I spend a lot of time preaching about the importance of the savings rate, counseling new residency graduates to continue to live like a resident for a few years after residency in order to pay off their student loans, get some equity into their home, and catch up on retirement savings.  In the early years of your investing career, nothing matters as much as your savings rate.  As time goes on, the savings rate matters less and less and the portfolio return matters more and more with regard to your eventual wealth.  However, once you get into the last 1/2 to 1/4 of your working years, your date of retirement matters more than anything else for a number of reasons.

6 Reasons Nothing (after 50) Matters More Than Your Retirement Date

Reason # 1  Compound Interest

By the time you hit age 50, you ought to have a large portfolio, probably a 7-figure amount, for most physicians and other high-income professionals.  The effect of returns of just 5 to 10 percent on your portfolio will dwarf the amount you can contribute and save each year.  The longer you work and don’t spend anything from your portfolio, the longer that the magic of compound interest has to work on that large nest egg.

Consider a doctor who has a $2 Million portfolio at age 55 and decides to work 2 more years before retiring.  If she manages an 8% portfolio return both of those two years, then she retires with an extra $332K, providing a 17% higher retirement standard of living!  Using the 4% rule, that’s an extra $13K a year to blow on a couple of nice trips.

Reason # 2 Additional Savings

But wait, there’s more.  If he’s still working full-time, he can also use those last couple of years to stuff his retirement accounts extra full.  Let’s say he makes $250,000 and saves 20% of it.  Now, 2 more years of working, saving, and compounding results in a portfolio of $2.45M, providing a 22% higher retirement standard of living ($18K per year using the 4% rule.)

Reason # 3 Easier To Save Even More In Your 50s

There’s a secret among financial authors, columnists, and bloggers.  We all tell you to save early so compound interest can work its magic.  “Start in your 30s,” we say, or better yet in your 20s or before you can talk.  But the truth remains that it is far easier to save in your 50s than at any other time.  There are a number of reasons for this.

Peak Earnings

The first is that people are at their peak earnings.  They finally know what they’re doing in their career and so are raking in the moola compared to what they were making in their 20s and 30s.  That might not be true for many doctors, but it is for a lot of people, at least those who don’t fall prey to age discrimination.

Freed Up Cash

Second, if you took my advice, used a 15-year mortgage, and followed the “one house, one spouse” philosophy, you’ll have your mortgage paid off around 50.  I don’t know how big your mortgage is, but mine was $2800 a month.  $2800 a month x 12 months = $33,600 per year freed up to be saved for retirement.

At some point in your 50s, you’ll have the kids out of the house, through college, and (if you did it right) financially independent of you.  You may also be sufficiently financially independent that you can drop your life and disability insurance, freeing up more money to save.

Catch-Up Contributions

Last, Uncle Sam wants you to save in your 50s.  How do I know?  Take a look at catch-up contributions.  At age 50, you can put an extra $6000 into your 401K, 403B, and 457 and an extra $1000 into your personal and spousal IRA (or for most docs, backdoor Roth IRA).

At age 55, you can put an extra $1000 into your HSA, AKA Stealth IRA.

Keep in mind that if you’re maxing out a self-employed retirement plan like a profit-sharing plan, SEP-IRA, or Solo 401K, that you’re still limited to just $56,000 per year.   Due to actuarial reasons, an older physician can often contribute much more to a defined benefit plan than a younger physician. These extra little tax breaks make it easier to stuff those retirement accounts full.

when should you retire

Reason # 4 You’re Mortal

The longer you work, the less time your retirement nest egg has to last.  Think of it as burning the candle at both ends — in a good way.  Putting off retirement a couple of years not only allows you to have 22% more to retire on thanks to additional saving and compounding, but (assuming you didn’t die during those two years) your expected retirement will be about 1.5 years shorter.

Reason # 5 Market Effects On Portfolio Size And Expected Returns

Your retirement date will also affect the size of your portfolio, and its future expected returns.  Consider a retiree who retired in early 2000 vs one who retired in early 2003.  The 2000 retiree’s terrible timing will result in severe losses on the equity portion of his portfolio.  The 2003 retiree, on the other hand, will have fantastic returns for his first few years of retirement, when it matters most.  Of course, this is assuming they’re both starting with the same size portfolio. The truth is that the 2000 retiree is likely to start with a larger portfolio than someone who retires after a 3-year bear market.

There is a lesson here for the investor considering entering retirement several years into a bull market.  If you have enough to retire after a 3-year bear market, you’re probably going to be just fine as future equity returns are likely to be quite attractive.  But if you retire several years into a bull market because your portfolio just barely hit the amount you need to retire, then you may be quite disappointed with the results.  Give yourself more room for error when retiring at high equity valuations.

Also, consider the effect of interest rates.  The lower the interest rates, the more difficult to get decent returns from safe assets.  It wasn’t very many years ago when money market funds and 10-year treasuries paid 5%.  The yield is the best predictor of future returns on safe fixed-income investments. Interest rates also affect the rates you can get on immediate annuities, although as you get older the effect of the mortality credits outweighs the effect of interest rates.

Reason # 6  Social Security

Although it is not necessarily an ideal strategy, most people start taking Social Security when they stop working.  Taking Social Security at age 70 instead of age 62.  Waiting until 70, especially if you continue to make contributions between 62 and 70, can result in a dramatically higher payment.  This payment is not only guaranteed until death, but it is indexed to inflation.  Retiring at 67 instead of 65, even if you don’t take benefits until age 70, will result in a higher payment.

Retiring Earlier versus Later

Obviously, the longer you wait until you retire, the more you get to spend in retirement.  The downside, of course, is that you have less time to spend it, and those early years of retirement, when you are presumably the most healthy and active, can never be recaptured.

One of the best ways to deal with this issue is simply to slide gradually into retirement.  Many hospital-based physicians such as emergency physicians, anesthesiologists, radiologists, and hospitalists can easily do this, but many employed doctors can also cut back in their 50s.  Dropping call or gradually transitioning a private practice to a younger doctor are also options.

You get many of the financial benefits of waiting to retire (more compounding, more contributions to Social Security, perhaps more saving, less time the portfolio has to support you, less market risk) but also the free time available to pursue alternative activities.

The best option, of course, is to find something you love enough that you would do it for free, yet pays you a great salary.  Then you’ll never work a day in your life and always have plenty of money.

Beware The Spending Trap

Some people approaching retirement fall into a trap that keeps them from ever really being able to retire.  As their expenses go down from the kids graduating from college and the house being paid off, they jack up their standard of living.

For example, imagine a high-income family making $25K a month, paying $5K in taxes, saving $5K toward retirement, paying $4K for a mortgage, and another $3K toward college expenses.  They’re living on $8K per month.

Now, imagine the kids graduate from college and the mortgage gets paid off.  That frees up $7K.  If they add that money to their retirement savings, they’ll be able to retire relatively quickly.  If, however, they increase their lifestyle from $8K per month to $15K per month, they may find they have to work longer than planned in order to maintain their standard of living in retirement.

Using the 4% rule and ignoring Social Security, $8K per month means a nest egg of $2.4 Million.  $15K per month means a nest egg of $4.5M.  If you have a nest egg of $2.4 Million, are saving $60K per year, and earn 5% real returns, you’ll need to work and save for another 10 years to get to $4.5 Million.

To make matters worse, because you’re still not financially independent due to your additional lifestyle spending, you need to keep increasingly more expensive life and disability insurance in place.

If you want an early retirement and financial independence, you’ll need to watch your expenses in your 50s just as carefully as you did in your 30s.

You’re Not In Control of Your Retirement Date

This whole discussion of when to retire assumes that you actually have control over that date.  Unfortunately, there are many times when a worker CAN’T actually choose his date of retirement.  You may lose your job or become disabled.  You may also be subject to the loss of a partner’s income or even a divorce.  All of these can wreak havoc with even the best-laid plans.  Start saving early, stay flexible, and maintain appropriate life, disability, and health insurance until you are certain it is no longer needed.

Your retirement date matters a great deal.  Do lots of thinking, calculating, and planning if you’re lucky enough to be able to choose your retirement date.  Give it a trial run for a year or two, living on your anticipated retirement income even though you’re still working.  This will allow you more time to compound, provide additional savings and Social Security contributions, prevent lifestyle creep, and most importantly, let you know if your plan is realistic.

What do you think?  What should people consider when determining their retirement date?  If you’re retired, how did you choose your date?  Comment below!