Early retirement is a goal for many, including physicians. An extra decade or two to travel, pursue hobbies, and volunteer becomes more and more attractive, especially as bureaucracy increases, paperwork pulls docs away from their patients, and reimbursements are threatened. However, the odds are stacked against early retirement. It isn’t that it is impossible to retire early, but it often simply isn’t worth the sacrifice. Here are fourteen reasons you shouldn’t retire early.
# 1 You Have to Save A LOT More of Your Income
While it is obviously true that the more you save, the earlier you can retire, to really retire early requires a savings rate that is too high for the comfort of all but the most frugal. Consider a doctor who gets out of residency at 30, earns $200,000 a year, earns 5% real on her investments, withdraws 4% a year from her retirement stash each year, and needs $100,000 a year of retirement income. If she retires at 70, she needs to save $22,000 a year, or about 11% of her income. But to retire at 50, she would need to save $76,000 a year, or about 38% of her income, over 3 times as much. She not only has half the years to save the money but also loses much of the benefit of compound interest.
# 2 You Have to Replace Social Security
For some bizarre reason, a lot of people have stopped planning on having any kind of Social Security when they’re retired. I don’t think this is wise. Social Security is an extremely popular program, and honestly, it’s one of the best government programs out there. Fixing it is a simple math problem (unlike Medicare.) Raise taxes a little bit, decrease benefits slightly, and increase the full social security retirement age slightly and voila, it’s solvent for centuries.
As an early retiree at 50, you don’t get to count on that income for at least the first 12 years of retirement, and possibly for the first two decades. How much income are we talking about? Well, the maximum social security benefit in 2020 is $3,011 a month. That assumed one started working at 21, paid the maximum each year, and retired at age 67. Adjusting that for age 70 gets you to $3790 a month. Remember that your spouse will also have a benefit. Just to make things easy, let’s assume the spouse gets ½ of your benefit. That’s a total of $5,685 a month, or $68,220 a year, adjusted to inflation.
When you consider Social Security, the doc who retires at 70 only needs to save 5% of his income each year versus the early retiree’s 38% (almost 8 times as much savings). Granted, the early retiree will also eventually get a Social Security benefit, but if you don’t get it for 12-20 years, and you need your stash to last an extra decade or two, you really can’t use a more aggressive withdrawal rate to make up for it. To make things worse, the early retiree gets slightly less Social Security when it finally does kick in because he paid into the system for less than 35 years.
# 3 You Have to Bridge the Health Insurance Gap
Medicare doesn’t kick in until 65, and that age may go up as part of any kind of Medicare reform. If you stop working at 50, that means you need to cover 15+ years of health insurance premiums, and at a time of life when the policies are more expensive, if you can get them at all. Plus, without the benefit of a group plan with an employer, you have to buy them on the more expensive individual market. Ehealthinsurance.com quotes me high deductible HSA plans that range between $1,000 – $2,400 a month for my family. Let’s average them out to $1,700 a month, and you’re looking at an extra $20,400 a year that must either be saved before retirement or cut from the retiree’s budget.
# 4 Immediate Annuities Shouldn’t Be Bought in Your 50s
An immediate annuity is a way to turn a lump sum of money into a guaranteed pension, essentially longevity insurance to ensure you don’t run out of money in retirement. Most experts recommend you buy it around age 70. Annuitizing a portion of your stash is a wise choice for most as it allows a much higher safe withdrawal rate. Even in our current low-interest-rate environment, an annuity pays 6.8% for a healthy 70-year-old female. Obviously rates for younger people will be lower. At 50 they may even be less than the classic 4% “safe withdrawal rate” and it is almost impossible to find an inflation-adjusted one these days.
# 5 You Don’t Get to Benefit From “Catch-up” Contributions
Beginning at age 50, you can contribute an extra $1,000 to an IRA (for each spouse), an extra $6,000 to a 401K (for each spouse), and an extra $1,000 to an HSA (after age 55). The early retiree is more often forced to use a less-efficient taxable account to save.
# 6 You’ll Have to Figure Out How to Get Your Money Out of Retirement Accounts Before Age 59 ½
Both IRAs and 401Ks have a 10% surcharge if you want your money for early retirement. Now there are several ways to get at least some of your money out without the penalty, but a traditional retiree doesn’t have to deal with any of them.
# 7 You’ll Have Less Time to Pay Off Educational Debt
Many of the people who graduated from medical school in the late 90s and early 2000s refinanced their medical school debt at a rate less than inflation. They’re planning to carry that debt out as long as possible. But no one in their right mind would carry student loan debt into retirement. Thus an early retiree has 20 years to pay it off, instead of 40. I recommend paying off student loans in 2-5 years but in reality, many people pay their loans off in 10-20 years. Dragging out student loan debt often keeps these people from maxing out retirement accounts, something an early retiree cannot afford. A full career allows you more options in choosing a medical school, a better in-school lifestyle, and more flexible payback options. It’s more acceptable to run up a bunch of debt if you’re willing to pay it off over a longer period of time or if you have to save less toward retirement.
# 8 You’ll Have Less Time to Pay Off a Mortgage
The early retiree won’t want a mortgage hanging over her head in retirement. That means she’ll need to be more frugal in her choice of housing and she’ll need a more aggressive mortgage loan, such as a 15 year versus a more traditional 30 year. It turns out you can live in a much nicer house if you’re willing to work an extra decade or two.
# 9 College For the Kids Becomes a Much Taller Hurdle
A typical doc starts having kids around 30, give or take a few years. That means the kids are in college in his early 50s. The early retiree, if she is planning to pay the tuition, not only has to save up for her retirement by age 50, she also has to save up the entire cost of college. A more traditional retiree can pay for at least part of college costs out of current earnings.
# 10 We Have a Progressive Tax System
You are penalized for earning a lot of money in a few years versus earning the same amount of money over a longer period of time. Doctors are already punished by this fact since they get no “credit” for not making anything in their 20s. If you “burn the candle” at the other end of your career, you’ll be punished again. Tax-wise, you’re far better off making $100,000 a year for 40 years than $200,000 a year for 20. For example, a married tax-payer making $100,000 a year and taking the standard deduction pays $9,024 in taxes. The same tax-payer making $200,000 a year pays $42,048 over four times as much. That’s not counting the additional state taxes, payroll taxes, or phase-outs either.
# 11 Retirement is Longer, But Not as Comfortable
Taking all these things into consideration, it really becomes impossible for the 50-year-old retiree to have as much in retirement as the 70-year-old. Thus, not only does the early retiree have to live a more frugal lifestyle during her career, but she’ll need to continue it in retirement. What do you expect when you want 20 years of earnings to cover a lifetime of living expenses? A standard retiree saving just 10-15% of her income will have much more spending money than an early-retiree that saved 30-40% of her income.
# 12 You’ll Have to Be Smarter About Investing
An early-retiree can’t tolerate poor market returns, serious investing mistakes, or the sometimes high cost of advice. There isn’t as much time to recover from errors during your career. You’re dependent on market returns for a much longer period of time. You’ll also probably need to learn to do it yourself to save on the costs of a financial advisor. If the typical life expectancy is somewhere in your mid 80s, a retiree at age 70 only needs to muddle through the markets for 15 years. An early retiree will need a higher percentage of stocks in his portfolio, which will then be exposed to 35 years of market gyrations. Consider what has happened in the last 35 years – the oil crisis of the 70s, stagflation, super high inflation in the early 80s, Black Monday in 1987, the recession of the early 90s, the currency crisis of 1998, the dotcom crash, the severe bear market of 2008 due to the housing crash, the euro crisis, and now COVID-19.
# 13 Early Retirement Can Impinge on Lifestyle Decisions
# 14 The Identity Crisis
Physicians spend the first third of their life preparing for their career. They may see their job as a calling which provides them a sense of identity and importance. They might even have been so busy during their career that they don’t have much in the way of hobbies, especially hobbies that can keep them busy all day every day. It isn’t unusual for someone to retire early, then after a few months to return to work in some capacity because they didn’t realize what an important portion of their life and identity their role as a doctor had become.
Now, there are a lot of options between retiring at 50 and retiring at 70. With a decent savings rate, retiring at 60 or even 55 is pretty easy for a doc. Transitioning gradually into a part-time position is also an excellent way to bridge the health insurance and social security gap.
When do you plan to retire? Vote in the poll and/or comment below!
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Your assumption of a 5% real return is insane. If you look at the history of the S&P 500 since 1926, with dividends, it has returned 8.6% which consists of about 4.4% real plus 4% inflation rate average. Now, if you look since February of 2000, the s&P 500 has returned about 1.2% on average per year. So it has done worse than inflation which over the last 10 years has returned about 3%.
So I think it is important in these times to just make as much as possible. I firmly believe stock market return is linked to GDP which has struggled over the past 10 years for a number of reasons. It is impossible to retire early unless you somehow win 5 or 10 million in the lottery as the cost of health insurance is terribly expensive.
I’m not quite sure I agree that a 5% return is “insane”. I do agree it is quite possible the S&P 500 will return less than 5% real over your or my investment “career.”
How much someone needs to retire early depends on their expenses. If you can live on $50K a year, you certainly don’t need a $5 Million Powerball win to get there. In fact, you probably need less than $1.25 Million.
Long-term overall stock market return is absolutely linked to GDP. The stock market isn’t creating real value, otherwise we’d all just trade stocks among ourselves and no one would work at the companies whose stocks we’re trading!
Health insurance IS terribly expensive, but not so expensive we need millions to pay for it. A 50 year old male non-smoker can buy a policy through ehealthinsurance.com for $161 a month with a $5K deductible in my area. A $1200 deductible raises the price to $507 a month. If you’re not healthy it could be quite a bit more, but it’s quite possible that an early retiree could get health insurance for a relatively cheap $3-8K a year. Another possibility is to continue minimal part-time work such that you are still eligible for your group’s health insurance plan. While it is a major issue to get from an early retirement at 50 or so to 65 when Medicare kicks in, it isn’t insurmountable, and certainly doesn’t require millions.
Keep in mind that your portfolio doesn’t not have to consist entirely of stocks from the S&P 500. There are much riskier stocks where one would expect a higher return, such as emerging markets, microcaps, or small value stocks. That doesn’t mean the return will actually show up, but adding more risk to the portfolio comes with the likelihood of higher long-term returns. Rental real estate and other investments also have the possibility of higher returns.
Lastly, I’m not sure your numbers with regards to the S&P 500 add up. I suspect you might have left out the dividends, which makes up a significant part of the long-term stock return. The S&P 500 return for the last 25 years (ending in 2010) is 9.94%. For 25 years prior to that it was 9.56%. For the 25 years prior to that, it was 11.76% for a 75 year average of 10.35%. Inflation over those 75 years was 3.66%, for a real return of 6.69%.
Now I don’t use that return for a couple of reasons. First, that return would likely be diluted by some lower-returning asset classes in the portfolio, such as bonds. Second, stocks began that period with significantly higher yields than they have now. Lower yields means lower future returns. In fact, some calculations suggest a return for the S&P 500 going forward of only 3-4% real.
But even so, at 3% real, an early retirement is still possible, you just need to save like crazy before retirement and be very frugal afterward. Is it worth it? Only you can decide. My article points out that a lot of people will decide it isn’t worth it once they realize the sacrifices they’ll have to make before and after retirement to achieve it.
Interesting to read some of these comments written in 2011 from the perspective of 2018. Stock market returns have had a great run since 2011, gnp growth is currently up and tax rates are a bit lower at least for now. Viewing the market returns from 2000 to 2010 as predictive of a low return future turned out to not be correct. If anything it shows that market performance is cyclical and a few years of exceptional performance account for most of the superior performance of stocks. As for health insurance, the Affordable Care Act has disrupted the individual health insurance market referenced in the comment. Such low cost high deductible plans are unfortunately only available to grandfathered plans and those who qualify for subsidies (which include some early retirees since subsidies are income based and not disqualified based on assets – though I suspect few early retired physicians would qualify for Obamacare subsidies).
1) Work Sucks – seriously it’s getting worse all the time. The actual practice of medicine/dentistry is interesting. But all the crap that surrounds it is intolerable. Insurance, disrespectful patients, the general public, etc. Many of the best treatments for people are either unaffordable to them or denied by insurance or both.
2) You can live lighter – No one needs 100K a year to live on. I’m exactly the person you talk about. Make about 200k.. living on 100K is no problem. As long as you don’t have “keeping up with the Jones” disease, or “luxury items” disease then it’s very easy to live in a way below your wage home, car, and everything. This solves the mortgage problem because you’re in a cheap home, it solves the college problem because that’s no trouble to afford when you live light.
And when you get used to living light then your retirement wont’ be uncomfortable because you’ll have a set pattern to living frugally.
3) investing is fun! – the smarter and more you get into it, the more entertaining it is, you’ll wish you’d gotten a finance degree rather than a medical degree.
4) bottom line is that you can choose whatever kind of lifestyle you want. Some would rather live in a nice neighborhood, drive a newer car, and send their kids to private school. They value status and things.
Other of us value time. And time is one of the precious commodities of this thing called life. The last thing I want to do is spend an extra 10-15 years in the office fighting to get paid by insurance and dealing with the general public when if i’d just lived like a middle class family while making doctor money I could spend my late 50’s and 60’s fishing, doing some inexpensive traveling around the country, and enjoying life.
Admittedly part-time work is an appealing option. My dad currently does this… He doesn’t get burnt out on 2-3 days a week.
But other than part time work, I don’t get why more people would rather have fancy houses and cars rather than plow money towards quitting ASAP
Wow. Sorry to hear it is that bad for you. Why don’t you quit and do something you enjoy, like the investment field? Life is too short to work at something that makes you miserable. I quit from a different industry and made a career change at age 35 and got into the financial services business. Best thing I ever did.
Because some people enjoy their work..?
As a student, what I have noticed is docs in their 50s/60s keep working full weeks 50-60hrs and don’t even talk about slowing down. Then you always hear about a doc suddenly had a heart attack and passed away. Our generation (those that are 25-30yo) place more value on time away from work. I think this trend will change in the next 30 years.
White Coat,
I’m interested in what you have to say about some form of partial retirement. I am not a doctor, but I can relate to the situations you write about.
Let’s say you work for a while and have developed a nice nest egg. If you can make $200k working fulltime, but only need, say, $100k to live on, then why not find a situation where you can work halftime, live off of your income, and thereby simply let your nest egg compound? This would allow for one to do quite a bit with their healthy years besides work for money.
I think that there are many people who are in this situation – where they can afford to work less but for some reason don’t. I’d like it if an expert such as yourself would explore it more.
I’m not sure I’m an expert, but there is a big reason why many people making $200K don’t work half time….they can’t. It’s harder to do than you think. For example, consider a doctor with a private practice with fixed expenses. If the practice generates $600K a year, and his expenses are $400K a year, then he takes home $200K. Let’s say $200K of those expenses are fixed, and $200K are variable. So if he works half as much, he generates $300K in revenue, but has $300K in expenses. There’s no money for him.
Even non-doctors have these issues. Most people who are paid $200K at their jobs don’t have the option to go part-time. Their employer needs a full-time guy. Aside from those needs, he doesn’t want to pay a full benefits package for a guy working half-time.
Emergency medicine, and my group in particular, does offer this option. We’re allowed to remain a partner with as few as 6 shifts a month (about 50 hours a month.) That’s a pretty sweet option I’m grateful for because I know how rare it is.
I would love to hear the conditions of working as a part-time partner in an ED group?
What do you mean the conditions? The group rules/business agreement say you have to work a minimum of 6 shifts a month to remain a partner.
Med School debt is a HUGE factor for this generation of docs. Mean debt burden for new grads now exceeds $150k at many schools, and $250k is shockingly common. Much of that debt is at ABOVE market interest rates now and cannot be discharged in bankruptcy. And that interest is NOT tax-deductible.
Might also add that any early retirement analysis should be based on AFTER-tax net income. If the Feds do not fix the coming HUGE tax increase in 2013 (Obamacare tax increases plus expiration of the so-called Bush tax-cuts), everyone’s net incomes will drop significantly whether retired or not.
Many docs are married to docs. With dual professional incomes it is not impossible to live very well mostly on one salary and save almost all of the other. With that kind of saving, early retirement should not be a big challenge. The problem I see is that such dual income couples find that the more the make, the more they feel comfortable spending. The consumption treadmill can be hard to slow down and get off of, but it is ultimately a prison if you do not save for a day when you cannot or do not want to work as hard as we all do.
In reason number 12 you list all the bad things that happened to the market over the past 36 years. There is always something bad going on somewhere in the world, it seems.
Despite all those market gyrations, the S + P 500 was up 77% percent of the time, or 26 of those years, with one flat year. In 1979 the S + P started the year at 96.73. Today it is at 1840. And that includes the two worst bear markets of our lifetime, since the Great Depression (2000-2003 and 2008).
We don’t know what the future holds, but one didn’t have to be smart to invest wisely. Just buy the index and let it ride. A study by Dalbar Financial shows that the average investor gets less then half of the market returns because of emotional, and timing, decisions.
One reason to retire early: Life is finite. I can plan for those other 14 reasons.
My father was an Engineer & struggled with the politics, travel & long hours of a 9-5. However, much to my mothers annoyance he kept buying property. By the time he passed away in 1987 they were collecting $42,000/yr just in passive income & my mother never complained about Real Estate again.
Much to my wife’s chagrin I also relentlessly pursued real estate investing & retired @ 49. In 2005 after eliminating all employees & expensive (shared office) suite rents my wife @ 45 began to consult (medical) 3 half days a week with temp help. She enjoys RE deal making rather than fighting HMO’s for the ever diminishing reimbursements especially under todays Healthcare debacle.
“health insurance gap” — we proper planning, there may be NO health insurance gap. In fact, retiring early may result in a net health insurance gain!
The principle is simple: if one retires early and lives off non-qualified savings and ROTH accounts, your income levels will qualify for federal insurance subsidies. If you do need to tap your tax deferred accounts, it is best to take as large a distribution as possible without bumping yourself into a higher tax bracket for that year if it allows you to not tap the accounts for the successive 1, 2 or 3 years. Your income levels for those subsequent years will be low enough to qualify for subsidies.
I understand some people may find this practice somewhat distasteful . . . in effect,”gaming the system”. I don’t. I call it playing by the rules
guess I wasn’t as smart and progressive as I thought I was . . .
http://www.early-retirement.org/forums/f38/for-the-recently-retired-how-do-you-resolve-aca-wage-inconsistency-big-drop-in-magi-74843.html
Bear in mind there was no subsidy when the post was written! But you make a good point. This gap is now far easier to cross.
Early retirement is key for health and happiness in longevity. Time is worth way more than having to work 15-25 more years to buy a boat, houses, cars or other things. Once you pay off your loans (student, mortgage,cars,etc), You only have living expenses and it is very easy to live and be comfortable/luxurious on $5-6k per month. My plan is to save 50-60% until I am financially independent in 5-10 years of attending work and then work part time and pursue many other hobbies/interests that I have.
That’s the main difference with our generation. That we want to learn/enjoy doing things other than being a doctor. We don’t care about the status of being a doctor. I don’t go around introducing myself as Dr. X so that everyone has to call me Dr. like the older docs do and expect everyone to treat them “like doctors”. I see many of the old timers in my institution and it just makes me sad for them but I understand where they come from.
I love what I do but doing it for 40-60 hours/week is not enjoyable. It is a job. Once I get to be a part time 2-3 times per week then I’ll be able to truly enjoy it.
Very disappointed with this post from an awesome blog. Although, I have to accept that us, early retirees, must take into account all of this if we truly want to retire early.
I don’t see why you’re disappointed. I can probably come up with 14 reasons why you should retire early if it makes you feel better. But if you want to retire early, you should give serious consideration to these issues.
This is a very sad article. Why would you encourage people to keep working longer than needed? Everyone should be shown the path to retire early. Do you not value your time? Some of these are more like things to keep in mind when youre trying to retire early. And then some are just really stupid. Like more time to pay off student loans or mortgage. You do realize that paying off loans quicker saves you on interest? Why in the world would you ever say its better to take longer to pay a loan off?
I’m not sure you got the main point of the post. The post wasn’t written to encourage people to work longer or to retire earlier. I don’t really care what they do. What I do care about is that they realize the consequences of their decisions. Retiring early, while doable, has very real consequences which should be weighed. In many ways, it is far easier to go part-time for a decade than to completely stop working, and might make you even happier.
Well its certainly not presented that way. It have a definite negative connotation to early retirement. It would be much more helpful if it was more about what pitfalls you should be aware of when trying to retire early. This article comes off as an “its way too hard to plan ahead for early retirement and I want to whine because…….”
My sisters accuse me of whining every time I play Settlers of Cataan too. Especially because in the end I usually win!
The title is click bait, like every other title on the website. I’m running a for-profit business here you know!
Seriously though, the article is a response to the often seen theme on the internet that early retirement is all that and a bag of Trix. Well, it’s not. There are very real consequences to retiring early. Far better to find a job you love to do, and one that you can scale back a bit to allow you to also do all the hobbies and stuff you love, and do it until you’re 60 or 70 than to do a job you hate for 10 or 15 years and punch out completely. In the first case, you’re happy for your entire career and you have very few financial issues. In the second case, you’re miserable for at least a decade and you have to deal with the points noted in the post.
But if you don’t like it, submit a guest post called 14 reasons you should retire early.
I think I just might!
):
-PoF
“all that and a bag of Trix”
Never heard that expression but love it. 🙂
Also, the article is titled “14 Reasons Why You SHOULDN’T Retire Early”. Seem like a pretty clear message to me.