Drifting Toward Early Retirement

[I hesitated before publishing this post because of the real-life finances contained herein but, in the spirit of putting myself out there, I decided to go ahead. My current financial situation can be attributed primarily to luck and happenstance, and I feel very fortunate to be where I am. Please forgive anything that may seem like a humblebrag; my true intentions could not be farther from that.]

Confession time: I am lazy at heart. Sure, I’ve learned some tricks to motivate myself over the years, but I am still that kid who watched Rocky I-V—back-to-back—one Saturday in 1993, only peeling myself off the couch to address critical bodily functions.

Perhaps this will help you will understand why I lack a detailed monthly budget. I am in good company among others who have raged against the budget, but my reasons are not so noble.

It’s not pure laziness, but a calculated laziness.

Many with frugal tendencies have one or two things on which they allow themselves to spend. Some crave a particular material object—house, car, clothes—and others prefer something more experiential—food, wine, travel.

I choose to spend on two things: travel, and what I think of as “budget drift.

Budget drift?

Budget drift means a couple of things to me: not keeping close tabs of what I spend, and not caring—both within reason. I trust that I will not drop $10k on a diamond-studded belt or $3k on a 22-karat gold thread dog mattress, nor do I sweat picking up a $200 tab at a restaurant. I’m not thrilled with an unexpected $2000 car repair bill, but I won’t eat ramen for a month to compensate.

As a result of budget drift—not tracking spending and being fairly loose with the purse strings—I inevitably waste some money. But on the bright side, I worry less about hitting specific monthly budget targets, which, knowing myself, would be a source of stress.

I euphemistically think of this tradeoff as “paying for the luxury of budget drift.” Some mental gymnastics, but it works for me.

diagram of impossible leg bending
Bone-bending gymnastics!

My very first big-boy budget

Many moons ago (about 70), as I began my first job after residency, I sat down with pay stubs and bank statements to create a simple budget based on 3 data points:

  1. Money coming in
  2. Money going out
  3. Desired nest egg for early retirement

Assuming numbers 1 and 2 hold steady from year to year (I reassess them periodically), the math is pretty straightforward. I need only choose my nest egg target number. More on that in a minute.

I hear the screams: “How can you know your nest egg number if you don’t know annual expenses?!”

My answer is that I don’t know precise annual expenses, but I know ballpark figures, and there’s a good chance those numbers might change in 5-10 years. So I make an educated guess.

Setting ourselves up

I sort of stumbled into a job that pays well, and then chanced upon an interest in personal finance, which has allowed me to careen toward early retirement. Some calculated choices along the way have also aided my family’s approach to financial independence.

  1. High paying profession. My parents never earned more than $50,000 per year throughout most of my childhood, so I am flabbergasted and supremely grateful that our household can earn that much in a month. I don’t think it’s a stretch to say that most doctors earn high salaries. I would be lying if I said it wasn’t a factor in career choice (not the only factor, of course).
  2. Dual-income household. Related to #1, but worth a separate mention. Both my wife and I work, realizing that the extra cash comes with strings attached: the need to pay child care, and the sometimes crazy juggling act that accompanies dual-working-parent households.
  3. Keeping our “starter” house. We purchased our current home while both still in residency, and paid it off years ago. It was cheap, costing us less than $200k in our LCOL area. Over the years, we remodeled a good bit and occasionally cursed its 100-year-old walls, but we are glad we stayed. The lack of a mortgage payment helped create even more laxity in the monthly “budget.”
  4. Luck. My recent visit to Vegas proves that luck is not always a lady (some advice: don’t spend an hour at the bar before trying to recall the blackjack charts you had memorized). However, fortune has shined upon me at a few other pivotal life moments.
    • When I first obtained life insurance late in residency, the broker gave me the hard sell for a pricey whole life policy. Frustration at my own ignorance made me purchase my first personal finance book—and subsequently discover the personal finance blogosphere—before I made any rash decisions (I got term life insurance).
    • My wife and I attended state medical schools from 2001-2005, and left with substantial but not staggering student loan debt, totaling around $300k. More, we were both able to consolidate at the crazy-low rate of 1.875%. Compared to what I read about student loans these days (83k per year?!), I feel like we got off easy.

The Budget

Now for some numbers. I debated whether or not to use my real numbers, and in the end decided to be straight with yinz*. Perhaps someone will find this exercise useful in contemplating a career decision, or in thinking about what is realistic and possible from a savings perspective.

*plural of “you” in the local dialect. Can you name the region?

colored ribbons hanging from ceiling
Our local children’s museum.

Pre-retirement numbers

  • Income
    • Household W2 income (2016): ~$600,000
    • Taxes: ~$200,000
  • Tax-deferred retirement accounts
    • Me: $53,000 ($18,000 elective deferral + $33,000 profit sharing)
    • Spouse: $28,000 ($18,000 elective deferral + $10,000 profit sharing)
  • Take home pay
    • ~$31,000 per month
  • Fixed monthly expenses (pre-retirement)
Fixed Monthly expenses pre retirement
*I am unsure if I should think of estimated taxes as expenses. If I am incorrect to include it here, I have erred on the side of overestimating expenses.
  • Discretionary spending
    • $31,000 (take home pay) – $20,400 (fixed monthly expenses) = $10,600 “discretionary spending”
    • A $10,600 cushion allows our month-to-month budget to vary quite a bit, to say the least. We don’t spend it all on hookers and blow: some is needed for gas, food, entertainment, and travel, and some is donated to charity. Any leftover money goes into our taxable retirement account.
  • Total annual retirement savings
    • Tax-deferred ($81,000) + taxable: ($120,000) = $201,000

[Edit: We also fund our backdoor Roth IRAs with part of our after-tax money]

Post-retirement numbers

  • Nest egg target
    • To calculate my nest egg, I only really need 2 numbers: my overall projected expenses (fixed + discretionary) and my expected withdrawal rate.
  • Fixed monthly expenses (post-retirement)
    • Come retirement, many monthly expenses will up and vanish like a fart in the wind, and they will look closer to this:

Fixed Monthly expenses post retirement

  • Other expenses (post-retirement)
    • Now time for some real speculation: discretionary spending. I plan to track this more closely as I approach retirement (i.e. actually look at my budget again). Based on monthly credit card statements, I’ll use an additional $5000 in discretionary spending, meaning a total of $10,000/month and $120,000 annually to cover all expenses.
    • Health insurance: The need to purchase health insurance would be an added fixed expense. At the moment, my plan is to maintain a minimum, part-time work schedule and keep employer-sponsored health insurance.
  • Withdrawal rate
    • An educated guess disguised as an informed choice. I need to provide $120,000 annually. At a conservative 3% withdrawal, that leaves me with a nest egg target of $4,000,000. At 4%, that number becomes $3,000,000. Amazing what a percentage point can do!
  • Taxes in retirement
    • I will actually need more than my $120k annual expenses to appease the tax man each year. One thing is certain: taxes will be much lower than during my working years. The beginning of an early retirement will be funded from taxable accounts, taxed at LTCG rates. I have yet to sell any taxable assets for a capital gain, so I have some homework to do!

Uncertainty

After completing this exercise, I am most struck by what I don’t know—expenses, “safe” withdrawal rates, taxes, and the future in general. Despite this uncertainty, my current assumptions and calculations tell me early retirement could come as soon as 7 years from today.

But a lot can change in 7 years! In 7 weeks, I will have another child, which will alter my “money out” calculus for sure. At a minimum, monthly child care costs and 529 plan contributions will double. If I quit work completely, I will need to factor in health insurance costs. And—as my nest egg approaches the lower target estimate ($3M)—the devil on my left shoulder will start to whisper about that 4% withdrawal rate.

How do you approach your own budget? Are any of my assumptions way off? Please comment below!

21 Replies to “Drifting Toward Early Retirement”

  1. I don’t have a solid budget. I run my own business and I plow most of my profits back into it. I pay myself just enough to live on.

    1. I think most people have a sense of how much money they are spending; whether or not they act on it can be a different story. Certainly if you are spending just enough to meet life’s basic needs, and banking the rest, you are on a trajectory for success!

      Thanks for stopping by!
      Dr. C

  2. With plenty of offense (income) and defense (LCOL in the ‘Burgh), I imagine you’ll reach your FI target in due time. Congratulations on the upcoming addition — another little Pens fan!

    If you really want to know what that target should be, sign up for Mint and see where your money is actually going. That huge “discretionary spending” category includes all of our biggest expenses — food & drink, auto & gas, healthcare, travel, etc…

    I’m using $80,000 as our anticipated annual output in early retirement. We do not plan on private schools, which comprises $36,000 of your $120,000 budget. Don’t forget what inflation can do, too. In seven years, your $120,000 might only be worth about $100,000 in today’s dollars.

    Cheers!
    -PoF

    1. I have used Mint in the past but had trouble syncing some of my accounts, so gave up. But perhaps I will give it another try.

      Private school tuition is certainly a big drag on the budget. However, we may move to another city, or even travel for an extended period (I think you have considered this too), in early retirement. If we move we will try to live in a good public school district. But if we stay here, we want to be in our current neighborhood, which unfortunately has horrendous public schools.

      All this may happen in the next 5-7 years, so I have a hard time planning for the even longer term future. In the meantime, I’ll probably stay budget lazy.

      Thanks for you thoughts!
      Dr. C

  3. I always considered myself to be frugal. We make a lot of money, live in a modest house, drive modest cars, wear old clothes, etc. Over the years, I spent over 100 hours trying to make a budget. I tried programs like Mint but they didn’t have enough granularity to help understand our cash flow. I made a 50+ item Excel spreadsheet, but it still missed things. So what did I do? I printed out our bank statements for an entire year (Jan 1 through Dec 31) and added up “money in” and subtracted “money out”. There was a HUGE discrepancy. We were spending almost 50% more than my budget estimated! So then I had to go back and see where it was all going. It was a punch in the gut. Be a forensic accountant and look at what you’ve ACTUALLY spent, not what you estimate.

    1. Wow, that’s a large discrepancy! Glad you discovered it sooner than later.

      I put everything possible on one credit card, and all the large deductions from my checking (CC payment, student loan, insurance, etc) come at the end of the month, so I feel like I have a reasonable handle on the money in and money out each month. I browse my credit card statements each month as well, to ensure nothing nefarious or weird is happening.

      At some point, I plan to go through the budget with more of a fine-toothed comb like you did. Reading all of these early retirement blogs and comments might just inspire me to do it sooner than later!

      Thanks so much for stopping by!
      Dr. C

    2. Dr K,

      Like POF recommended, I’d combine both Mint and a spreadsheet if you are having trouble with getting your budget down to an understandable level. Use Mint to sort most things, and use a spreadsheet for the last few bits of granularity that you want, i.e. “Shopping” or “Groceries” broken down into finer specifics. With Mint or YNAB or Personal Capital doing most of the heavy lifting, your extra work in a spreadsheet becomes much easier. When it’s easy, it gets done; if it’s complicated, it won’t.

  4. Love the article of your post! My wife and I are also two physicians “drifting” toward FI and, likely, eventual part-time work (assuming we still enjoy it). We are further along with our two kids (elementary school age), and also find ourselves “drifting” in another sense: away from full-time work – having reduced our hours either through job restructuring or by giving away work to “unlike-minded” colleagues – in order to spend more time together and with our kids while we are all still young and healthy. We used to roughly estimate our budget and expenses, like you, but I would heartily second PoF’s recommendation of Mint.com as well, for looking backwards and figuring out your expenses. I also highly recommend YNAB (the classic version, so you don’t have recurring expenses and more consciously input your spending) for helping your money decisions as you go forward – it is the first budgeting system that my wife and I have both been able to consistently use. App works great and syncs across our devices and computer on one account. I would guess that your discretionary expenses are probably higher than you think. Ours were, and it has been a rewarding game to see our annual expenses fall over the years since we’ve been more intentional about our spending. (Your Money or Your Life was right in that way – and definitely worth a few re-reads!). We also think of our “FI number” in terms of our annual expenses (25x if using a 4% withdrawal rate, as you discussed) PLUS “one-time buckets” that we anticipate. Like you, we are thinking of private school for our kids, (though only junior high and high school for us) but it was an epiphany when we realized that those costs don’t go into your FI number, they are added in as “one-time bucket” numbers. Quite large buckets, but $20k x 4-7 years of school x 2 kids is way less than $40k x 25 (or 33). We have also found it is psychologically fulfilling to get to our base FI number first, then fill up those other “optional” buckets afterwards (who really “needs” braces anyway). Another benefit to tracking your expenses more closely is that you will have a better idea of what your “post-retirement” (from full-time work) work-related expenses will look like (e.g. How much commuting costs will go down, what CME-related costs/trips can and can’t be dropped, what practice overhead-related expenses can and can’t be dropped). Couple other things – I have been reducing my disability and life insurance coverage (and increased the waiting period) each year or two along the way to FI – no need for a new application or exam when you are reducing your benefits, only when asking for more coverage. Just ask your broker for a form and send it back – a few minutes will save you hundreds a month. Also watch out for over-funding your 529s. A lot written about this recently. Just a few thoughts from a fellow FI-minded physician couple a few years ahead of you. Thanks for sharing, look forward to hearing more about your journey! (And thanks to PoF for his link and his blog too!)

    1. Lots of great thoughts here, Dr. A!

      The concept of having one-time buckets is intriguing. We plan to have college savings (primarily 529s but also taxable money) filled by the time we pull the trigger.

      In truth, I doubt we will both fully retire right away, but rather step down via a part-time path like you did (in fact, I just wrote another post about this).

      Slowly reducing life/disability, rather than all-or-nothing, was not on my radar, so I have some homework regarding this as well.

      Glad to hear you are on your way to FI, and best of luck in the future!

      Take care,
      Dr. C

  5. I think budgets are kind of like diets. They are restrictive and feel like deprivation. We just make sure we are spending intentionally and efficiently. I have noticed spending drifting up over the last few years, although nothing too alarming.

    Tracking spending Ii do find very useful, because it identifies where my money is going. We can then look back and see if our spending aligns with out values.

    1. I like the diet analogy. I would say that try to “eat sensibly” and not worry about it as long as I’m not “gaining weight” alarmingly or otherwise damaging my “health.”

      Alright, alright, you guys are convincing me that I should at least try to track spending. I was a stubborn child, but perhaps I will listen.

      Thanks so much for you always insightful comments!
      Dr. C

  6. Wait. Why don’t I know you already? And where’s my guest post? 🙂

    And why are so many physician financial bloggers radiologists?

    1. Hi Jim,
      I have been lurking for years but just started this site a few weeks ago. I would be thrilled to write a guest post, just let me know when and what!

      Radiologists have too much time on their hands, I guess. And we sit by computers all day. And some of us are a little weird.

      Thanks so much for stopping by!
      Dr. C

  7. Fun to run the numbers isn’t it. I am envious that you stayed at your residency home. We are 3 homes in and 3 towns later. The home is our biggest hassle/hinderance to early retirement. The other kicker is we moved from a no state income tax state to California. Man seeing the tax man take our check and cut it in half is a tough pill to swallow.

    1. We considered moves twice: right after fellowship and a couple of years ago. In the end we stayed put, but I would have been happy to move as well.

      Living in the same place from medical school until now has been easy on the pocketbook, but we occasionally get the feeling that we should live in another part of the country, just for the experience. There is something to be said for a little variety.

      Take care and good luck with the tax man!
      Dr. C

  8. We found that simply tracking our spending for a few months led to almost $24k/yr we were literally just pissing away on Target trips, Costco trips, eating out a lot, etc… We don’t have the income levels like you, but both made pretty good money in the O&G industry then so we could always pay off our credit cards each month. It was amazing how much we were just losing each month stimulating the economy picking up this and that, which ultimately amounted to nothing.

    As far as budget estimations ofr post FIRE life, we ahve tracked our spending for a few years now and like you mostly just use 1 credit card and 1 checking account to cover everything. It makes it easy. Mrs. SSC used Mint but it didn’t get granular enough for her, and now she uses personal capital. It helps but she still has a mega spreadsheet to account for things outside of that program.

    Essentially stuff like changing interest rates, inflation, property taxes, increases in spending as kids get older, market returns and more. It lets us play highs and lows and see what number we’re comfortable with before we pull the trigger on our careers. Beyond that, cfiresim is another fun calculator to play with. You can do the same and set all kinds of scenarios and see how your number plays out. Good luck!

    1. Did you notice a big change in your habits after getting very granular with your spending tracking?

      Even if I know exactly what, where, and how much I spend, I question if I will be able to make significant changes anyway. I suppose putting my spending habits more in the front of my consciousness on a daily basis will probably elicit some changes, but I’m curious how it worked out for you.

      Thanks for the comments!
      Dr. C

  9. Dr. Curious and I attended the same residency in the ‘burgh. I wonder how many of our contemporaries are contemplating early retirement? Is it a generational thing? I plan to ask my residents a my next lecture. If this is a trend, then I see a workforce shortage coming in the next 10 years.

    1. Or maybe there will be twice the number of doctors all working half-time. If the number of blogs about early retirement is any indication, I would say it’s trending.

      I often wonder if any other city thinks of itself at “the ‘burgh” besides the real one, i.e. Pittsburgh. Edinburgh, Scotland was around before us, but they pronounce it wrong 🙂

      Thanks for stopping by!
      Dr. C

  10. How can you participate in a group health care insurance plan while working part-time? My understanding is that full-time employment is generally required as a condition of participation. I suppose there might be exceptions for physicians, but you should check this out if you’re uncertain about it.

    1. Good question. When working part-time, individuals in my private practice negotiate a total compensation package that may include health insurance. If they forgo health insurance, they can draw a higher salary.

      You are right that this can be more challenging for employees, but assuming our group’s situation remains stable (fingers crossed), I should be able to pull off my plan.

      Thanks for taking the time to read!
      Dr. C

      p.s. I must admit your name intimidates me slightly 🙂

Comments please!