How to Retire Early 9


The primer for this post is here: Retiring Early

We’re going to go through some of the math you need to understand in order to retire early.


Let’s start with this:

How much money do you need a year during your retirement to last from 55 until ~ 90? (from my prior post)

Is it 60k? Then you need ~$2 million.

Is it 80k? Then you need between $2.5 million to $2.75 million.

Is it 100k? Then you need $3.25 million to $3.5 million.


Let’s try to calculate the two extremes of $2 million and $3.5 million.

Now this will vary for some of you depending on how long your residency/fellowship training is. However, if you started work at 30, you have 25 years and if you started at 35, you have 20 years of compound interest in order to earn you nest egg. Let’s also assume a 6% return to be more conservative.


Let’s look at $2 million first.

The handy dandy compound interest calculator helps us here again.

Just input 1, 5000, 20, 6% and 1 to start with.

If you put away $5000 a month ($60,000 a year), you will have $2,207,138.68 in 20 years.

If you put away $5000 a month ($60,000 a year), you will have $3,291,875.01 in 25 years.

If you put away $3250 a month ($39,000 a year), you will have $2,139,720.26 in 25 years.

So there you have it, in order to retire early and have a ~$2 million nest egg, you need to put about $60,000 away a year for 20 years (starting at age 35) or $39,000 a year for 25 years (starting at age 30).


Now let’s talk about the $3.5 million:

The handy dandy compound interest calculator helps us here again.

Just input 1, 7000, 20, 6% and 1 to start with.

If you put away $8000 a month ($96,000 a year), you will have $3,531,419.96 in 20 years.

If you put away $8000 a month ($96,000 a year), you will have $5,266,997.44 in 25 years.

If you put away $5500 a month ($66,000 a year), you will have $3,621,062.08 in 25 years.

So there you have it, in order to retire early and have a ~$3.5 million nest egg, you need to put about $96,000 away a year for 20 years or $66,000 a year for 25 years.


That seems pretty doable right?

This calculation assumes you have no debt and no other high costs to attend to (such as a mortgage or car payment). You will be living on $60,000 to $100,000 a year, some of which will probably be taxed because at least a portion of your nest egg probably came from a 401k/403b account which is pre-tax.

Additionally, these calculations do not take inflation into account, and you should probably try to live on less than what you expected:

There are a ton of inflation calculators around, but I like this one because it shows a nice graph and lets you select your expected inflation rate.

If you assume 2.5% inflation, then $60,000 in 2016 is worth ~ $98,317 in 2036 and $111,237 in 2041 (20 year and 25 year retirement from today respectively).

This means that you would need > $100,000 a year in 2036 and 2041 to approximate a similar lifestyle to $60,000 a year in 2016.

If we mess around with the numbers and assume a 2.5% inflation rate, then we figure out that:

$35,000 in 2016 will be worth $57,352 in 2036

$35,000 in 2016 will be worth $64,888 in 2041


Wait… what?!

Inflation also compounds. You need your own compound interest to offset it.

If you calculate for a $60,000 a year nest egg and save your $2 million dollars at the age of 55, then you will need to live off of the equivalent of $35,000 a year. This is STILL doable assuming you live somewhere with a low cost of living, own your own low maintenance house, and own your own cars. However, you will not be taking any lavish vacations anywhere.

Saving ~$3.5 million for the equivalent of a $100,000 a year is more reasonable because that is ~$60,000 a year equivalent in 2036 and little less than that in 2041.


Ok, so what should I do then?

There have been studies on how much money a person needs to “be happy” over which there isn’t much of a difference. This was researched previously to be the round number of $75,000 a year back in 2010, out of Princeton. Note that this $75,000 number is a household number.

Using our inflation calculator again (with real values this time, not predictions).

$75,000 in 2010 will be worth $81,866 in 2016

However, Huffington Post did another follow-up to this in 2014 where they tried to break things down state by state. This intuitively makes sense because “$75,000 happiness” is not the same as Mississippi ($65,850) versus Hawaii ($122,175). This of course is based on cost-of-living, but does not take into account retirement benefits like certain pensions/social security being taxed differently in different states. However, that is a whole other post for another time. (Spoilers: There is a reason why everyone retires to Florida.)

So how much is a $82,000 a year (2016) equivalent nest egg in 2036? Our inflation calculator (2.5%) says:

$82,000 in 2016 will be worth $134,367 in 2036

$82,000 in 2016 will be worth $152,023 in 2041

That’s a lot of money to be withdrawing every year. However, that is a pretty comfortable retirement in my opinion.

Remember the retirement calculator from my prior post? BankRate? Let’s fire it up again:

If you have $4,5000,000 saved and withdraw $12,000 a month, assuming a 1% return. You will last the 35 years and die at 90 with $348,252 left.

So you would need to have between $4 million and $5 million dollars to last the 35 years.

Of course, this number is different if you need it to last a shorter amount of time… which is why retiring at 55 is so much more difficult than retiring at 65.

Having enough money for 25 years of retirement is entirely different from saving enough for 35 years.


Other things to consider:

You will get some form of Social Security (probably), but it won’t be much.

Expect medical costs to increase and long term care costs to increase, and they are already pretty expensive in 2016. Reference

No one can tell you for sure how much your health care and/or long term care will cost. All you can do is make a conservative estimate.

The farther you are from retirement and the longer your nest egg has to last for makes it very difficult to predict costs. These numbers will need to be worked and reworked probably every year. So just saying you want to save $3 million dollars and retire at 55 is a reasonable plan… but it’s still only a plan.


So, you need to ask yourself… How much do I need?

Is it $3 million? $4 million? $5 million?

Do you want to retire at 55? 60? 65?

What is your number?

Mine is $5 milllion. That is the amount I am saving toward by the time I hit 65.

Will I get there? I hope so.

I’ll talk more about my long term plan later.


TL;DR

Retiring Early is difficult… but not impossible.

$60,000 today is not $60,000 when you retire.

Inflation compounds too.

“Happiness” was $75,000 back in 2010. Probably a reasonable starting point for a comfortable retirement.

What is your number?

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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About Sensei

A young attending physician trying to navigate the mine field that is life after medical school…


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9 thoughts on “How to Retire Early

  • Physician on FIRE

    My number is $3 million in retirement savings. That will be 40 years of expenses at our current spending level as a family of four.

    Other numbers I’m aiming for:
    $100,000 or more in each of the two boys’ 529 funds.
    Zero debt. [Done] Two properties in low cost of living areas are fully paid off.
    45 (Age by which I’ll likely be retired from clinical medicine)

    I’m anticipating working full time another 3 years or so plus perhaps an additional year or so overseas (New Zealand and/or Australia). And of course, I will continually evaluate the plan, reserving the right to change course.

    Cheers!
    -PoF

  • Future Proof, MD

    My number is $5 million. That’s including anticipated costs of starting/raising a family, future education costs and travel expenses – I would like to be able to take the family on 2-3 international trips/year. Of course, as circumstances change, so will my number. But right now that sounds about right. I hope to reach it by age 55. It sounds quite ambitious I know, but I think it’s not entirely out of reach.

  • Passive Income M.D.

    Again, I think about my retirement number differently than most people. I think of it in terms of “how much passive income do I need monthly.” If I can build up a portfolio of rental property, dividend stocks, and other passive income cash-flowing ventures to hit “X” amount monthly, then I’m good right then and there. Sometimes I think that number is $15,000 a month, sometimes it’s $20,000. (I live in one of the cities with the highest cost of living in the US.) I think I can get there in 10-15 years.

    That’s not to say I don’t contribute to my 401k. I contribute the max for the tax benefits, but I consider it gravy.

    Would love to hear what you guys think about this…

    • Sensei Post author

      Hey dude, I forgot to reply to this comment.

      The idea of passive income from rental property, dividend stocks, and other ventures to hit a monthly income goal is admirable. However, I am not sure many doctors have the risk tolerance or ambition to do such things. Just “being a doctor” is enough stress for most doctors.

      That aside, having sources of passive income would be a boon to retiring early. Any way to achieve a recurring monthly passive income is of course favorable. I would imagine that many bloggers (physicians or not) would like to have this kind of income generation. However, this is not achievable for most people.

      I think that the most efficient form of “passive income” is compound interest. ie. Getting your first million in index funds is the hardest, then it gets easier to make the 2nd and the 3rd, and so on. Of course, if you can acquire other forms of passive income while still getting to your first million in index funds, then of course, that is all the better.

      Of course, that is easier said than done and requires some degree of risk on your part…