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?
Are you sure?
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.)
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.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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