Ok, we’ve gone through a bunch of the finance, investing and retirement topics in my prior posts. We now have enough information to start talking about how to plan for your own retirement.
If you haven’t read them yet, I would advise you to go through the Finance Fridays posts and read most, if not all of them before reading this post. It’s a lot of reading, but really you need that background in order to understand this post to its fullest extent.
That said… let’s start:
Most of what I talk about in my prior posts is focused on retiring comfortably at 65 debt-free. By that point, you should have enough of a retirement nest egg to provide for you well into your 90s, and possibly even an inheritance for your children. We’ll talk about estate tax later… but that most likely won’t be a problem for the majority of us.
However, the question which almost invariably happens when I talk about retirement is…
What if I want to retire early… at like 55?
The first answer to this question is: Great, at the very least you have prioritized the idea of retirement in your head. It is such a high priority that you now what to do it early. Now for the bad news:
Retiring at 55 is very, very difficult. Especially for a physician who doesn’t start earning a real salary until their early to mid 30s. Instead of a 30+ year work history to accrue a retirement nest egg, you are looking at a condensed schedule of about 20 years.
If this is something you really want to do, then
Here are a few conditions that you must almost invariably meet:
Don’t get a divorce.
Giving away half your salary every month makes early retirement essentially impossible. You’ve been warned.
Live in a low cost-of-living environment.
That means no San Francisco, New York City, Honolulu, etc. Cost-of-living will literally eat into your salary every month and if you plan to retire early you simply can not afford that kind of waste. Paying $5000 a month for rent versus $1000 a month adds up quickly.
Waste not, want not.
You will need to be frugal with your expenses. Brand name clothes and a BMW should not be a priority. Your early retirement is the priority… remember?
The above are what I consider essential in order to retire at 55.
The next few are “helpful”:
Don’t have kids.
Don’t get me wrong, I love my kids and I would never be able to “not have kids”. However, I am also looking to retire at 65, not 55. In fact, I like my job so much I’ll probably do it until I’m 70. However, children are pretty costly, especially if you plan to pay for private school and/or college.
Don’t buy a house.
Unless you plan to have paid off this house and retire in it, it’s a better use of money to simply rent for 20 years before retiring at 55.
Don’t have any student loans.
If you are lucky enough to not have any student loans… well, that is obviously very helpful.
Ok, so what do you think, can you do at least the first 3?
“Yes”
Are you sure?
“Yes”
Ok, then let’s dive in:
You want to retire at 55 and let’s say you plan to live until ~90. So you’ll have been retired for 35 years. That means you need enough of a nest egg by 55 to pay for the 35 years of retirement.
There is something called the “4 percent rule”. Now it’s not perfect, but it seeks to provide a reasonable approximation for what is a “safe” nest egg. Also note that this rule is based around low cost index funds and not more volatile offerings. If you want to read more about it go here, William Bengen 1994.
So there are a lot of withdrawal calculators, but let’s just use Vanguard. Just from fiddling around with the numbers, if you have $2 mil in a nest egg, you could withdraw $5000 a month for 35 years, with an initial withdrawal rate of 3%. Just to prove I’m not making up stuff, let’s use another one, Bankrate. $2 mil nest egg, 30 years, 1% return (very conservative), and $5000 withdrawal a month would leave you with $322,463 when you turn 90. (These calculators make assumptions about returns, etc.)
As you may know, I like round numbers, so basically. You need a $2 million nest egg, with $60k yearly withdrawal ($5k a month), and it should last you for 35 years without much problem.
So then, the real question is, can you live on $5000 a month?
Note that the Bankrate calculators doesn’t inflation into account, so you may start at $5000 a month, but that may increase slightly each year (~4% withdrawal) to keep up with inflation. This is probably the reason that Vanguard recommends starting with a 3% withdrawal rate (which is $5000) in the first place.
Wait…so is it 3% or 4% withdrawal rate?
Good question. Honestly, I believe that 4% is still walking a fine line. Remember that Bengen wrote this paper in 1994 for the previous years. Those time periods did not have a problem. However, I am a scaredycat and I would probably go with 3% to be safe… at least to start. It’s always easier to spend more money if you have it. Being more frugal, however, is more difficult.
If you want, you can just split the difference and go with a 3.5% withdrawal rate.
Ok back to the numbers again:
You’ve just finished residency and are starting your first job. You’re probably 30-35 or so. That means you have 20-25 years to accumulate enough of a nest egg to last from 55 to 90ish.
How much do you think you’ll need a year to live off of?
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.
More than that…? Well, the sky’s the limit.
That’s a lot to accumulate in a short amount of time, especially if you have $300k-$500k debt hanging over your head.
I’ll go into more detail (and math) in a follow-up post. (ie. What about Social Security? What about pension?, etc.)
TL;DR
Retiring at 55 is “Hard”.
Retirement will need to be the priority in your life.
3%-4% withdrawal rate is the key.
You’ll need $2 million to $3.5 million in a nest egg by 55, depending on your lifestyle and cost-of-living in retirement.
-Sensei
Agree? Disagree? Questions, Comments and Suggestions are welcome.
You don’t need to fill out your email address, just write your name or nickname.
You’re speaking my language, Sensei! Well, sort of… I actually think it’s not at all difficult for most physicians to retire at 55 or earlier by making sensible choices. I’ve made some mistakes, but made a lot of good choices, and was financially independent at age 39, within ten years of finishing residency.
I haven’t retired yet (now 40) but will most likely leave clinical medicine by age 45. I mostly enjoy my job, but I’ve always liked my days off more. I’ve been that way since first grade, when I would pray for snow days rather than school.
You are absolutely right on with the advice: One spouse, no more than one house (I don’t practice what I preach on this one), and especially living in a low cost of living area. Minimizing loans, or perhaps arranging for loan forgiveness can be huge, too. Public schools from kindergarten through MS-4 for yourself and your kids. Having children does cost money, but for all but the most destitute, money should not be a factor in the decision to have them.
I would also emphasize becoming educated in personal finance, and not relying on advisors to handle your money. Advisors can certainly be helpful, but you need to learn enough to be able to sort the good advice from the bad. When you know enough to be able to make that determination, you might just know enough to DIY.
Understand that investing fees can cost you millions, and be the difference between being able to retire at 55 versus 65. Also understand that when you start your career, you may want to work for forty years. Ten years in, you might be ready to hang it up in five. Medicine changes, as do people.
Best,
Physician on FIRE
True, Physician on FIRE. You are probably the most qualified person to talk about early retirement. I’ve read your blog before and I like it a lot. Overall, it probably is not as difficult as I make it out to be. However, I wanted my readers to be aware that in order to retire early, they must make a fundamental change in their priorities compared to other “normal” doctors.
I completely agree with your advice on not relying on advisors to handle your money. I speak about Financial Advisors, The Good Ones, and How to Find One in my prior posts. However, being your own advisor is probably the best way… assuming you can stick to your plan and stay the course.
You do bring up a very good point about how you feel about working when you first start versus 10 years in. I really like my job, and I think I can do it for 30+ years. However, who knows how I’ll feel in 10 years… maybe I’ll want to slow down. Saving money early and having the option to retire early is always nice.
-Sensei
So true. As you say, “in order to retire early, they must make a fundamental change in their priorities compared to other “normal” doctors.”
Live like no other doctor today, so you can live like no other doctor tomorrow. It’s also quite true that setting yourself up to afford an early retirement doesn’t have to lead to an early retirement.
But financial independence gives you much more latitude to practice in a way that suits you. That could mean working less, working at a different pace, teaching in an academic center, or not working at all.
Glad you’ve discovered and enjoyed my blog posts. I’ll be following yours!
Cheers!
-Physician on FIRE
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Hi Al,
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Good post…but I totally disagree 🙂
I contend it is stupidly easy for a physician to retire at age 55, and the only reason one shouldn’t be able to retire is due to some unforeseen life disaster or multiple bad decisions. Sure, if you are a pediatrician, the sole income earner and you live in San Fransisco you are probably never retiring, but on average it is easy. I would say for a high income specialist 45 should be relatively easy, even easier if the spouse works.. At age 40 things start getting difficult and you need to be either frugal, lucky or both.
If you go straight through training and school you will probably be out of residency/fellowship by age 32. This gives you 23 years to earn to get to 55. Back of the napkin calculations: Save 8k/mo at 5% real returns (8% nominal) you have $3.2 mil in today’s purchasing power. At a 3.5% SWR this is $112,000/yr which is a ridiculous amount on money. This does not even account for social security or and inherited money which add higher margins of safety, in fact a 4% SWR is probably even too conservative. You could most likely spend 150k/yr and be just fine.
Also if you are in a high earning specialty like radiology you should be able to easily save more than 8k/mo unless you have specifically designed your life to be expensive.
I also disagree that you need to rent and have no kids. Rent vs. buy is market specific and it is just bad advice to tell someone to do one of the other without running the numbers in their local market.
Kids are not expensive unless you make it that way. They want your time and love and require little else. It is not mandatory to put them in private school, 5 club sports, executive violin lessons or pay for 8 years of the most expensive college and graduate program you can find.
I agree with you that divorce is a financial hand grenade.
Retiring at 40 is kind of hard. Retiring at 55 is easy for a physician. All you have to do is not make multiple mistakes, have a slightly above average financial intelligence and live a life only slightly less ridiculous than the average doc. If you are content with an average middle class lifestyle (most docs are not) you can get out in 10 years no problem.
Hi @TheHappyPhilosopher,
Thanks for your comment! I will write a reply soon. Just need to run a few errands this morning.
-Sensei
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