean, you need to. You make this kind of income. You’re a Henry, you know, high earner, not rich yet. It’s pretty simple. You save, you know, about 25% of your income and you’re automatically there. You’re at that $8 million number. People just can’t do it. Yeah, and that’s a proven. You just look at averages and very. Some people do it so well, they, like, over accumulate, and then most people, they just can’t, they get so distracted or they don’t dial in these rules and before you know it, you know, 10, 20, 30 years is up and you’re in that median net worth and you can’t retire.

Jamison Smith
15:30
Yeah. So let’s say if you want eight and a half million, what would be the breakdown of Roth pre taxable?

Matt Blocki
15:37
Yeah, that’s a great question. So I would say at least a third Roth. So if they’re both maxing out the Roth 401 ks, that’s going to be more than a third. But right now, with the low tax bracket environment went in, we’d recommend front load those Roths. Right now, obviously, the match is going to be pre tax. So generally speaking, a minimum of a third tax free between basis and a brokerage account and Roth accounts, and the other two thirds could be pre tax. Because often the argument’s like, okay, I’m going to be in a lower tax bracket when I retire because my school loans, my kids are gone, my house is paid off. And I get that. But the way the government has these accounts structured, you have required distributions on these pre tax accounts.

Matt Blocki
16:14
You have dividends that show up, your Social Security is taxed. This all works into your adjusted gross income and your modified adjusted gross income, which the Medicare rates are based on. Before you know it, you may not need all that money, but you’re still going to be paying a high tax bracket. So, you know, generally speaking, a minimum of third Roth or third tax free, two thirds tax later. Ideally, if it’s me, I want half and half.

Jamison Smith
16:39
So I would say most cases, especially if you’re 35 years old, Roth’s probably not going to be around forever. Lock could change and then you can’t fund it at all.

Matt Blocki
16:49
Yeah. So definitely front load. That so perfect. Well, there you have it. $8 million is the new 1 million. If you’re a high income earning position, at a minimum, it may be more than that. Now, if you’re a single person, don’t just divide this in half at 4 million. Jameson, talk through us. Talk as why.

Jamison Smith
17:08
They’Re not buying half the size. They’re not going to buy a $500,000 house. So that’ll probably be maybe they’re 700. That’s one thing.

Matt Blocki
17:17
You’re paying utilities. Those aren’t a half. Just because one person’s out of two person.

Jamison Smith
17:21
Yep. Let’s see what else. Kids, I guess, may or may not be in the picture.

Matt Blocki
17:29
What would you say the number is for? We just talked through a half million dollar physician family, two kids as an example. School loans, all that they need. Eight and a half. If it’s just a single physician making 250, we’re saying it’s not.

Jamison Smith
17:43
4.255 to 6 million would be the number.

Matt Blocki
17:46
Yeah.

Jamison Smith
17:47
And that’ll generate what times 300,000 ish a year?

Matt Blocki
17:53
Yeah. So they got 6 million. We could say they’re pulling 20 a month pre tax easily. And then after taxes, blended tax rate, probably about 17 plus Social Security is another three. So they’re clearing 20, which would be equivalent to like eight or 9000 a month today, which is close because that person’s probably bringing home eleven to twelve a month in today’s dollars. Yeah, I would agree. I’d say 5 million is the number. If you’re a single income earner making between 250 to 400, then you need to target at least 5 million by 65 and two.

Jamison Smith
18:24
This is very much lifestyle spending base. Like, we do have clients that, like you said, they over save. Maybe they really are only going to need 10,000 a month. And that’s really realistic. They obviously would need a smaller number. So this is general advice. But this can get more skewed one way or the other based on lifestyle, no question.

Matt Blocki
18:45

All right, well, there you have it. Look forward to catching everyone next week. Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very.