If you’re thinking what I’m thinking, we’d both be right. Today’s guest post is, in fact, written by an actuary with an uncommon wit and a penchant for pensions, among other things.
I’ve had the pleasure of clinking pint glasses with the Actuary on FIRE when I happened to be in his neck of the woods a couple of years ago. We spoke of kids, numbers, spreadsheets with other fun people including Laurie from The Three Year Experiment and Liz, the Chief Mom Officer.
I haven’t seen the bloke since, but he continues to post sporadically as he races towards financial independence with a salary that would make many of my physician friends envious. He also recently created a course on FI spreadsheet making, because what else would you expect from an actuary?
Thank you, AoF, for the insightful and irreverent guest post that follows!
Are Actuaries the FIRE Superheroes?
When you were a kid, did you like to argue over what was the best superpower? Perhaps it was invisibility, or the ability to fly, or maybe telekinesis, but there’s no doubt that you couldn’t be a great superhero without excelling at one or more of these great powers.
But which profession is the superhero of FIRE?
Which profession has nailed all the FIRE superpowers to create the easiest path to financial independence and retiring early?
- I examine five professions: Actuaries, Physicians, Teachers, IT Professionals and Lawyers.
- I assess them on four key FIRE super-powers;
- Size of income
- Natural frugality
- Location independence
- Investment know-how
I’m going to single out four key professions that are widely represented in the personal finance community; Physicians, Teachers, IT Professionals and Lawyers. It is easy to find blogging or social media niches devoted to each of these groups and you will commonly come across many individuals from these professions in the personal finance space.
I’ve always felt that actuaries are not well represented, but they are a small profession and around 1/20 the size of the body of physicians. However, In terms of FIRE superpowers, I’m bullish that I’ll find that actuaries will punch above their weight!
To give you an illustration of the relative sizes the Bureau of Labor Occupational Employment Statistics from May 2018 has the total number employed as the following:
As you would expect there are a considerable number of teachers and almost two lawyers for every physician (I’m sure there’s a joke there somewhere…). But very few actuaries – we like to keep a stealthy profile.
We all know that the path to FIRE requires satisfying the equation of a high income combined with low costs and investing the difference over many years. So let’s look at income in more detail.
Superpower 1 – High Income
The Bureau of Labor’s statistics has data on average wages that I summarize below.
These figures look somewhat low to me, however, they are from a consistent data source and I’m not too concerned with the absolute values and I’m more interested in their relative sizes.
[PoF: I’ll interject that these data sets are usually based on a 40-hour workweek, and physicians tend to work, on average, 50 to 60 hours a week. So the unadjusted median would be 25% to 50% higher, or $250k to $300k, which sounds more realistic. The same may be true of other professions.]
Based on this summary, I bet you are thinking that physicians are the runaway leader and should clearly be the FIRE superheroes.
Not so fast! You’re not looking at the bigger picture of lifetime earning.
Calculating Lifetime Earnings
To examine lifetime earnings we need to take account of speed to the workforce along with professional debt burden. It’s in these two areas that Physicians have it tough; not only is their period of study longer than most (all?) professions but they emerge with a huge debt burden.
Actuaries, on the other hand, can start work straight from a first degree, and can even get a head-start on the actuarial exams during their higher education. The time for actuaries to qualify is around 7 years, but employers sponsor a student’s progress through the exams, so there is a good salary from day one and the employer provides study leave and all education costs.
In calculating lifetime earning, I’m going to assume the following; working to age 65 with a 7 year delay for physicians to reflect additional school and training on a relatively low salary, a debt burden of $200k for the physician, a $30k debt burden for the actuary, the average earnings from the table above and a discount rate of 5%.
It turns out that when you crunch the numbers the lifetime earnings for a physician are only 25% more than that of an actuary’s. That is a much lower differential than suggested by the above median earnings.
Why a 5% discount rate I hear you ask? Only because it’s a gray-suited-serious-kind-of-actuarial discount rate. Had I used a more brash-physician-red-Tesla type of discount rate and gone with 7%, then the lifetime earnings differential would have shrunk to a mere 10%. Barely any difference at all.
At this point, we need to rate our professions against the different superpowers, and to do this we will give a score of 0-3 stars for each category. Some criteria will be fairly easy to assess such as income, and others will be more subjective. However my judgement will be final and I will be adopting the international rating system – the Arbitrary Star Score (‘ASS’).
- For income, it’s clear that physicians earn 3.0 stars.
- Given actuaries’ strong showing in the lifetime earnings they will be awarded 2.0 stars, and I’m going to guess that lawyers might be similar at 2.0 stars.
- IT Professionals receive 1.5 stars
- And Teachers 1.0 stars.
Physicians are currently out of the gate quickly with a pretty good ASS.
Superpower 2 – Natural Frugality
Clearly, when on a path to FIRE, it’s desirable to keep spending low, but that can be tough as you progress through your profession and enjoy greater material rewards. However, a natural propensity for frugality can be a real benefit, but which professions have it?
I’m going to argue here that all the professions except physicians see relatively gentle progressions in their wages and this steady growth in earnings will support a frugal outlook. Physicians, however, see relatively poor incomes through medical school with a much more significant bump in earnings later in life.
It is this significant bump that can de-rail years of frugal penny-pinching. I’m sure that if I suddenly found myself in a position to now consume much more, then I would ramp up my standard of living.
This is really not the case with actuaries. You can see below a snapshot of wage progression for one branch of the actuarial profession. There is no real cliff-edge between being unqualified and qualified, it is more of a gentle progression as you pass exams and gain seniority.
Actuaries are not generally flashy, they are often your typical math-nerd types. You don’t need the interpersonal skills of a physician for most actuarial work, so I think this introspective tendency lends itself to frugality and I will award physicians 1.0 star and actuaries 2.0 stars.
I think there is no argument that Teachers are generally frugal in comparison and so receive 3.0 stars, and I yet to meet a frugal lawyer so I’m gonna give them 1.0 stars and programmers are somewhere in the middle with 2.0 stars.
Superpower 3 – Location Independence
In this context, location independence means your ability to practice your chosen profession in an area of the country that you wish with a low cost of living. You could be the most frugal person in the world, but if your profession requires you to work in New York or San Francisco then your FIRE plans could get blown up. So I think this deserves a category in its own right.
The Bureau of Labor came up trumps again with their data, and they supply the number of professionals and wages split by state so I started to crunch some numbers…
I wanted to measure income disparity across the country for each of the professions and weight that by the number of professionals in that state. A perfectly equitable distribution would have an equal number of people in a profession living in each state and all earning the same wages. In this case, you would have a fair chance of being able to move to a low cost of living state.
However, income distribution is not equitable for any of the professions and the most common measure of income disparity is the Gini coefficient. I’m always amazed at what I learn by blogging, and I learned that calculating the Gini coefficient is a huge pain, so I’m going to do things visually with a chart. (For the technically minded the curves I’ll show are the Lorenz curves, and the Gini coefficient is calculated from the area under the curve.
In the chart below, the straight green line shows the perfectly equitable situation I described above. The extent to which a curve dips below this line show the disparity in income across the states.
You can see that lawyers have the most un-equitable distribution. It is particularly steep at the end and you can see it goes through the point 90% and 50%. This means that 50% of the income power is distributed among 10% of the states. If you are a lawyer then the biggest opportunities by far are in Florida, District of Columbia, Texas, New York and California.
Not only do these areas have the highest number of lawyers but they are the best paid. If you want some geographic flexibility, then working as a lawyer provides the least flexibility.
By comparison, the other professions are more flexible, however none of them exhibit anything close to a geographic equitable distribution. In terms of stars I will award;
- Actuaries 1.5
- Physicians 2.0
- Teachers 2.0
- IT Professionals 2.0
- Lawyers 1.0
The final FIRE superpower is investment know-how. It’s no good earning a barrel-load of money, being frugal and living in a low cost of living area if you make poor investment decisions.
Superpower 4 – Investment Know-How
In my research on financial literacy, there seems to be agreement that the public, in general, is pretty challenged around investment and personal finance issues, but I’ve not been able to uncover any research on the differences between the professions. So I will have to rely on my own personal prejudices.
Physicians…. what can I say? if there wasn’t a problem, then there would not be this proliferation of personal finance blogs aimed at doctors. I mean, how many equivalent blogs do you see aimed at actuaries?
There’s a reason for that. Physicians are not taught personal finance and investing, whereas actuaries have years of grueling exams on precisely these topics.
To illustrate how disinterested actuaries are in personal finance, here are the number of posts devoted to certain topics obtained from one actuarial online chat forum.
You can see that actuaries would much rather talk about almost any other topic than personal finance. Given investments is their day job they would much rather talk about Game of Thrones (the predominant contributor to the 2.5M posts in “Non-actuarial topics”).
Consequently I’m going to award physicians 1.5 stars and actuaries 3 stars.
In terms of investment know-how, I feel that lawyers are a little worse than physicians with 1.0 stars and teachers are on a similar level to physicians with 1.5 stars. I think IT professionals have the math chops and the time to devote to learning this material and so I’m going to place them at 2.0 stars.
It’s time to check out the size of those ASSes!
IT Professionals 7.5
I think you guessed that result was a foregone conclusion with actuaries leading the field with 8.5/12. Physicians, teachers and IT Professionals are not far behind with 7.5/12, however, lawyers are lagging the pack with sub-par FIRE superpowers. Perhaps they are destined to work forever!
I’m fully expecting the comments section below to be in eery silence as readers digest the power of this finely honed argument and the irrefutable conclusion. However, if you want to comment below to perhaps offer your moral support to lawyers or congratulate actuaries then that’s acceptable.
Actuary on FIRE is not actually on fire but blogs at actuaryonfire.com and by day provides investment and pension consulting to corporate America.
He has recently released a new online course – Create a kickass financial independence spreadsheet and PoF readers can enjoy a limited-time discount of 50% with code POF500, bringing the cost of the course down to the price of about two lattes.
What do you think? Are actuaries the true FIRE Superheroes? If not, what profession beats them? What would the Arbitrary Star Score on a 0 to 12 basis?