Every time I speak or write about retiring at age 54, someone feels the need to tell me “I could have done that too if I was a Specialist like you. I’m just a pediatrician.” Or they are one of the other specialties that tends to rank lower in income than general surgeons. The implication is that if they had the same income as me, they would have had the same results. This is not a correct assumption.
As they converse with me, their income frequently comes up in conversation. Often, they are earning more than I ever did, but I don’t bother pointing this out as they won’t believe me anyway. The reason they can’t retire usually becomes clear as well, but since they are not asking my advice, I don’t usually point it out. Their spending habits speak for themselves.
Self-bias is when we attribute the good things that happen to us as our own doing, as in it was because of our great work that we accomplished something great. But the bad things that happen are attributed to some outside force, never our own poor performance.
Thus, if someone hears I retired at age 54, but they know they could not have retired or will not be able to retire by age 54, they assume it is because something special must have happened to me that didn’t happen to them. They seldom believe the reason they can’t retire yet is because they have different money habits such as putting themselves in the position of being house poor, they used debt too freely, they spent more than they earned, they drive cars they can’t afford, they never maxed out their retirement contributions, they spend too much money when they travel, or they borrowed from their retirement fund. They seldom attribute the issue as being caused by these self-inflicted wounds.
It is never their own fault, but an outside source that prevents them from retiring before age 60. They often tell me things like: you made more money than me, you got lucky in real estate, you had scholarships to keep your student loans low, you made gobs of money selling books, you didn’t live in a high cost of living area, or my favorite misconception – you didn’t retire, you switched to coaching and writing to make a living.
Let’s look at what I, and almost everyone who retired early, actually did to set ourselves up for an early retirement. Spoiler alert — earning a higher income is not on the list.
Spend less than you earn
This is the single most important thing one can do to become financially independent, wealthy, or reach retirement ahead of schedule. Everyone has heard “You must spend money to make money.” But they tend to forget what comes before that, which is “You must save money in order to have money to invest.”
You must consistently spend less than you earn. The money you earn but don’t spend is the seed money for investing. To be a smart investor, you must first save some money that can be used to invest.
When I was in residency, I began teaching other physicians about money. I tried to convince other residents to contribute to the retirement plan the hospital offered. Unfortunately, only one other resident participated in the hospital’s deferred compensation retirement program with me. That one move, saving for retirement during residency, accounts for about one quarter of my retirement plan balance today.
During my residency I remember chatting with an attending while we waited for the next surgical case to start. We began talking about finances. He had been an attending for several years but finance was not his forte.
He asked me “How long do you think you could last if your income stopped?”
I had never thought about it before. It took me a moment to calculate my answer. When I finally told him I could last forever, he scoffed at me in disbelief. How could a resident who earned only about $30,000 a year be financially secure enough to last more than a month without his paycheck? After all, he was having a hard time stretching his earnings to last all month.
I told him that my wife and I decided when we married to live on half of our income. The other half we would save for the future. Since we each earned about $30,000 a year, we set up our budget to live on $30,000 a year and save the rest.
Thus, if my income stopped, we could live off her paycheck indefinitely. Until I found another job, we would simply stop saving.
The 50% of our income that we did not spend was the reason I could max out my hospital’s deferred compensation retirement plan and fill up both of our IRA accounts every year during residency. We also saved money that was not in retirement plans. This pattern of living below our means was the reason we had enough money for a downpayment on a house and could also afford to take three months off when my residency ended before starting my attending job.
We continued living on half of our income for the rest of our working years. That is a lot of savings that we invested. If you can’t learn to live on less than you make when your income is low, you will not be able to do it when your income is high.
Most people are not willing to live on just half of their income, they want to spend more, and therefore couldn’t duplicate my results. But physicians and other high-income professionals can almost always live a very nice lifestyle on half their income, which is likely well above the median household income in America.
Use debt very sparingly
Debt is not our friend. When someone gives us a loan, they are not giving us anything. In fact, they are making good money off our desire to buy something before we have saved up enough money to pay for it ourselves. We have become indebted to them, and they now have power over us.
I used debt very sparingly until I became an attending. When my income went up, I started buying stuff with borrowed money. My aversion to debt seemed to vanish for a couple of years and our debt rose from about $6,000 to over $500,000. I lost my bearings during those years but found my way again a few years later.
When we realized what we had done, we began using the 50% of our income we were not living on to get out of debt. We have remained debt free ever since we made our final mortgage payment.
I had mistaken the ability to make the debt payments as being the same as being able to afford something. They are not the same.
After paying off their home mortgage, very few people ever say, “Paying off the house was stupid. Now we don’t have any more good debt. Let’s borrow 80% of the value of our home and invest that good debt for a better return.”
Almost everyone who pays off their house, keeps it that way. Having the weight of debt lifted from their shoulders made them feel less stressed and more secure. Since they have experienced both having debt and being debt free, they now know the benefits are not just monetary. Once you know better, you must do better.
Use the money saved to invest in a conservative manner
Invest, don’t gamble.
What does investing look like? Investing is when you put your money into something where you expect a good return and would be surprised if you lost the principal or the return was very small or nonexistent. In baseball this is hitting singles and doubles. Some examples of conservative investing: buying a certificate of deposit, making a ten-year commitment to a mutual fund, buying a rental property with the intent to keep it for at least 30 years.
What does gambling look like? Gambling is when you are swinging for the fences, seeking a super high, above average return at the risk of striking out. This is also known as trying to “get rich quick.” Examples of gambling include; buying bitcoin, picking individual stocks you think will be winners, buying gold on the dip, trying to time the market, investing in futures, drilling oilwells, buying initial public offerings, or believing you have an insider’s tip.
Then there are those ideas that create a second job that you convince yourself is investing. Examples include; flipping houses, most side gigs, and day trading.
Be consistent
Consistency is a big factor in being able to retire early. You can do a great job of putting the maximum you can into your 401(k) and then blow your retirement future income by gambling instead of investing, which costs a huge chunk of money, or when leaving a job, pulling all the retirement money out to “tide you over” until you get the next job.
Consistency is very important to keep compound interest working to the max.
Spend less than you earn, invest the difference, avoid debt, and do it for a long period of time. You can’t miss with this strategy.
Next time you compare your results with someone else who seems to have done better, don’t ask yourself what they did to get so lucky. Instead, ask yourself which of the above items you could have done better. Then make the necessary changes.
If you need more ideas to change your financial future, read my Doctors Guide book series.
I for one do not adhere to the pay off the mortgage early mantra. Of course this depends upon the interest rate. Our home for most of the time we were paying on it had an interest rate around 3.25%. We were in approximately a 40% marginal tax bracket. Since the interest was tax deductible the effective interest rate was 1.95%. Not only is this below inflation, it is also far less than the money would earn invested in the stock market over time. Paying off a cheap mortgage early does yield a sense of security, but financially it is often a bad decision. Oh and before anyone shoots down my credibility, I retired at 54 as a family physician.
Good advice but you need the right kind of wife. You are blessed.
Yes the spouse is very important and I truly was blessed in that department.
Why do so many physicians want to retire early? We are still among the most respected and needed members of society. With experience our value only increases in terms of treating complex problems and mentoring junior associates. When I interview college and med students they all express an interest in a career of helping people, teaching, research and service, often abroad. Our good incomes allow for travel, service and leisure activities t/o our careers. When one enters a profession, a lifetime of involvement is (was?) typically a given. The plethora of early retirements in recent years suggests a healthcare system in very poor health. As our own illnesses/disabilities grow in time, we physicians could well find the young doctors treating us to be contemplating their early retirements more than our medical concerns.
I couldn’t agree more with you. I do truly believe that a lot of physicians who are planning early retirements or have retired early are fed up with the dysfunctional American healthcare system which is just sucking the life and career satisfaction out of them. I love being a physician, in particular, an academic physician. We make even less money than those in private practice but the satisfaction of caring for complex patients, engaging in research, traveling to meetings, teaching, etc makes up for the lost opportunity cost and the overhead is generally absorbed by our employers. But importantly, we do not have to make the binary decision of whether to or not to retire. We can gradually cut back. I can stop seeing patients or see less patients but continue research and teaching, for example, and do it only a few days a week.
All sensible advice about living within one’s means and saving but why the focus on retiring early. Doesn’t anyone love what they do? I am 68 and have no plans to retire anytime soon even though I could afford to. Society contributes a lot to our education and we are short physicians in this country so I encourage everyone to choose a specialty that you love and work longer.
I wonder if doing anything too much can lead to dissatisfaction and a desire to quit.
Many doctors work long hours.
May I ask what is your work schedule?
5 days a week I don’t think I want to do for next 20 years.
But 3 or 4 days a week, that could be sustainable for me in the long run.
For myself when I talk of early retirement, what I really mean is early cutting back the hours on the job.
I had 4 days scheduled each week plus time on call.
Very insightful. Thanks for sharing. Fortunately, I have lived by those 4 suggestions and can retire comfortably at age 57. My only question is how to manage health care costs if someone retires before being Medicare eligible?
SurgeonDoc,
How to handle health care costs is an interesting question. Why don’t people ask how to handle mortgage costs, or how to handle automobile costs, or how to handle vacation costs during retirement?
Healthcare is just one other line in your budget that needs handling exactly the same as all the other line items. I handled it by using a HealthShare program. I have been happy with the results and have saved more than $150,000 so far over the cost of typical health insurance. This is how you handle healthcare in retirement: Budget for it and pay for what you choose. Whatever choice you make for health insurance, it simply is added to your retirement budget and you can retire when your passive income can meet that budget.
Thanks for your insights. I have lived by those 4 principles you’ve mentioned and I can retire comfortably next year at age 57. My only question is what is the best way to handle health care costs while waiting for Medicare eligibility?
Luck has nothing to do with financial success. As my physician mother-in-law said when she was told how lucky she was, “The harder I work, the luckier I get”. Thank you for an excellent common sense article. I retired at age 59.
I think a lot of the principles mentioned align with what my financial advisor tells me. My experience and that of some of my medical school classmates does also suggest that one’s choice of specialty and educational debt also have a big role. For example, in pediatrics, it’s generally a negative financial decision to pursue fellowship assuming good retirement plans in both groups because most subspecialties don’t earn enough to make up for the 3-year advantage of higher income of general pediatricians (except PEM, neonatology and cards). Cost of living makes a huge difference too. My wife’s $29k salary in St. Louis was actually pretty comfy in the late 90s as a student but my $36k salary a few years later in Denver – not so much. I have friends who weren’t so fortunate to have a wealthy grandfather to pay for college and med school but they make considerably more than I ever will now. Yet, they’re still way farther from retirement than I am from a financial standpoint. Good money management practices are crucial but it doesn’t seem quite so simple
The author is correct. It’s about the time value of money. The time money is invested is more important than the amount invested.
I think you’ve hit the nail squarely on the head. I don’t want to make any self serving comments about how I retired early except that I employed all of those methods that you have listed. Always live below your means, invest more than you spend, and try to invest in things you understand and feel comfortable with. This could be almost anything but a disciplined approach to the stock market has been my preferred approach. I was the sole bread winner and I paid for three educations including two professional schools. And of course most people must acquire some debt along the way but try to keep it manageable and pay it off early. “Good debt” is a fallacy, unless you have an immediate source for differential income. You only receive a fractional write off of what you spend. In my opinion good money habits generally are common sense, but the discipline required is rare!
Not as easy as it sounds but I commend you for living within your means. You were fortunate in that you started with advantage of 2 incomes. I supported my wife while she completed her training during my residency and fellowship. So 2 people were living off of 30G/ year from ‘94-‘97 and yes I moonlighted every chance I could get but that just paid the food bill, gas, electric and we didn’t travel because we couldn’t. So how long should one defer pleasure? What about a family? Not everyone should wait until their late 30s to start having children. I would argue that if doctors are fiscally castrated from having children that’s not a doctors choice, that’s a societal issue and part of a bigger problem. After all, it’s not slowing down other groups.
I saved as much as I could but I could never catch up. I hope I can do better in the next 15 years but I still have 2 kids to finish college. I will try not to go into debt paying that off. Is that considered savings since I am not paying 8% interest? I think it should.
Living within your means is a firm choice you make. Not spending all of your money every year is not the same as deferring pleasure. Saving for the future is not deferring pleasure. I don’t think we deferred any pleasure in our life. Just because we could have purchased a more expensive car, doesn’t mean we deferred pleasure or missed out on anything by spending less on the car we purchased. We took great vacations, lived in a nice house and drove nice cars. All of this can be done easily within a physician’s income. Avoid doing it with debt and you save a lot of money in the process. We paid for our kid’s college by paying off our home. The old home mortgage payment was enough to cover college costs for two kids. We saved more in mortgage interest than we spent on college for two kids. Don’t wait to have children until “you can afford it.” Do it when the time is right and you will find a way to afford it. Best of luck to you. If you feel you need help in achieving all your goals, maybe you should consider contacting me for financial coaching. Sometimes we need an outside perspective to point us in the right direction.
Agreed, paying off home mortgage is a key to success and retire early. If someone can pay off home mortgage before their children go to college, it become piece of cake to pay college expenses of kids and make them debt free when they graduate.
Pleasure, fun and having kids are part of life. No-one should postpone them, instead enjoy them within our means. Save first before planning a big vacation. Take a day trip for fun rather than travelling far. Fun is a company of people around us, not a destination. It is nice to visit various destinations, however, save expenses first before chasing destination.
Yes, I am a big believer in the 10-15 year mortgage. If anyone ever did the math on 30 year and now longer mortgages or interest-only loans and of course using your home as an ATM, they would never do it. We paid off our home despite all advice against doing so. Advice against it was based on our low home mortgage interest rate vs stock market returns at the time. I wanted it paid off as security and I wanted to pay as little as possible. Literally, my financial advisor and others treated me like a dumb-blond (no offense to all those smart-blonds out there). Long story short, I retired at 53, last year in November and I am loving it!!
We all have some degree of luck, good or bad, that contributes to the outcome despite the process. However, we cannot change that. Your big four points about what we can do and the choices we make can change are key. Rational spending, saving, investing, and consistency also give you more options when you do get unlucky. My parents retired around the same age as you as a nurse and lab tech. Way less income than any doctor, but using the same principles.