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Top 5 Reasons to Retire With Less Than 25 Years of Expenses

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Not long ago, I shared the top 5 reasons one might want to accumulate more than 25x of anticipated annual expenses before retiring.

The reasons are legitimate, but if you’re more willing and able to be flexible or take chances and want to retire sooner, there are a number of reasons that a 25x target may be overkill for you.

Where does 25x come from? It’s the inverse of 4%, which was determined to be a safe starting withdrawal rate by studies from William Bengen, Ph.D. and a group of professors from Trinity University in the 1990s. Both studies looked back at U.S. investment return data to before the great depression.

Take 4%, or 4/100, invert it, and you get the number 25, which is the number of years’ worth of expenses the studies suggest you save up to nearly ensure you will be able to maintain your desired standard of living for at least 30 years.

Most of the chatter around the 4% rule is that 25x may not be enough, and I clearly do not disagree. I also recognize the fact that most people will never get that far ahead and that it may be okay to retire, even early, with less than 25x expenses set aside.


Top 5 Reasons to Retire With Less Than 25 Years of Expenses


1. You Can Still Earn Money


Paid work is becoming a more common aspect of many people’s retirements. Yes, it’s possible to retire from something and still be productive in some capacity afterward. Shocking, I know.

I prefer to think of the word “retire” as a verb. It’s something you do at least once, not something that defines what you can and cannot do for the rest of your life.

You can retire to travel the world and never earn another cent. You could also retire, travel the world, and occasionally be paid for your photography, writing, or language skills.

You can retire from corporate actuarial work and never lay eyes on another spreadsheet. Or you could retire for a few years, be excited about a new and different challenge, and earn good money on one-off consulting projects on your own terms.

Your retirement can be intentionally temporary.

Rather than take a full retirement, you might choose a short-term “mini-retirement” to test the waters, returning to part-time work.

Giving two weeks’ or two months’ notice does not forbid you from earning another dime in your life, even if you never work a “real job” again. In today’s gig economy, there are always options to earn additional money if desired. Here’s proof from a former lawyer.


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2. Social Security and Other Defined Benefit Plans


The 4% Rule (of thumb) assumes you have one pile of money to draw from for the rest of your remaining years. No other income sources are factored into the equation.

Even if you don’t earn any more active income, it’s likely that you’ll be the recipient of passive income in your retirement years.

Pensions still exist for many government employees, and some private companies still offer defined benefit plans for their retirees. I know physicians working for the Veterans Administration, Mayo Clinic, and Kaiser Permanente who are all looking at high-five-to-six-figure pension plans to fund their retirements.

For those of us who didn’t choose an employer offering such a benefit, or didn’t stay with them long enough to qualify, Social Security will likely pay us a fixed income at some point.

As long as you worked and contributed for at least 10 years (technically 40 quarters), you will receive some benefit, and you can estimate that future benefit here.

Assuming I pay the maximum into the program for at least a couple more years, between my benefit and my wife’s spousal benefit (half of my benefit if taken at full retirement age), our combined benefits would cover more than half of our current annual expenses, and that future benefit will adjust upwards with inflation annually.

Yes, it’s true that there almost certainly will be changes to the Social Security program between now and when I tentatively plan to start collecting in the year 2045. The benefit could very well be lower, but the odds of it going away altogether are nil.

If half of your expenses are covered by Social Security checks, your withdrawal rate is also cut in half. If you started with 20x and a 5% withdrawal rate, when Social Security kicks in, your withdrawal rate will drop dramatically overnight to a very safe range.


3. You’re Willing to Accept a Higher than 1% Failure Rate


When Karsten Janske, Ph.D. of Early Retirement Now took an updated look at safe withdrawal rates in 2016, he found a 30-year failure rate of 1% when invested in 75% stocks and 25% bonds using a 4% initial withdrawal rate (and adjusting the withdrawal amount with inflation every year thereafter).

What happended when he used a 5% initial withdrawal rate? The failure rate was 20%, for a success rate of 80%.

When pushed out to 60 years, the 4% initial withdrawal rate was successful by virtue of not  running out of money 91% of the time and the 5% withdrawal rate cohort still had money left after 60 years 58% of the time.


Based on historical U.S. returns going back to 1871, a nest egg of 20x expenses would have an 80% chance of lasting 30 years and a 58% chance of lasting at least 60 years. That’s assuming you made the scheduled withdrawal of an inflation-adjusted 5% of the initial portfolio value every year without fail.

Is that what you’d do in real life if you encountered lousy investment returns early on in retirement? I highly doubt it. As mentioned above, you could look for ways to earn more money. You could also find ways to withdraw a smaller amount while waiting for more favorable market conditions to return. More on that below.

How good is good enough for you? Are you willing to live with a 4 out of 5 chance of your money lasting long enough if you make no adjustments? Or do you need the security of 99 out of 100 odds?


4. You Don’t Expect to Live 30 Years or More


Each of the three safe withdrawal rate studies mentioned thus far used a 30-year retirement length. The average retirement length is 18 years.

When Michael Kitces of Nerd’s Eye View dug into the data, he found that the median outcome was to have nearly 2.8 times the starting portfolio value after a 30-year period using the 4% rule. Note that those are nominal dollars, not adjusted for inflation, but with typical inflation in the 3% range, 2.8x as much 30 years later would represent preservation of purchasing power.

Of course, half of the results were to have less than 2.8x and a few outcomes were to be left with nothing after 30 years.

Thirty years is a long time. If you retire early at 55, you’ve got an excellent chance of having money, and quite possibly a lot of money, left at age 85. If you retire “on time” at 65 with a 4% withdrawal rate, your odds of running out of money by 95 are slim (and that’s without factoring in Social Security).

My Grandparents lived to be an average age of about 88 years old. One smoked Lucky Strikes. Another routinely cooked with lard by the pound and salt by the tablespoon (and still made it to 99). They didn’t know what we now know about healthier living and did not benefit from the medical advances of recent decades. I might live to be 100 or more.

You, on the other hand, may not have longevity on your side. You might have bad habits, bad luck, bad diagnoses, or bad genes. I wouldn’t plan on dying young, but you may have some inclination that you won’t live to see your 90s based on your family and personal history.

A 20-year retirement may be more likely for you, depending on who you are. In that case, you don’t need a withdrawal rate with a high likelihood of lasting 30 to 60 years.

If you look at Dr. William Bengen’s original paper, a 5% withdrawal rate lasted 20+ years much more often than not with a 50/50 mix of stocks and bonds (Figure 1(c)). Increasing the stock allocation to 75% (Figure 3(b)) shows no failures in the first 18 years, and only a few failures at the 20-year mark for those who retired in the mid-to-late 1960s.

Healthy early retirees should plan on their money lasting for decades. A couple of decades might be enough if you retire at or above a typical retirement age, particularly if you are not in good health and/or come from a family where no one has seen an 80th birthday.


5. You Have the Ability to Lower Expenses


Personally, I think a retirement budget should have plenty of discretionary expenses.

We all have core expenses. These cover basic needs like clothing, shelter, food, transportation, taxes, insurance, and more. Clearly, one could spend a lot or a little on these core expenses.

Beyond core expenses are discretionary expenses. These are categories that are more optional. Think travel, entertainment, fine dining, and gifts, including charitable giving.

If you have a generous budget for core expenses and a fair amount of your overall budget designated to discretionary expenses, you’ve got plenty of “wiggle room” to make adjustments.

Let’s say you retire with $2 Million and plan to spend $100,000 a year when you first retire. That’s a 5% withdrawal rate and a nest egg of 20x.

Let’s also say that $60,000 are core expenses and $40,000 are discretionary. It’s not hard to see that if times get tough, you could reduce the discretionary budget by 50% to 75% for an annual spend of $70,000 to $80,000 for a withdrawal rate of 3.5% to 4% of the original nest egg.

You may be able to shave another $10,000 to $20,000 off of your core expenses if you live in more house than you need, drive expensive vehicles, eating most meals out, or carrying insurance you no longer need.

If you’ve got a fatFIRE budget to begin with, you could cut back to a more typical retirement budget to make your money last. You vacation in Mexico rather than the Maldives. You dine at Matt’s instead of Manny’s or Murray’s. Life is still good.


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Geographic arbitrage could also play a role. Moving to a lower cost of living area within your home country or to a whole new country could allow you to stretch your dollars much further.

Your retirement nest egg is most at risk of damage due to lousy investment returns in the first seven years after you retire. Your returns in the final few years in the workforce and the next few years of retirement beyond year seven carry greater weight than others, as well.

If those years aren’t disastrous, you’re likely going to be in good shape even with a withdrawal rate greater than 4%. If you do encounter a bear market or two in that timeframe, the more ability you have to cut back on spending, the better off you’ll be.


Are You Ready to Walk Away Now?


Before you give notice and pack up your desk or office, be sure to read my previous post on the subject: Top 5 Reasons to Exceed 25 Years of Expenses Before Retiring.

Leaving a career in medicine tends to be a one-way street. Knowing that, I exercised caution, accumulating well over 25 years of expenses while developing a new income source before retiring from my career as a physician anesthesiologist.

Your path may look much differently, and retiring with 20x or less could make sense for you. I want to thank Travis Hornsby, who first retired from Vanguard with a smallish sum before pursuing an encore career as The Student Loan Planner for inspiring this post.

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Would you retire with an initial withdrawal rate of greater than 4%? Have you? Share your thoughts or your story in the comment box below!

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18 thoughts on “Top 5 Reasons to Retire With Less Than 25 Years of Expenses”

  1. Pingback: Top 5 Reasons to Retire With Less Than 25 Years of Expenses
  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. Regarding your one grandparent who lived to 99.. maybe using lard instead of vegetable oil was one of their keys to healthy living. Maybe they are the ones with the healthy lifestyle. Maybe we are the ones, with our low-fat, high carb, processed food menu, that don’t know what a healthy lifestyle is.

    • You may be on to something, Rich.

      Excuse me while I go prepare myself a BLT, sans lettuce and tomato. 🙂


      • Don’t forget to save the bacon fat for your eggs the next morning; your grandmother would be proud ?.
        On the main topic, everyone seems to want an 80-90% probability of not running out of money at age 95, when there’s probably only a 50% chance (tops?)of living that long.
        Take that bet and retire a little early!

  4. Found this post through the Curating Wisdom email. 🙂

    I enjoyed reading this. I’m mid-50’s and am cutting down to part-time work next year. I’m nearly at my (to me) FAT-FIRE figure, and it makes me feel comfortable knowing that if TSHTF I can live on the smell of an oily rag if needed. I’ve done it before, I can do it again…

    It’s nice knowing that, even only working 3 days/week next year, if I still don’t like it I have the option to walk away. Near enough will almost certainly be good enough.

  5. Perfect explanation for seeing the 4% rule more as a guidance instead of gospel. Earning money in retirement, considering eventual Social Security, and if ever necessary downsized relocation are all part of our < 25X saved early retirement strategy. 10 years into ER and I'm happy that I didn't wait to hit the 25X saving milestone.

  6. This is a great reminder that we don’t need to be a slave to the “4% rule.”

    If you hate your job or are looking forward to early retirement, consider quitting sooner rather than later.

    Life is too short to spend your days (and some nights) doing something you hate.

    Realize with a year or two of cash or a short-term 5-6% withdrawal rate you can take some time to consider your next move or build up a part-time business.

  7. If anyone has fiddled with the expected market return rates and/or inflation rates on those calculators, they likely have noticed what a drastic effect that has on returns over time.

    I found an Excel spreadsheet that, with a tiny bit of fiddling, allowed me to put in my current situation (working and contributing to 401K), a retirement date, then a separate date for when my “pension” (Social Security) would start and how much money that will be. My biggest frustration with many calculators is that they didn’t allow for late SS filing; they assumed you started SS the day you stopped working.

    My spreadsheet also allows me to put in inflation values and starting value for savings withdrawals, plus market return rates. I was able to put in a pitifully low market return and still show 100% certainty for my money lasting me for my expected remaining 32 years of life.

    So I think I’m good.

  8. I love having both this article and your previous one about saving more than 25x side by side. That is the broader lesson to me. For example how could a 30-year-old with 25X possibly know Who they will be at age 60 and what those expenses will be? At the same time in our money based society how could a 30-year-old who has already saved up 25X not generate more cash somewhere from her passions over 30 years? …Also the Manny’s vs Matt’s is obviously a trick question. Manny’s doesn’t Even have a juicy lucy!!

  9. I’m going with 23.57364 years worth ; ) – JK

    I will probably hold out for 25X at this point, but as we get closer I seem to get more liberal with this stuff.

    Social Security is worth accounting for, even with a conservative monthly rate. My wife is Canadian and has been paying into the program for about 10 years so she is applying for citizenship to make sure we lock that in (and Medicare Part A). We may eventually move to Canada in our next phase, but hopefully, it will make traveling and figuring out benefits much easier.


    • It’s good to keep all options open. Smart move on dual citizenship. I may look into that with the EU eventually.


  10. I love this post. So many retirement calculations are done using spending patterns that may be enjoyable but certainly aren’t required.

    We originally ran the numbers with a pretty conservative budget (but without any additional income from social security). That gave me the mental freedom to leave my job and enjoy time traveling with my family/homeschooling/etc. Then I settled back in to a new normal, which is generating some income along the way. We do some significant spending (just paid cash for a new car and went to the World Series, going to Europe and Asia in the next six months), but this could easily be scaled back if needed.

    • Thank you, Eliza!

      Recognizing that retirement doesn’t have to be an all-or-none phenomenon can open up doors that most assume are closed.

      Flexibility is one of the most powerful tools in retirement planning and life in general. Enjoy your trips! I hope our paths cross again somewhere on this great globe.


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  12. I think most people who would retire early are planners and are going to be conservative.
    We will build in safety margins with every step.
    Just because we can withdraw 4% doesn’t mean you have too. Just like during the earning stage. You do not have to spend all your income.

    Has anyone backtested portfolios that adjust to market fluctuations? Like cutting discretionary spending during bad years as you described. It would be nice to know just how much it makes a difference. Even if you only cut spending by 5-10%.

    • Good question. There are several posts in ERN’s SWR series of 30+ posts that deal with flexibility in retirement spending. This one might be what you’re looking for.


  13. Your point about the discretionary income as a built in safety margin is one that I have taken to heart.

    Although some expenses are likely to be higher in retirment (Healthcare is the main one that worries me), a lot of other things will be less expensive and my budget calls for a nice discretionary component so I can enjoy traveling and fine dining.

    The adaptability component is the best defense to making your portfolio last. In lean years I would tighten the belt and take more basic trips etc.

    I too feel that it would be hard to come back to medicine once I leave it and have been pretty conservative because of that. Still want to retire young but want to go way beyond the 25x rule to feel comfortable first.

    • The critics of the 4% SWR typically fail to recognize the fact that humans have the ability to adapt to their environment. In a low-return environment, most of us can spend less. That’s especially true when you have that nice discretionary component built in to the budget.


  14. Its important to think about what “failure” means when looking at a 1 or 10% failure rate.

    You can either view it as a catastrophe: “oh shit I ran out of money” or it might not be all that bad. If you spend down all your assets and still have social security and a pension, or if you spend it all down and only have a couple months left to live, is that really a failure?

    As Kitces points out, most plans have 3x more after 30 years then when they started. So 4%, by any measures, is a very conservative estimate. But that doesn’t mean you start out with, or plan to spend 4%! Just that you can boost the withdrawal rate after you have passed Sequence of Return Risk. Flexibility is key.


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