Retire Early From Medicine - Don't Want To See Patients Until 65?

If you're a healthcare professional, especially one who worked through the pandemic, the traditional idea of working until you're in your late 60s  might not be appealing. Constantly seeing patients can take a toll, and the thought of being work-optional—where you don’t have to work for a paycheck unless you want to—can be very enticing.

But achieving this freedom isn’t about age; it's about reaching a specific financial milestone known as your financial independence number or financial freedom number. If you aren't sure what your financial freedom number is, click here to get it in <60 seconds. This means having enough assets to live comfortably without needing to earn another paycheck- something to look forward to, right?

I’m a critical care PA who worked through every wave of the pandemic in an ICU. Even before the pandemic, but especially by the end of it, I knew I didn't want to work until I was 65. So, I dove into figuring out how to become work-optional much sooner. My initial goal was to retire by 45, but it looks like I’ll be able to do it even sooner. Amazing right!?

Before we dive into investing metrics, if you're not sure how debt fits into the equation click here.

Understanding the Rule of 25

In the personal finance world, you often hear about the "Rule of 25." It’s simple: take your average annual expenses (not your income) and multiply that number by 25. This gives you your financial independence number. There are a few nuances, but let’s break it down visually.

Here’s what the Rule of 25 means: if you have $1 million invested, it can generate $40,000 per year for you to live on. This is based on a 4% withdrawal rate in retirement. So, if you need $40,000 annually, you need $1 million invested. 

Now, if you’ve been earning a six-figure salary, or if your household has two six-figure incomes, living on $40,000 a year might not be feasible.

The Path to Financial Independence

Achieving financial independence requires planning and discipline. Here are some steps to help you get started:

1. Calculate Your Expenses: Determine your average annual expenses. This will be the foundation for your financial independence number.
2. Multiply by 25: Use the Rule of 25 to find out how much you need to have invested.
3. Invest Wisely: Focus on investing in assets that will generate a reliable income. This could be a mix of stocks, bonds, and real estate.
4. Reduce Unnecessary Spending: Cut down on expenses that don’t add significant value to your life. Every dollar saved is a step closer to your goal.
5. Increase Your Income: Look for ways to boost your income. This could be through side gigs, asking for a raise, or finding higher-paying opportunities.
6. Stay Committed: Financial independence doesn’t happen overnight. Stay disciplined and keep your long-term goals in mind.

The Path to Financial Independence

One of the key factors in retiring early is understanding the withdrawal rates for early retirees. The traditional 4% rule is based upon assumptions that you are a traditional retiree (exiting the workplace mid 60s), so it’s crucial to consider the data and nuances behind early withdrawals.

Vanguard’s Data on Withdrawal Rates

Vanguard’s research provides valuable insights into safe withdrawal rates for early retirees. Here are some highlights:

• Impact of Fees: Vanguard looked at a 50-year retirement term, from age 45 to 95, and analyzed the probability of success for a $1 million portfolio based on investment fees. They found that if your investments have high fees (1% expense ratio), your probability of a successful retirement drops to 8.6%. Adding a 1% advisor fee on top of that makes it nearly impossible to succeed with a 4% withdrawal rate.
• Lower Expense Ratios: By keeping expenses low (less than 0.2% or 20 basis points) and diversifying internationally, the safe withdrawal rate drops to about 3.3%. This means that instead of $40,000 per year from a $1 million portfolio, you can only safely withdraw about $33,000 annually.
• Dynamic Spending Model: Vanguard also explored a dynamic spending model, where you adjust your withdrawals based on market performance. In good years, you can withdraw more, and in bad years, you withdraw less. This approach helps extend the life of your portfolio but requires flexibility and a buffer to handle income variability. The combination of low fees, international exposure within your portfolio, and this spending model may allow a withdrawal rate closer to 4%, even for an early retiree.

Understanding these details can make the difference between a successful and an unsuccessful early retirement. It's crucial to keep investment fees low, diversify your portfolio, and be prepared to adjust your spending based on market conditions.

You see, being able to say you’re work-optional is about more than just not having to work; it’s about having the freedom to choose how you spend your time. For healthcare professionals burned out from the pandemic, reaching this goal can provide a much-needed respite.

Take the time to plan your financial future carefully, and you could find yourself living a life where work is optional much sooner than you think.

Remember, it’s not about the age you retire, but the freedom you gain.