Six Reasons Nothing Matters More Than Your Retirement Date After Age 50

If you’re a follower of both Physician on FIRE and The White Coat Investor, you already know that WCI is not as big a fan of early retirement.

In fact, his post entitled 14 Reasons Why You Shouldn’t Retire Early was instrumental in my decision to actually start a blog. I could easily refute most of those reasons (and he readily admits he has a counterpoint for each one, as well).

Today’s Saturday Selection from the good Dr. Jim Dahle (who is wrapping up a week of volunteer service in Honduras) is another post that does not exactly encourage one to retiire early. Whether you agree or not, he does make some excellent points.

This post was originally published at The White Coat Investor.

 

Six Reasons Nothing Matters More Than Your Retirement Date After Age 50

 

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 (calculate yours here).  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.

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.

 

 

Blue Chairs

 

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 $2,800 a month.  $2,800 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 $6,000 into your 401K, 403B, and 457 and an extra $1,000 into your personal and spousal IRA (or for most docs, backdoor Roth IRA).

At age 55, you can put an extra $1,000 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.

 

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. [PoF: Going on the record to say that a shorter retirement is not a good thing!]

 

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.

 

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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.


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

13 comments

  • While working longer definitely gets you more savings and the ability to spend more, like you mentioned, you also lose the time to spend it.

    The time to be who you want to be is very valuable so I wouldn’t really recommend anyone who has to money to stop working, keeps working. (I think PoF would say this too, not mr WCI).

    I love the recommendation of sliding out of work though. Get extra money, test out retirement, don’t work so much. Depending on your job you can even keep just the parts you like and offload all the other stuff. I sort of pulled that off and loved it.

    Its nicer to not work but it at least takes a while to get used to having no externally scheduled time.

    • I literally just posted about retiring when you have enough rather than over stacking savings at the expense of time which is the currency you never get back. I also see the value in testing new lifestyles before jumping in and the logic of this post for saving being easier in 50s. Strangely, they are both right. As the writer of one of my favorite books said “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.” -F Scott Fitzgerard

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  • I quit when I realized my continued working was just buying me more risk. My coffers were full and a little more fuller wouldn’t make a dimes worth of difference to my financial survival. I realized this about May. So I worked 2 more months to get the last SS payment into my SS account got some healthcare together and quit. Whether you “love” your job or not it’s not wise to keep working if all you buy yourself is risk. Becoming an ex-physician is the best thing I ever did. Cleared the mind and gave me plenty of time to “be” as opposed to being lost in constant “do”maybe “doo doo”

    • bill

      Agree with //Cleared the mind and gave me plenty of time to “be” as opposed to being lost in constant “do”//. This is the part of retirement that has been a very pleasant surprise to me and my wife. Also an unexpected part of “being” vs “doing” is that “being” costs very little money which probably means I could have retired much earlier than I did. I suspect many of the docs that go back to work after retirement did not make the shift in awareness, especially if complaining of nothing to “do”…

      It is better to conquer yourself than to win a thousand battles. Then the victory is yours. It cannot be taken from you, not by angels or by demons, heaven or hell. Buddha

      • Lil

        I love both of the above comments. Gasem, I’ve been reading your comments/posts for awhile and really happy to hear how you feel your mind has cleared in retirement.

        Bill, love that Buddha quote and your thoughts on being and doing. Good stuff! I’m trying to make more room for being while still working (hello part time), but I do noticed how easy it is to get wrapped back up in busy/doing/going all the time. 🙂

      • Yes! A Zen life is exactly where I got to. Enjoy!

    • Mr. Household CFO

      Gasem: can you elaborate on what you mean when working more was just buying you more risk?

      • Hi Mr Household

        A physician lives a life with a target on his back. In my specialty (anesthesia) not much goes wrong but when it goes wrong it’s often life threatening. The patient population is getting sicker and sicker, and even the kids have asthma obesity poor teeth and all kind of things that can get you into trouble. Since I had more money than I could spend in the probable time I had left to live and enough to carry my wife through her life, even though I enjoyed the job, every day I went to work the money I made was not worth the risk of something bad happening and getting involved in a 4 or 5 year long lawsuit. When you have enough any extra is not worth the risk. I also needed to rejigger my portfolio before age 70 and get money out of the TIRA and into a Roth and the most efficient way to do that is to live on cash so the only taxes you incur are those associated with the conversion, so I closed that chapter on the accumulation epoch of my life and proceeded into retirement. Best thing I ever did. I recommend!

  • M

    Two more years of maxed out SS contributions will also increase an early retiree’s eventual payment by upwards of 10%, depending on their overall earning history.

    I’ve often wondered if the folks that are truly retiring in their early 30s have done the calculations of what additional years of even modest earnings will give them many years down the road.

    • Once you’ve reached the second bend point (which I expect to do at 45 despite having a number of years of zero earnings), the returns of additional contributions are pretty lousy.

      I think there is a real benefit to continued SS contributions prior to the second bend point, but I don’t think I’d base my retirement date on it. There’s way too much uncertainty.

      Best,
      -PoF

  • Gasem made a great point. Don’t forget that medicine can be like a game of Russian roulette. The longer you work the higher the probability of getting a lawsuit. Granted most lawsuits are not as bad as we make them out to be but it still would be something I would avoid if I could and the only way you can do that is stop playing the game when you already won.

    The other key that was mentioned is that by working longer than we have to once we hit our FI number we are giving up potentially our most valuable years, when health and wealth overlap. Our bodies age and stuff we can do in our 40s is more than what we can do in our 50s, 60s, 70s and beyond.

    Would be a shame to work so hard to build up a sizeable nest egg and then can’t go on all those planned vacations because of health limitations. Plus the future is not guaranteed. My father died at age 50 of pancreatic cancer. He essentially worked right up until he couldn’t. I wish he was able to have retired early and enjoy those last years.

    • Lil

      I completely agree with being aware of the difference in what our bodies can comfortably do as time passes. I’m very much feeling these days that now is the time of my life and I want to really be awake and alive for it. Still working as a doc, raising kids, living a busy life and want to keep that awareness that NOW is my life, not some time down the road when my nest egg is bigger or the kids are grown.

      Like you, my mother died at 50 and I’ve had a couple of other unexpected family losses before 50. It really does change your perspective on how you want to spend your time. At this point in my life, the perspective shift isn’t a doom and gloom, the sky could fall at any moment, more like, kindly remind myself (again) that the time is now. 🙂

  • Lynne

    Both of my parents are in the last year or two of their lives at ages 86 & 87. I’m 25-26 years behind them, so let me tell you that does a number on your head… tick-tock here I go to my expected expiration date.

    I actually FIREd 2 years ago but accepted a part time position offered by my former employer that has started creeping up to 32-35 hours a week. Seeing my parents go downhill before my eyes has shown me it is silly to keep working when I really don’t need the money. I won’t get these years back later and money is meaningless if I get sick earlier than them and never have a chance to spend it doing the fun things I’ve delayed for decades.

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