How to plan for an uncertain financial future

The tricky part about retirement planning is uncertainty.

Uncertainty in retirement planning comes from three major sources.

1. Current and future income

Doctors are fortunate in that they have very high job security. Even if you were to be let go from your current position, there will almost always be another position somewhere in the country (although you might have to move out of your current metropolitan area).

However, the high income doctors currently enjoy is hardly certain to persist in the future. Healthcare in America is very expensive, and government and private insurers are continuously looking for ways to cut physician reimbursement (or at least slow its growth). There has almost always been a pessimism from physicians about the future of doctor salaries (although previous fears from the past few decades have largely gone unrealized).

2. Investment volatility

The second form of uncertainty in retirement planning comes from the volatility of investment returns.

It is easy to plug in a single number for your investment return in a calculator or investment spreadsheet.

The reality, of course, is that the stock market does not go up 10% every year. The volatility of the stock market is why equity returns are so high in the first place, and the stock market doesn’t always deliver high returns, even over long periods of time.

For example, the historical volatility (standard deviation) of the S&P 500 is 20% per year. Assuming that each year’s investment returns are independent (i.e. not correlated) with the prior year’s returns, then over a 35-year investment horizon, the standard deviation of your investment returns is 20%/SQRT(35) = 3.4%.

Many investors like to be 95% confident that they will meet their investment goals, which means you would need to plan for a long-term return that is 5.6% (3.4% x 1.65) lower than the expected return.

Over the course of decades, the difference between an 8% return and a 2.5% return is millions of dollars.

3. How long you’re going to live

The final form of uncertainty is not knowing how many years of retirement spending you will need to save for.

We’ve all had patients or friends who worked their whole life to reach retirement, only to pass away early in retirement from a sudden illness. In retrospect, they did not need to save anything in retirement if they knew they would die shortly after retiring (actually, they probably would have retired earlier had they known).

On the other end of the spectrum, you could live to be 100 or more. Most retirement calculators assume a retirement of 30 years, but more and more people are living longer than that.

You can look at an actuarial table from the CDC or another source to know the average life expectancy at your desired retirement age, but of course, you could live much longer (or much shorter) than that. Your retirement plan has to be able to handle the “worst” case scenario, which would be a long retirement.

Flexibility is the solution to uncertainty

Because of this uncertainty, most of us will have to save significantly more than what we will eventually spend in retirement — the difference will go to our heirs when we die.

There will always be some uncertainty in retirement planning, but the single theme that binds many of the methods to reduce uncertainty in retirement planning is flexibility.

There are many forms of flexibility when it comes to retirement planning:

1. Spending flexibility

This has been discussed previously by others, and for good reasons — this is one of the most important forms of flexibility in retirement planning.

If you are willing to decrease your retirement spending if the stock market does unexpectedly poorly (especially early in retirement), then you can probably use a higher withdrawal rate compared with someone who is inflexible in your retirement spending needs.

How do you increase spending flexibility? The easiest way is to reduce your fixed expenses. If you don’t have a mortgage or a car payment, then a higher percentage of your income becomes discretionary income. It’s much easier to cut a vacation or two from your retirement spending budget than to downsize your home.

2. Flexibility in your retirement date

Having flexibility in when you’ll retire will make saving for retirement a lot easier.

If you have a certain age in mind (such as 65) when you must retire, then you’ll probably need to save more and invest more conservatively to make sure you have hit your retirement number by that age.

On the other hand, if you have a willingness to work longer if necessary to reach your retirement goals, then you can probably save less (and spend more) during your working years. You can also invest more aggressively during your working years. Paradoxically, this means you might actually be able to reach your retirement number earlier than if you have a set retirement age in mind.

3. Job flexibility to increase and decrease work hours

Another key form of flexibility is your ability to easily increase or decrease your work hours. Doctors may be paid more or less in the future, but if you work in a shift-based specialty (hospitalist, emergency medicine, anesthesia), then you have the ability to simply work more to keep up with whatever income or lifestyle you want to have (up to a point).

Similarly, if you want to reduce your hours because you’re way ahead of your timeline to meet your retirement goals, it’s easy to do so. While other specialties may have some room to work more or fewer hours (e.g. take more or less call), physicians in shift-based specialties can more confidently project their future pay.

4. Retirement income sources that are independent of how long you’ll live (“health flexibility”)

Obviously, none of us know how long we will live, and we need to plan accordingly. Of course, we all would rather have the potential to live for many, many years after we retire as opposed to being limited by a degenerative, life-limiting illness such as heart failure, cancer, or Alzheimer’s. And for many of us, simply working until we die is not a desirable option.

However, from a financial perspective, you can increase your “health flexibility” by having more of your retirement savings in forms where how long you live does not matter.

Pensions and Social Security are the best examples. These retirement income sources will pay you benefits for as long as you live.

Annuities are another way to increase your “health flexibility”. While the safe withdrawal rate in the Trinity University study was calculated to be 4%, annuities will generally pay 6% or more (and this is after the insurance company takes their cut). This is because a retiree who uses a 4% withdrawal rate rarely runs out of money, but they have to plan in case they do have a long retirement.

An annuity ensures a stable lifetime income stream, but if you put your entire retirement savings in a fixed annuity, no money will be left to your heirs, and if your retirement expenses unexpectedly jump (e.g. increased healthcare costs), you could run into major cashflow issues at the most inopportune time.


Because of the uncertainties in future income, investment returns, and life expectancy, most physicians will end up saving much more than they will ultimately spend in retirement. However, various forms of financial flexibility allow you to “hedge” some of this uncertainty. Consider increasing one or more of these forms of “flexibility” as you think about and create your own retirement plan.

What do you think? What is the biggest source of uncertainty in retirement planning? Are there any other forms of “financial flexibility” that you would add to my list?

“Wall Street Physician,” a former Wall Street derivatives trader , is a physician who blogs at his self-titled site, the Wall Street Physician.

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