5 Good Times to Retire (and 1 Bad Time)

Retirement is not an age; it's a number. That number is really two numbers, a ratio even. That ratio is about 25, and the two numbers are the amount of money you have and the amount of money you need from your portfolio each year. Per the 4% guideline, you can spend about 4% of your portfolio a year—adjusted upward each year with inflation—and expect, with a very high probability, that your money will last at least 30 years.

So, if retirement is not an age but a ratio, how can there be “good times” to retire? Well, there are five times in your life when that number changes significantly. Sometimes, it's because the numerator (how much you have) changes, but mostly it's because the denominator (how much you need) changes.

#1 Paid Off Mortgage

A big piece of the budget for most families is the mortgage. White coat investor mortgages range from $1,000-$20,000 per month, but making that final payment usually frees up quite a bit of income—income that doesn't need to be replaced in retirement. Imagine you have $2.5 million and a $2,000 mortgage. If your other expenses are $100,000 a year, you don't have enough to retire. But take away that mortgage and voila! You've got enough, you're financially independent, and you can retire. This age can be anywhere from 40 to 75, but it's in your control because you get to decide how much house you buy, the size of the down payment, the length of the mortgage term, and the size of additional mortgage payments.

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#2 Kids Off the Payroll

Without a doubt, kids are expensive, and for most of us, that expense doesn't end when they turn 18 and we no longer have a legal obligation to feed, clothe, and house them. Perhaps because of my culture, I'm not a fan of letting them live in the basement as adults (at least for any significant period of time), but they're probably still on the payroll at least through college. Unless you've saved it up in advance in a 529, a $30,000 annual college tuition payment works exactly like a $30,000 mortgage. If your last kid is born when you're 35, your payroll ends at 57. Downsizing once the kids are gone also has the potential to decrease your expenses (in my experience, though, people downsize to a house that is smaller but just as expensive).

#3 Medicare Eligibility

You know what else is really expensive besides a mortgage? Health insurance. I'm doing well to have a family of six covered for about $1,200 a month. I've heard of plenty of couples in their 50s paying twice that much just for the two of them. At age 65, Americans become eligible for Medicare. Now, Medicare isn't free (at least beyond Part A), but it's usually much cheaper than buying insurance on your own. Many people who could not afford to retire before 65 are suddenly put in a position where they can.

#4 Social Security Eligibility

Forty percent of Americans retire on Social Security alone, with an average payment of just $1,767. Most white coat investor households will have a benefit twice that large at age 62 or three times that large at age 70. This boosts the numerator in their ratio and often puts people over the top and allows them to retire, whether they take it at 62 (generally not recommended) or 70.

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#5 Windfalls

You know what else can boost your numerator? Winning the lottery, selling a valuable practice, receiving an inheritance, or getting some other windfall. It wouldn't be unusual for the nest egg of many doctors to double upon the sale of their practice. Windfalls can happen at any time, but they seem to be much more common in your 50s and 60s.

A Bad Time to Retire

Sometimes your ratio hits 25 near the peak of a huge bull market. That feels wonderful, but maybe it shouldn't. The truth is that there is little difference in the dollar amount of future returns between a portfolio that went up 30% in the last year and that same portfolio a year ago. As valuations climb, future expected returns fall and vice versa. It's really the same thing to have a small portfolio with higher expected returns ($3 million x 8%) vs. a larger portfolio with lower expected returns ($4 million x 6%). While I wouldn't necessarily hold off on retiring just because the market is at or near an all-time high (it usually is), I would certainly feel better about my prospects if the market recently dropped 20% and I still had enough money to retire.

 

Retirement might be a number, but it isn't a single number; it's a ratio. You can hit your ratio by increasing the numerator, decreasing the denominator, or both.

What do you think? Are there any other ages or events that make retirement more or less likely? 

[EDITOR'S NOTE: Here at The White Coat Investor, we know our readers love having real-life examples of portfolios and how people accumulate their money and then eventually spend it. That's why we want to hear from those who have already retired and who are living their lives in a post-work world, so those of us who are still working can be inspired and learn how to get where you are right now. Please fill out this form and inspire us with your wisdom. Don't worry, we'll keep your identity a secret. We plan to take your answers and create even more content, beginning in Q4, for those who want to learn about how to spend in retirement. Help us help others!]