You want to retire early?

There was a recent discussion on our FB group about retirement. It was stated that we should save as much as possible as early as possible so that we could retire as early as possible.
I have zero argument about the advice to save as much as possible early in your career. After all, compound interest (when the interest you earn each year is added to the principle, which in turn, earns more interest) is the greatest retirement tool out there. We’ve all heard the story of the two doctors: One saves $1000/year from age 25 until 45 then stops contributing altogether and yet has more money at 65 than the one who waits until age 45 and puts $4500/yr away until age 65 (this is 100% true). However, savings is only one half of the retirement equation.
Yes, the older you are when you retire, the less money you will need. Assuming you live until 90, it makes perfect sense that one who works until 85 will need a smaller nest egg than one who retires at age 65. After all, one only needs 5 years of savings and the other 25 years worth. However, there’s much more to the equation than that.
Let’s assume that you saved a ton of money starting the year you got out of residency (age 29). You got an awesome corporate job, were single with no kids, no school debt and could put away $100,000/year for retirement. If you could do that for 10 years through having kids, saving for a house, buying a practice, etc, THEN at age 39, ramp it up to a $150,000/yr contribution for the next 11 years, you would have roughly $6,344,000 at age 50 (assuming a steady 8% interest rate throughout). Sounds like a ton, right? OK, so you decide to retire. Do you have enough money?
Well, it obviously depends on your spending habits. At 50, your house is likely not paid off, so you probably have a mortgage. Also, remember that single life you had at 29 which allowed you to sock away a ton of money? Odds are at age 50 you have kids either bound for, or in college. Now, you could say that you’re not going to pay for their education, but let’s assume you are.
That 50 year old who gets 5% per year (after taxes) on their money (remember, this is your nest egg and you can’t risk it) at 3% annual inflation and removes $250,000/year (before taxes) runs out of money at age 85.
Sure, I get it. You said that you would like to retire at 50, but of course you want to do something to make money on the side, or you just plan on working on your terms, but the point of this discussion is to talk about the reality of retiring at 50. If you work until 60, instead of 50, the whole equation changes because in that scenario (with same variables), you have $16,250,000 at age 60 probably with kids out of the house and mortgage paid off.  But this discussion was about early retirement in a vacuum.
Sure there are some huge variables such as the fact that as one gets older, they tend to spend less; An 80 year old couple travels less, has Medicare to cover expenses instead of paying for health insurance, has no mortgage, etc. But, the point of this entire post is simply to get younger docs (who may not have yet met with a financial advisor) to understand two things.
1. If you can,  start saving early to build as much early capital s that you can take advantage of compound interest.
2. While one may dream of an early retirement, keep in mind that the earlier you retire, the more savings you need, particularly if you still have kids at home or in college.
Here’s a little summary I once heard from a famous money manager and it’s stayed with me:

  • Until the interest you’re earning from your portfolio exceeds the amount you’re putting in every year, conservation of capital is key. (i.e.-investing $10,000/year and earning $3000/year in interest.) Don’t ever buy into the “you’re young and can risk everything, if you lose it all you can rebuild” argument.
  • When the interest you’re earning equals or exceeds the amount you’re putting in, the rate of return is the key. (i.e.-investing $10,000/year and earning $10,000/yr interest.)
  • When the interest you’re earning is 3 times what you’re putting in every year, you c an stop putting money away for retirement and start using that earmarked money for the fun stuff you want because it plays a smaller role in your retirement. (ie.-investing $10,000/year and earning $30,000/yr interest.)

For you younger docs, I hope that this post helps you think about things you may not have given attention to. Yes, it’s tough if we owe student loans and try to build a practice and a family at the same time. However, we practice in a great profession and if we play our cards right, will have a future retirement that works out well.
Best wishes,
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