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

early retirementA 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

The desire to retire early may push you to have children earlier or fewer children than you otherwise wish.  It might preclude you from a lower-paying job you may enjoy more.  It’s almost impossible to retire early if you get divorced and have to pay alimony and child support.  You might not be able to get that boat, purchase a  second home or donate to charity and still hit your savings goals.

# 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.

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