Don’t Let Fear Of Retirement Keep You From Retiring Early
The general concept for us docs is that we accumulate debt in medical school, get a little income in residency, make good money as attendings, buy a house and then spend what’s left of our youth paying down somewhere around $1,000,000 of debt.
Along the way we may put some money in a 401(k) or similar retirement vehicles such as 403(b) or 457’s. We may contribute to an IRA and we may even put some money into a private brokerage account.
Many docs however just keep on working …. they just keep paying down debt, driven by fear that there may not be enough. There may not be enough income, there may not be enough savings, not enough money for their kids to go to college and not enough to pass down to heirs.
Personal Finance Is Not A Science
The field of finance certainly isn’t a science but everyone in the world is playing the same game. Therefore, there are some general predictions that one can make. Trends are the one thing that most of us won’t be able to pinpoint accurately and consistently.
First let’s talk about why there is so much uncertainty and fear. Brokerage companies where most of your retirement accounts and investments are held make a ton of money instilling fear in you. They pay millions of dollars just to put out articles, websites and information that lead you to believe that you cannot retire without $8-$10,000,000. Even your financial adviser may benefit by you having a large amount of assets under management.
The Basic Concept, The Truth
Yes children, I am here to set you free, to tell you the truth. Cholesterol meds are shit and don’t change your health’s outcome! Oh sorry… wrong platform. Finances, right, here we go….
The money you put away by investing it in mutual funds, savings accounts, CD’s, retirement accounts and other investment accounts can and will generate you passive income. Even if the market tanks (bear market) you can still make money off your investments, maybe not quite enough to pay for hookers and blow but definitely a sizable amount. And when the market goes up (bull market) you can take out quite a bit more.
The basic principle, which I won’t get into detail of here, is that your investments can generate 2% of income damn near guaranteed every year– on the low end. If done right, best with the advice from a good financial adviser, you can likely get 4-6% every year… both of these percentages are net incomes, after taxes.
As an example… if you have $500,000 invested you can see a passive income of about $10,000-$30,000 per year. But, come on now, you’re a doctor, if you only got $500k saved by the time you want passive income well then you gotta curb your gambling habits or stop buying Louboutin shoes. If you have $1,000,000 saved you can expect $20,000-$60,000 of annual income, after tax, net income!
Oh, and did I mention that this passive income assumes that your initial investment, your principal, either stays the same or goes up in value. So, your heirs will be fine, they will have a nice stash of cash to blow on crap they don’t need …. or, to start socially conscious businesses with!
The Details For This Passive Income
You can put money away in a savings account, you can put it in retirement accounts (our main focus for now) or you can invest your money in real estate and businesses. Money kept in a savings account right now (10/2015) accrues very little interest. But, that will change. That is the one thing certain about finances… it will go up and it will come down and then repeat. Right now, putting your money in a savings account won’t even keep up with inflation. Inflation is at about 1.8% (the rate at which your money loses value) and savings account APR’s are less than 0.2%… yes, your money would lose 1.6% in value every year.
Even if you decided to just put your money in a savings account (for the security of it) but had let’s say $1,500,000 saved up; that money would still last you about 25 years if your expenses were $60,000 a year.
However, back in the 1980’s you could put your money in a CD and make a solid 8-10% return by just parking let’s say $150,000 in that account and make a passive income of $15,000 per year. So, my point is, these low savings APR’s and CD rates will once again go up.
So back to the basics. You have a 401(k)… you have no idea what the fuck it is. But you know that $750 gets taken out of your paycheck every 2 weeks and deposited in this account. Yes, that money is all yours. It’s a retirement account because it means that you have full access to it (without penalties) once your face has as many wrinkles as a shar-pei. In the meantime you can’t access that money until age 59.5 unless you pay a 10% tax penalty. Even then, there are still ways around this… look up SEPP.
By the way, this is a great way to screen your financial adviser. If he or she doesn’t know what a SEPP is or what a rule 72(t) is then you should either not do business with them OR punch them in the nuts and/or ovaries if you are already working with them.
Too Complicated? Want Something Simpler And SAFER?
SPIA may be the right thing for you. What the shit is a SPIA? It’s a single premium deferred annuity. I’ll keep it short and simple (basic), you turn over a sum of cash to a company and that company pays you out a set amount in monthly installments. It’s as safe as it gets, as predictable as one can have it. I’ll also say that annuities for the most part are a bad idea. Many annuities are there to rip people off. But saying that all annuities are bad is very narrow-minded.
As an example, I give a large well-known insurance company $1,200,000 and in return they guarantee me a monthly payment of nearly $4,900 every month until I die. No more worries about how the economy is doing and whether my investments are making money or losing money. Of course, I’m giving basic overviews, you need to strategize when you got the SPIA route.
How Much Money Do You Need?
I realize, so far, this isn’t a very detailed way to help you understand how your money and savings and retirement interplay but I hope it gives you a good idea. One of the reasons I love Betterment and Vanguard is that they make this concept of passive income super easy. All you have to do is invest your money with/through them, and once you are ready to take income from your investments they will do all the work for you.
So imagine you decide to retire early, you are 45 years old. You are married with 2 kids. You have decided that your kids need to pay for their own education. Your house is paid off, your student loans are paid off and you just have 4 people to support in your household. Well, if you want $4,000/mo then you need somewhere in the $1,200,000 invested. If you want $6,000/mo then you need a little closer to $2,000,000.
Ok, let’s see what Fidelity and even Betterment (tsk, tsk) recommends that you save for retirement. Remember, the more money you have with them the more money they make. They recommend that if you make $250k a year now as a 40-year-old adult that you save nearly $7,000,000!!!! W….t….. f!
$7 million would generate a passive income of $23,000 a month. That’s $280,000 of annual income. I mean I totally get it, if your yacht runs on truffle juice then yes, it can be quite costly.
I have multi-millionaire friends that don’t spend that much a month. And I’m talking multi-millionaire with multiple properties, multiple businesses and various hobbies. So, if you need $23k a month then I hope to god that you stopped reading this post and blog after the first 1-2 sentences.
To put away $7 million you need to make nearly $13,000,000-$14,000,000 because uncle sam needs his cut, your financial adviser needs a lil’ sum’, sum’ and you gonna make some mistakes along the way, that’ll cost ya. You gonna need a few bypass surgeries, some money for your divorce lawyer and an even better lawyer to keep the ambulance chasers off your tail if they find out what you’re worth.
Let’s see, $16 mill at $300k a year would take 43 years… not bad! Well…. I’m stretching it a bit. The truth of it is that if you really wanted to stash away $7 mill then you would need to save $10,000 per month for the next 30 years…. lemme double check the math…. yeap, you’d be right at $6,200,000 which is close enough.
I don’t know about you, but I can think of so many better things to do than to pollute the world with all the negative energy it takes to stash away $10,000 every.. single.. month… for 30 years of my life. I’ll gladly forgo the $23,000 monthly passive income that I would get to enjoy at age 60.
Okay, I don’t know how to make this post any longer so I’ll stop here. What I want to get across to you is don’t be afraid of being able to generate passive income. There are even more ways than I have even outlined here. I promise I will go over every single income generating option that I come across over the next few years. Don’t let fear keep you in a job that you aren’t passionate about.
Remember, advice about how much you need for retirement generally comes from those who get to benefit from your higher savings. The more you save, the more you fear retirement, the more they benefit.
Your savings, if invested in mutual funds (stocks, bonds etc), will generate passive income while your principal investment either stays the same or goes up. Come up with a good plan, figure out how much income you need, save for that goal. Don’t just keep working and saving… if you don’t have a plan for yourself someone else will make a plan for you.
How much income do you think you need every month once you retire?
Do you handle your own retirement planning or have you used a financial adviser?