Seeking Advice for Early Retirement

[rheumdoc1977]

I am just starting on the path to early retirement. While I am looking over the posts in the past, I was wondering if I could get some advice on my specific situation.

Age: 30

Married, no kids (plan on 2), DW age: 28

Goals: own home, retire in 20 years

Current savings: 6 months emergency funds, essentially zero retirement funds (just got out of medical school, now with first "real job")

Current income and savings rate: $200,000 combined gross, 20% gross per year

Estimated living expenses: 60,000/yr before taxes (I arrived at this by taking our current take home after taxes/savings minus mortgage (which I hope to no longer have), minus DW's pension. I have not factored in any social security or inheritance.

So far, this is what I have done in estimating what I will have to do:

1. I estimated that to generate 60K after taxes, I would need about 75K before taxes. With inflation, this would be the same as 150K/year in 20 years.

2. I am comfortable with a 5% withdrawal rate. 150K times 20 is 3 million.

3. In excel, if I save 40K a year (20% gross) for twenty years, I would have to earn 12%/year to make my goal. This seems impossible.

4. Disappointment set in, and so I drowned my sorrows in a coke float.

Questions:

1. Am I missing anything here, or do I just need to save tons more? Has anybody calculated what percent of gross one needs to save to retire in 20 years starting with nothing?

2. Currently I am invested in the following way:

20% intermediate bond fund
56% Total US Stock Market index fund
24% Total international Stock Market index fund

Any reason to change this? Should I have more/less in bondS 9I have a moderate tolerance for risk)? Specifically, should I invest some money in REITS at the expense of my Total US Stock allocation?

Thank you for any suggestions.

[Rich_in_Tampa]

Welcome to the board. There is a handful of people here who admit to being doctors, so just scream if you need help.

For starters, it would be very worthwhile to familiarize yourself with FireCalc which would answer most of your numeric questions. Personally I would not feel quite safe with a 5% withdrawal rate (though some do) but only you can decide.

$40k per year at 8.5% gets you $2mm after 20 years. I like your allocation and you can accomplish it with just 3 funds through Vanguard, Fidelity and other fund families (choose the one with the lowest expenses, usually Vanguard). At your age you could even omit the bond fund, or keep it very low.

And when you are in a foul mood, just repeat to yourself, "Remicade. Remicade. Remicade." .

I hope you enjoy the board.

(I'm an academic internist/hospitalist, approaching early semi-retirement).

[Milton]

Hello rheumdoc, and welcome.

You are fairly young, and 20+ years is a fairly long time: so it's difficult to estimate what will happen by the time you're 50. Perhaps taxes will be much higher than you assume; or maybe inflation will be much less. Perhaps you'll be content with a small house, or maybe you can't conceive children. Because there is so much uncertainly regarding future contingencies, I wouldn't get too caught up in trying to plan everything with precision, or disappointed with the seeming impossibility of your goal.

For now, saving / investing 20% of your combined gross income sounds good to me. If you do that, you will be ahead of the great majority of people. There will be plenty of time to fine tune your strategy as you gain experience and your investments grow.

A few random thoughts:

(1) estimating your expenses is better than nothing, but you'll get a more accurate understanding of your cost of living by actually keeping track of your actual daily spending for at least three months. That exercise may also indirectly cause you to reduce your spending, which might allow you to save even more than 20% of gross.

(2) you don't say what your debts are, so I assume that you don't have any. If that assumption is wrong, you'll need to factor it in (and it would be prudent to pay down high-interest debt as soon as possible).

(3) you might enjoy reading The Millionaire Next Door, especially the comparison of the spending and savings habits of "Dr. South" and "Dr. North".

(4) you might also benefit from reading Your Money or Your Life, which in many ways is the 'Bible' of LBYM and FIRE.

(5) with a 20+ investing horizon, I wouldn't own any bond funds, which are a (relatively) high-cost, low return investment strategy. If you are determined to allocate 20% to fixed income, I suggest that you buy individual bonds, not a fund.

[rheumdoc1977]

Thanks for the replies, everybody.

Milton:

I do not have any high interest debt. I am currently saving for a house, which I will purchase in 5 years on a 15 year mortgage, so I will have this paid off in twenty years. My only other debt is my student loans at 2.5%. I am in no hurry to pay these off, so I included them in my estimated expenses after retirement.

Perhaps I will reduce my bond exposure to 10%. I buy my bonds through my 401K, because of the taxable interest. Individual bonds are not offered in my 401K/403B.

I guess my main concern is that it seems absolutely impossible to retire in such a short time frame. As Rich in Tampa pointed out, even saving 20% of gross (more than anyone I know) I will fall short of my goal by 1 million dollars.

The numbers just scare me. To be able to withdraw the equivalent of 40K a year in 20 years, one must be a multimillionaire (2 million in investments)??! it just does not make intuitive sense to me that people need so much to retire.

[Rich_in_Tampa]

Originally Posted by rheumdoc1977

The numbers just scare me. To be able to withdraw the equivalent of 40K a year in 20 years, one must be a multimillionaire (2 million in investments)??! it just does not make intuitive sense to me that people need so much to retire.

Those are the numbers (with inflation adjustment presumed), but they are not as scary as you might think. For one thing, the market has averaged > 10% and over the long haul that is as good a guess as any (it's obviously lower now). Second, what's causing your angst in part is that you are shooting for an age 50 retirement starting your run at age 30.

Run the numbers (again, in FireCalc) for age 60 or even 55 and they look a lot better. Even better, run them to age 50 and then how about 5-10 years of part-time work which you enjoy, maybe locum tenens with travel, maybe part-time consulting for a group, or even something totally new and different. Just enough to meet your expenses.

I paid off my last educational and practice start-up loans at age 40 or so. Late, late start, but that's the way it is for many in our profession. Still, 25 to 30 years of a profession you love, retirement at 55 or 60 - not too bad at all.

[Milton]

Originally Posted by rheumdoc1977

I guess my main concern is that it seems absolutely impossible to retire in such a short time frame. As Rich in Tampa pointed out, even saving 20% of gross (more than anyone I know) I will fall short of my goal by 1 million dollars.

The numbers just scare me. To be able to withdraw the equivalent of 40K a year in 20 years, one must be a multimillionaire (2 million in investments)??! it just does not make intuitive sense to me that people need so much to retire.

Well, it makes sense to me. After all, we're talking about working for only 20 years, and then living off the accumulated capital for perhaps 40 years. That's no mean feat.

However, it's not absolutely impossible. You can increase your chances by one or both of the following:

(1) reduce your expenses, so that you have more (after-tax) money to save / invest. Don't take fancy vacations; buy a modest house rather than a big, showy one; don't have children; learn to do your own home repairs and car repairs; take public transit and avoid owning a car; etc.

(2) increase your earning power, so that you have more (pre-tax) money to save / invest. I don't know your situation but perhaps there may be opportunities for you and/or your wife to moonlight in your free time. This is probably more difficult than (1), but try to be creative.

Unfortunately, sacrifices will be necessary. If those seem unpalatable, don't sweat it: you will still eventually be able to retire, it will just take you longer than 20 years to get there.

[headingout]

Originally Posted by rheumdoc1977

it just does not make intuitive sense to me that people need so much to retire.

It is a shocker. I'm approaching 50, strong finances, just a few years from ER, but running out of gas at work, and still get depressed at how hard it is to ER. Every time you run the numbers there are new concerns about inflation, food prices, health insurance, social security, you name it. But a few thoughts do console us:

• If you're saving 20% then, like a lot of people in this forum, you are far ahead of the average person.
• As daunting as the reality might be for us, at least we aren't going to be waking up in our 50's/60's like a lot of indebted people and realizing they are still decades from retiring, if ever.
• Even if you can't fully retire, you may be able to get to the point where enjoyable, rewarding part-time work can pay the remaining expenses.
• You can leverage your emotions over the reality of what it takes to retire to make yourself save even more and spend even less.
• Whatever the realities of ER are for you (and in the long run the variables are just too unpredictable for absolute certainty until very late in the game), you can still take confidence in the size of your building nest egg and know that your life will be better in the long run, however it turns out, by living below your means.

[DblDoc]

rheumdoc - welcome from another MD

The numbers do seem daunting at first but as RIT and Milton have pointed out there are several ways to get to Rome. If you start now at 20% you are, as you pointed out, so much further ahead then most, particularly your MD peers.

Your AA is fine, we can all quible about the % of bonds but you are at about the efficient frontier - meaning your return for the risk is about maximized.

Your next steps are to minimize your expenses. We live on about 32K/annum excluding mortgage with a teenage son. Every penny saved is a penny earned and now invested. Suddenly your 40K/yr is 42K, then 45K, then 48K.

As you are just starting out you are also likely to get, wait for it... Pay Raises. Don't spend them. Save and invest them.

20 years is a long time and many things could change. The important thing is to plan but be flexible and enjoy the ride.

DD

[lightspeed]

Hi Rheumdoc- just watch out for an escalation in lifestyle that creeps up on you over many years. Tends to happen with people who make the money you do. Also, doctors are prime targets for high risk, hope to get rich quick investments. Don't fall in that trap. You probably will not if you are thinking this far ahead for your retirement. Best of luck to you, you are ahead in the game!

[haha]

Originally Posted by rheumdoc1977

I guess my main concern is that it seems absolutely impossible to retire in such a short time frame. As Rich in Tampa pointed out, even saving 20% of gross (more than anyone I know) I will fall short of my goal by 1 million dollars.

The numbers just scare me. To be able to withdraw the equivalent of 40K a year in 20 years, one must be a multimillionaire (2 million in investments)??! it just does not make intuitive sense to me that people need so much to retire.

Have you ever considered taking a federal job? For a Doc the pay should be high; and you will certainly make your retirement goal on time, and without a lot of uncomfortable scrimping along the way.

I may set up an advice bureau- no matter what you do other than hedge fund manager, stop it and go to work for the Feds!

Ha

[Coach]

Rheumdoc, welcome aboard! It's always great to see someone thinking about retirement planning at the beginning of their career.

As others have suggested, you should spend some time with FIRECalc. It's designed to do exactly the kind of forecasting you're trying to do, and will help you think through the issues.

You do need to understand that retiring after a 20 year career is an ambitious goal. It's hard enough that few people even try. Compare it to a 30 year career -- ten years less to accumulate, 10 years less compounding on every dollar saved, and 10 more years of retirement to fund. No wonder it's so hard.

But that's not to say you can't do it. Is there any way you can save more, now? The dollars you save now are the ones that compound the longest. And the dollars you don't spend now, you don't get used to spending in the future

Best of luck, in your career and your retirement!

Coach

[Milton]

Originally Posted by rheumdoc1977

it just does not make intuitive sense to me that people need so much to retire.

Sorry to go back to an issue already addressed in one of my earlier posts ... but the more I think about this, the more surprised I am by the o/p's incredulity.

20 years' income x 20% = four years' income. Even allowing for healthy compounding of the money invested in the early years (less inflation and taxes, if invested outside a tax-sheltered plan), it seems rather obvious that four years' gross income (and social security benefits after age 62) will be challenged to pay for a retirement lasting perhaps 30 or 40 years.

[rheumdoc1977]

Thanks again everyone for the replies.


Milton, you are absolutely correct, the numbers are what they are. I guess I was just shocked when I did the actual calculations. Many sources I had read recommended the 20% but it seemed like a totally inadequate savings rate based on my calculations.

One thing that I did not consider is only increasing my spending by the rate of inflation, and saving my raises. Assuming my raises outpace inflation, that could make a substaintial difference.

[Rich_in_Tampa]

Originally Posted by Milton

Sorry to go back to an issue already addressed in one of my earlier posts ... but the more I think about this, the more surprised I am by the o/p's incredulity.

Yes, but I think that his incredulity is not mathematical, but rather the sudden realization of what it will take to retire -- the time, emotional effort, the income, the savings, the planning, etc. Maybe a dose of futility.

I can relate: I recall my late FIL saying something to the effect that, ahhh, you're a doctor, you'll be able to do whatever you want in 10 years. Probably never accurate, such a belief was built long before 6 digit education loans, HMOs, Medicare oppression, 45 million uninsured and rising, staggering malpractice premiums.

Painful as this epiphany might be, if RheumDoc1977 can use the experience to dig in, take a long view, and get going now, it will have served him well. Imagine if this dawned on him 10 or 15 years from now. At least at age 30 with the "enlightenment" gleaned from this thread, he stands a fighting chance to salvage some pretty darn good ESR (early semi-retirement) and FIRE years. Sure has a 10 year headstart on me at that age.

[socca]

My assumption has always been that the folks who choose the wife+kids life-path have pretty much committed themselves to working to age 60 or later (assuming no extraordinary circumstances such as large inheritances, etc.) Many people (but not all) consider the sacrifices they have to make to live the 'traditional' lifestyle well worth it. If I were in your shoes, I would save like hell, see how your career goes, and re-evaluate your situation in 5 years.

[Milton]

rheumdoc, this summary of Your Money of Your Life may be of interest: The Simple Dollar » Review: Your Money or Your Life.

FIRE is possible, if you want it badly enough. If not, at least you have chosen a career that provides you with flexibility regarding where you work and how much you work.

[hankster]

Originally Posted by socca

My assumption has always been that the folks who choose the wife+kids life-path have pretty much committed themselves to working to age 60 or later (assuming no extraordinary circumstances such as large inheritances, etc.) Many people (but not all) consider the sacrifices they have to make to live the 'traditional' lifestyle well worth it. If I were in your shoes, I would save like hell, see how your career goes, and re-evaluate your situation in 5 years.

I've found this to be true in my life. I often joke "I could've had money, but I had kids instead" I'm realistically looking at retiring somewhere between 59 1/2 and 62. That being said, I have no regrets about that choice. Our kids and their families are treasures that we wouldn't trade for all the money on Earth.

[Milton]

Yes, I think it is true for the vast majority of parents. There are exceptions [see e.g. Book Review: Stop Working: Here's How You Can]; but typically those people live a marginal existance by North American standards, and are at least somewhat dependent upon government handouts to make ends meet. They also usually do part-time work in their (alleged!) retirement; at least, Derek Foster does.