Early Retirement Strategy For Physicians
I think you can retire as early as age 35 with some good planning, by age 37 if you are willing to live a more frugal lifestyle and definitely by age 40 even without trying too hard.
Let’s define retirement. Being retired means no longer having to depend on a job for one’s living expenses. It makes no difference if you decide to continue to work (I’ll define job a little further down). The important 2 factors when it comes to retirement are
- having full control over one’s free time and
- being financially independent.
Misunderstandings Regarding Retirement
The mistake that I see people making when discussing retirement or when planning for it is trying to achieve near 100% success. Finances/economics are everything but a science. Fortunately, diversification is a good substitute for certainty. Instead of saving $6,000,000 for retirement you could save quite a lot less but have multiple income streams.
Another factor that makes retirement such a tough topic to address is that a lot of households don’t know what their expenses are. Since they don’t have this information they don’t know what income they need to sustain their desired lifestyle. This is probably the main reason so many individuals wait until age 65 to retire… they have chosen to follow a path that has been laid out for them. This way they don’t have to pave the road themselves, ignorance is their bliss. Unfortunately, when you follow “the man’s” plan you will always make someone else richer and happier and do the opposite for yourself.
So, if you have any desire to retire early, you will need to achieve financial independence by creating multiple income streams and in order to do so you will need to know how much income you will need.
Job, Work, And Free Time
When I tell friends that I want to retire early their first question is “What would you do with all that free time? Wouldn’t you get bored?” I suppose that’s the first question you should ask yourself, do you know what you would do with all your free time? Remember, it’s your time. You can fill your day with yoga, exercise, cooking, learning something new, reading, spending time with loved ones and …. working. Yes, even though you are retired you can work. You can work around the house, you can do volunteer work and you can do paid work in a field that’s your passion.
It’s fascinating to me that someone who makes only $35,000 of annual income their entire life retires at age 65 and doctors who make 10x that amount retire at around the same age. Sure, doctors drive cars of slightly more exotic origins, take a few fancier vacations, have slightly fancier homes but that still doesn’t explain why they feel like they need to wait until age 65.
This higher income that we are fortunate to receive is what allows us to retire far sooner than those with lower incomes. I think that taking advantage of this can afford you freedom that few get to experience at a younger age.
You can never save enough to guarantee that you will have enough money until you die, any good financial adviser will tell you this. Of course, if you have $5,000,000 and don’t have very expensive taste it’s REALLY hard to run out before age 100. But saving $5,000,000 will take quite some time and if a person making $35,000/yr can retire on far less $1 million then why would you need $5 million?
Social security is one income stream that you will vest in if you have enough credits, as of this writing you need 40 working credits to vest in social security. Many larger medical groups will let you vest in a pension plan if you work somewhere in the 5-10 year range with them, that could be another way of creating those “multiple income streams” that I mentioned earlier. You may have started your own private practice which you could run by hiring an employee once you retire. You may buy a real estate investment or rent out your current house and move into a cheaper place which is another form of income stream. Investing in stocks and bonds can generate income as well. You can also invest in peer-to-peer lending companies. People are also making decent money on other peer-to-peer websites such as AirBnB and RelayRides.
Last but not least, you can always go back to working as a physician if you end up falling short of your goals or decide you want a little more income. I wouldn’t call this “diversification” but it’s an arm of your retirement plan to increase the chance of success. You wouldn’t depend on work as your only means of income, only to supplement your passive income.
Your Retirement Budget
When planning your retirement you need to anticipate your approximate base budget. People hate the b- word but it’s not that tough. Don’t try to calculate your entire budget down to every penny. When planning for retirement always plan for the basics. You will need housing, food, health, transportation, communication and entertainment. Your housing would be the cheapest rent you could afford in the place of your choice. Housing also comes with utilities expenses and unless you are living in extreme environments this can be quite low. Food should only be groceries, $250 as of 2015 can easily sustain a healthy active adult. Health insurance is quite variable so do your research and factor that in. Transportation can be public transport and biking but you can factor in a car if you need to. Communication would be cell phone and internet expenses. Entertainment would be your gym membership, eating out and coffee expenses. This last category I would recommend being very conservative with. Sure, you may be spending in the $500 a month range right now and even far higher. However, you can live on much less.
So am I being a commie by telling you to plan your retirement on a $1,500 per month budget? Of course not. You may want to buy gifts, donate money, travel, support a more expensive hobby, take classes, date high maintenance individuals etc. The reason I wanted you to plan your retirement around base expenses is because our feeling of safety comes from making sure that we have the basic necessities. For many of us, the enjoyment of life, however, may come from the extracurricular activities. I, for example, have a $70/mo gym membership (don’t judge) which I would happily forgo if it meant that I could retire earlier. However, it doesn’t mean that I can’t plan for having those expenses covered as well.
Any good plan will have multiple fail-safe aspects. So, plan for the basics and add various income streams to cover the extras. In our economy the housing market can crash, wall street can crash and established institutions can fail spontaneously. Thankfully this is far less common in the US than other countries.
Let’s Talk Examples
Ok, for the literal folks out there let’s talk turkey (Tofurkey, for us vegans). This isn’t exactly my situation but let’s assume I’m 37 years old right now and I want to retire by age 40. I make $250,000/yr and save aggressively. I have my student loans paid off. I have saved about $400,000 which I am investing in broad index funds. I also decide to buy a single family house that I will pay off and rent out before age 40. I have skills in auto-mechanical work, I obviously have skills as a doctor and I can do general repair in a house. I will have a pension from my work that kicks in at age 65 if I can continue working until age 40. I will also qualify for social security once I reach the proper age. I happen to have a passion for writing so I am honing my writing skills in hopes of one day selling a few articles (nothing wrong with making money at a hobby). By age 40 I would have somewhere in the $1.2 million invested in the market. I would take $200,000 and buy that single family home which would net me $800/mo. The $1 million that’s invested would net me $2,900. My writing by age 40 will net me another $700/mo.
So far I already have an after-tax income of $4,400 per month which is far more than I need to live on. I may take the extra and invest it back in the stock market. Or, because I have an entrepreneurial edge, I may decide to invest some of it in various business ventures many of which may fail but you only need 1 success to be successful.
Now, let’s say I want to take a $10,000 vacation somewhere, I can either sell some stocks/bonds and use that money for the vacation or I can save up for a few months of my disposable passive income (the leftover from the $4,400 that I don’t spend) or finally I could just pick up a few shifts at work and generate that cash. Isn’t diversification great?
In other posts I have discussed step-by-step how a person could arrange their finances to achieve a successful retirement before age 40. In this post I was hoping to have you start thinking about what it takes (the big picture) to retire by age 40. Not only is it possible but very easily attainable for someone with a high income. I haven’t even gotten that creative. There are so many other ways of creating some passive income to supplement your retirement income. You will first need to know what your budget is so that you can develop a good savings percentage. You will also need to know what your retirement base expenses are so that you can plan for that. I also discussed how you can create various income streams in order to increase your chance of success.
In today’s economy there is no longer a need for you to wait until age 65 before retiring and there is no longer the need for you to have one large stash of cash that you can draw down from.
Do you have any plans on retiring earlier?
Do you have a “dollar amount” figure in mind that you are aiming for?