Can I Afford Retiring Ahead of Schedule?

Physician's Money Digest, July15 2003, Volume 10, Issue 13

One of the most frequently asked questions by investors is, "Can I possibly retire early—before age 65?" Normal retirement age in the United States is age 65. However, with the changes taking place in medicine today and physicians' frustration with these changes, many physicians would like to be in the enviable position to retire early, at say, age 55. Or, if they don't consider early retirement an important goal, they would still like to be in the financial position to afford an early retirement.

Each individual case is unique, so there's no simple formula for determining early retirement. But I can illustrate by way of example the financial impact of taking an early retirement at age 55 as opposed to waiting 10 years. Let's examine what an individual has to do in terms of annual savings to be in the position to retire at age 55, instead of waiting until normal retirement age.


Dr. and Mr. Smith have just celebrated their 40th birthdays. Currently the Smiths have a combined pretax annual income of $250,000. Let's assume that the Smiths will be able to retire on the equivalent of $150,000 pretax annually in today's dollars. In other words, when they decide to retire, they will need substantially more than $150,000 annually, as we have to adjust this figure to keep pace with inflation.

Let's suppose that the inflation rate will be 3% compounded annually throughout the planning horizon. So, assuming that either Dr. Smith or her husband lives to age 90, to purchase the same lifestyle that $150,000 buys today, they will need a whopping $658,000 of retirement income in their 90th year (50 years from today) to purchase the same lifestyle that $150,000 buys today. Additionally, let's assume that Dr. and Mr. Smith have already accumulated $350,000 in financial assets that are allocated toward retirement.


In this scenario, let's consider 2 alternative investment rates of return. Let's assume in our example that a moderately conservative investment strategy will yield 7% net of expenses and that monies will accumulate on a tax-deferred basis in vehicles such as retirement plans, annuities, and life insurance policies. An aggressive investment strategy should return approximately 10%. Consider the long-term rates of return and risk measurement (Table 1).

In fact, if you go back and observe the 50-year compounded rate of return from March 1953 through March 2003, the S&P 500 would have returned 11.07% according to Ibbotson Associates. Given these historical rates of return and assuming an investment management fee of approximately 1%, it's reasonable to assume that the table's rates of return are realistic.


Recognize that there is considerably more risk and volatility when investing in the S&P 500, but the returns over the long term have compensated the investor for the additional risk. How risk averse the Smiths are will determine how much they need to accumulate for retirement and how much they will have to save monthly to reach those retirement goals.

As Table 2 demonstrates, if Dr. and Mr. Smith wish to retire at age 55 and they adopt an aggressive investment strategy (10% tax-deferred net rate of return), they will need to accumulate approximately $3.33 million and will have to save almost $3570 monthly or $42,800 annually for 15 years to reach their goal. However, should they decide to adopt a more conservative investment posture (7% tax-deferred net rate of return) and work until age 65, they will need to accumulate $5.28 million and will have to save approximately $3530 monthly or $42,400 annually over the next 25 years. As you can see, investment returns play a very crucial role in long-term capital accumulation.


Now, you may be tempted to say to yourself, "If I were just a bit more aggressive with my overall investment strategy, it would be possible to retire 10 years earlier." This may be true, but remember that investing can be an emotional roller coaster—as we've witnessed these past 3 years. Therefore, when implementing a long-term investment strategy, you must not only focus on the potential returns, but also be sure to consider the risks associated with achieving those returns (Table 3).

As Table 3 illustrates, in the 10- year time period ending April 30, 2003, the best 1-year return on the S&P 500 was nearly double that of the Lehman Brothers Bond Index. However, the worst 1-year return on the S&P 500 exceeded that of the Lehman Bond Index by more than 19%.There are always risks involved.

  • How much you already have allocated toward retirement,
  • How much market risk/volatility you can endure during the preretirement period.

Thomas R. Kosky and

his partner, Harris L.

Kerker, are principals of

the Asset Planning

Group in Miami, Fla.

Mr. Kosky teaches corporate finance in the Saturday Executive and Health Care Executive MBA Programs at the

University of Miami

and welcomes questions

or comments at 800-953-5508. For more

information, visit