FIRE Crossroads 024: Coasting to fatFIRE

As you may know, we’ve talked here before about the concept of fatFIRE – that is, a spending budget in retirement north of six figures. Using the often-quoted 4% safe withdrawal rule, you would generally want about $2.5 million before you could reasonably consider yourself a member of the fatFIRE community. And quite a community it is, if I have anything to say about it.

Of course, many professionals find themselves at a point in their journey to financial independence that some call Coast FI, which is generally where one can withdraw one’s foot from the pedal in terms of huge additional regular contributions to savings and instead let the money one has already put away do the heavy lifting from thence forward.

Today’s interviewee has reached the latter point, not counting their residence or their investment property. They’re still working, but the hard part of accumulation is behind them, and by any measure, they’re well on their way to as fat a retirement as they’d like.

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Getting to Know You

 

Where are you on your financial independence journey? Have you crossed the halfway point in terms of net worth and/or passive income?

We have a net worth of approximately $5.5 million which includes our property value (minus mortgage). Using our “nest egg” number, we are currently at Coast FI.

Our “nest egg” includes our retirement, HSA, and taxable brokerage accounts and does NOT include our emergency savings, UTMA accounts, 529s, and donor advised funds.

 

Tell us about your household. How many people and at what ages? Are you supporting anyone outside of your home? Where do you live?

My spouse and I are in our mid-40s with three school-age children living in the Midwest. We do not support anyone outside our home.

 

In what field are you working? How is your career going? What do you like best and least about your chosen profession?

We both work in academic medicine and have for our entire careers since completing fellowship training. The best things I like about my profession/specialty are the flexibility and the options for clinical and nonclinical work.

We are considered mid-career – about 15 years out of training. What I like least is in-house calls necessitated by our specialties.

 

Do you feel you’ve come to a crossroads of sorts? If so, tell us about it. What options are you contemplating?

I do feel that we are at a crossroads of sorts…we have enough saved to Coast FI, but we are continuing to contribute the max to our 403(b), 457, and Backdoor Roth IRAs (for now). I feel that we need to invest more in our taxable accounts so that we have more flexibility once in retirement.

I will likely retire earlier than my spouse who plans to work until at least age 55. We would be able to live off of my spouse’s income without needing to withdraw from our retirement accounts, but we would not be able to continue saving into a taxable account unless we stop our contributions to tax-deferred accounts.

We are planning on opening a business (franchise), which also complicates our plans, and have been putting away money into a savings account so that we do not need to take out additional loans.

Do we cut back on our tax-deferred contribution to invest more in a taxable account?

 

Investing

 

How is your nest egg invested? Approximately what percentage is allocated to stocks, bonds, real estate, and alternatives?

What I consider our nest egg (which is about $4.4 million of the total $5.5 million mentioned) does not include our primary home or investment property, 529s, donor-advised funds, UTMA or emergency savings.

Our nest egg is held in:

  • 403(b)
  • 457
  • Defined contribution
  • Roth IRAs
  • Taxable brokerage accounts
  • HSA

Allocation of our nest egg is roughly 60% in total US stock, 21% in total international, 11.5% fixed income, 7.5% in real estate and alternatives – the allocation is spread across all of the accounts.

 

Are your investments primarily in tax-deferred, Roth, or “taxable” post-tax accounts?

About 77% of our nest egg above are in tax-deferred accounts, 17% in after-tax accounts and 6% in taxable accounts.

 

Do you have investments in an HSA? How about 529 Plans?

We have an HSA that we contribute the maximum each year that is invested in mutual funds and has a balance of around $63,000.

We have 529 plans to which we have stopped making contributions, with a balance of approximately $380,000.

 

What has been your best investment?

One of our best investment decisions was contributing a lot of money (relative to our income) into our retirement accounts and 529 plans when the market was down during the Great Recession.

Continually contributing during that market downturn has brought such fantastic returns that we are no longer contributing to our 529s.

Although we did not max out our 457 plans from the onset, we have been contributing to the max for at least the last decade. Another great investment decision was converting our 401(k)s from residency (rollover IRA first) to a Roth IRA (since we were still under the income limits at the time).

Right around the time we finished fellowship training, we learned that the income cap for Roth conversions was going to be lifted in 2010. We took that opportunity to contribute to a nondeductible traditional IRA from 2007-2010 and converted it all in 2010 to a Roth along with our 401(k) from fellowship.

We had to pay taxes on the interest accumulated during those years with the conversion in 2010, but we felt that having more money in the Roth bucket was worth it. We continue to contribute to the backdoor Roth annually. Although our Roth accounts are a relatively small portion of our nest egg, it should be at seven-figures by the time we start drawing down from it.

 

Your worst investment?

I wish I had contributed to my 401(k) from the start of residency, rather than waiting until mid-residency and also maxing out our 457 when we became attendings. I made the mistake of listening to a fellow resident who told me that it was pointless to contribute as we would not be vested.

Although it was true that we would not be 100% vested, I was still leaving money on the table. Since that time, I educated myself and learned the basics of personal finance, and I continue to be a life-long learner.

As I mentioned above, doing a Roth conversion was a great investment, but unfortunately, with our first experience with a financial advisor we invested in loaded mutual funds that had a 5.75% upfront load. If I had the chance to do it again, I would have invested in low-cost index mutual funds. Fortunately, the small portion we have in those initial Roth accounts have done ok.

Finally, I wish that I paid more attention to the downturns in the stock market, such as in March 2020, so that we could have bought more funds at a significant discount!

 

Into the FIRE

 

 

Numerically, what is your FI goal?

I have been debating this for a while and have landed on $6 million which is more than 35X our annual expenses, but it includes an increased expense toward travel during retirement.

We currently have around $4.4 million in our nest egg. We have an additional $200,000 in savings that we plan to use for our franchise.

We have $325,000 left on a mortgage for our primary residence and have an out-of-state investment property with no mortgage that nets about $18,000 per year.

I suppose that if we subtracted our passive income from our annual expenses, then our FI goal would decrease to $5 million.

 

When do you suspect you will achieve financial independence? Will you retire from your career once you’re comfortably FI?

Conservatively, I think we will hit our Fat FI goal in the next 3-4 years if we continue investing like we have been doing. If we stop investing and just let our nest egg grow, we should reach our FI number in 5-6 years.

I’m not sure that anything will necessarily change once we reach our goal. I have already been trying to cut back on things at work that I don’t enjoy doing.

I have certainly had a change in mentality knowing that we are Coast FI and that working is now optional (at least for me, as my spouse will continue to work longer by choice).

Having FU money has significantly lowered my stress levels and has allowed me to realize what aspects of my work I’d like to continue doing and what I could do without. However, given my personality type, I will most likely be working longer than I need!

My spouse has not been very interested in personal finance, but fortunately is frugal by nature and enjoys taking care of patients and plans to work for another ten years or so. Despite the lack of interest, we do discuss our finances and my spouse is periodically updated on where we are on our FI journey.

 

What are your post-FI plans? How will your life change? What do you look forward to the most?

As I mentioned above, we plan to open a franchise in the near future. Although we don’t intend to run the business (even during retirement from our careers), we will be managing the financial and bookkeeping aspect.

FI will allow me to design my life around the people and things that matter most – family, friends, health, certain aspects of my work, hobbies, and service. We plan on a lot of travel when possible and have allotted about 20% of our retirement expenses to travel.

 

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Have you made any major changes in your lifestyle or investments to accelerate your FI path?

We spend intentionally on things that matter to our family – experiences, food, health and exercise, and hobbies. I don’t feel that we have been deprived in any way.

We have never been the type of people to keep up with the Joneses. We’re not interested in driving the nicest cars, having the biggest house in the neighborhood, or buying the newest tech gadget. We don’t eat out regularly, mostly due to the fact that it’s healthier to cook at home, but we order take-out a few times a month.

Before the pandemic, we would take four weeks off per year for vacations, generally spending $15,000 to $25,000 per year. Of course, we did little traveling since the pandemic and we have been able to save quite a bit more due to lower travel expenses.

We did refinance our home mortgage this past year. I had the mindset that we would accelerate our mortgage payments and pay it off in the next 5-7 years (we had 10 years left of our 15-year mortgage); however, we ended up refinancing to a 15-year mortgage at a rate of 1.875%. Given the very low interest rates, we are no longer paying additional principal.

 

Did you receive any inheritance or financial help to accelerate your FI path? Are you facing any unique challenges making FI or RE more difficult?

I am tremendously grateful that we have not hit any significant challenges or roadblocks to FI. We also have not received any inheritance that has contributed to our FI path. However, we have been extremely fortunate in many aspects since the start of our investing timeline.

Although our parents helped pay for our undergraduate education (we both attended in-state universities), we both had to take out student loans to pay for medical school. We were lucky to be able to consolidate our loans at the time of very low rates at sub-2% and eventually my loans were paid off due to a loan repayment program. The remainder of my spouse’s loans will hopefully be forgiven through PSLF with the COVID waiver.

Our careers also began during the Great Recession when we were throwing money into the stock market and not really paying attention to the value of our investments. We didn’t realize how much we had until around seven years later when our investments had grown to seven figures!

Although we could be making a lot more money in private practice, the benefits of being able to contribute to multiple buckets such as 403(b) and 457 plans, as well as generous employer contributions to our retirement have allowed us to accumulate a significant amount in a relatively short amount of time. Our frugal nature and intentional spending are also important contributory factors to our overall success.

 

What advice do you have for others who are seeking financial independence?

1)    As the WCI always says, “Live like a resident!” and save the rest. We did this as new attendings long before it was even a saying. Although we did upgrade our lifestyle from fellowship, our spending was still well below our income level.

We chose to live in a much cheaper home than during fellowship, despite being larger in square footage, in an area that had lower property taxes until our oldest was school-aged. This allowed us to save a significant amount towards a down payment for our “forever” home.

We did buy two new cars after fellowship, several years apart, but we are still driving those vehicles today! Save the rest of your income – whether it’s for emergency funds, down payment, car fund, vacations or retirement.

2)    Spend money with intentionality. Spend money on what’s most important to you…don’t spend money to impress other people.

3)    Invest your money and monitor your fees – even if it’s in low-cost target date funds that you set and forget – buy into the market and stay for the long haul.

 

Finally, is there anything under the sun that you’d like some help with? The hive mind would be happy to weigh in.

1)     Regarding our mortgage, the math is obvious and we probably should not pay off our mortgage given the low interest rate, but would it make sense to pay it off before we fully retire – which would likely be by age 55?

2)     Are we invested too aggressively with 81% in equities with retirement ~10 years away?

3)     At what point should we stop contributing to tax-deferred accounts to increase our taxable savings – when I retire from medicine and my spouse is the sole income-earner? Or should we always be contributing to tax-deferred accounts to lower our AGI?

 

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I thank today’s interviewee for sharing their story, and I’ve shared my feedback privately with them. I wouldn’t want my opinions to influence yours. Please give your take and answer any questions they have had in the space below!

Again, if you’d like to partake in a future Q&A, please download a FIRE Starter, FIRE Crossroads, or Post-FI Notes interview form. We need your help to keep this series going!

 

7 thoughts on “FIRE Crossroads 024: Coasting to fatFIRE”

  1. What an impressive nest egg! I’d retire today 🙂 I appreciate how intentional you are with your spending and think it’s an underrated activity to take a pulse check of where you are and where you want to be. Doing a year-end review in my journal has helped with this.

    Also impressive how you invested aggressively during the Great Recession. Curious as to how you determined it was the right time for a buy-in strategy, and how you felt comfortable doing so even with no guarantee the market would go lower (the markets today seem ever-more unpredictable.)

    Reply
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  3. 1) I wouldn’t pay off the 15-year/1.875% mortgage early; that’s a great rate and you can keep socking away that difference into your taxable account
    2) Also agree with other comments: 80% equities is fine, given a 2-physician household and coast-FI
    3) I would keep maximizing tax-deferred accounts while you are still working. Don’t forget, once you retire, you can (and should?) start drawing down your 457(b) accounts first–while letting the taxable and tax-deferred accounts keep growing (and do Roth conversions if possible until age 70 as they fit into your tax-brackets/planning).

    Reply
    • If it were me, I would also steer clear of owning a franchise. I don’t think it will be as passive as you think and might be a huge drag (time, financial, liability) on a relaxing retirement–I definitely don’t think you’ll need the income.

      Reply
  4. 1) My goal is yours…retire by 55. Just refinanced to a 30-year with an interest rate of 2.5%. Despite that, I am accelerating payment to have no mortgage by the time I retire.

    2) No

    3) This is the “problem” with academia, and we have the same issue as we’re also academics. You get a ton of tax-advantaged space but also lower pay. You’re going to have an RMD issue I think. I don’t have a good answer to your question but I disagree with those who say to just keep putting more and more into pre-tax space. Maybe Roth space instead. Are either you or your spouse anticipating an inheritance by age 55? If so, could that be your taxable account? Another thought is maybe instead of paying down the mortgage you put that amount in taxable instead. Then when you retire you look at your mortgage balance and your taxable account balance and use that to decide what you want to do. But sure to have a plan to convert pre-tax money to Roth at lower tax rates from age 55 to 72

    Reply
  5. 1) when should you get rid of your home mortgage? Only if you really want to. Mortgages always carry some risk. It’s great to be debt free. And frankly, your FI situation won’t change much if you pay your mortgage off sooner. I would.

    2) are your investments too aggressive? Nope. I’m similar age and much more aggressively invested.

    3) keep maxing your tax deferred strategies. But watch out for how required minimum distributions will affect your tax situation down the road.

    Honestly, you are in a great situation and I would encourage you to find and pursue that passion your talking about. I invest in companies but I also would caution you about buying a franchise or any business if you want totally passive income. It’s the best ROI for your money, floating above inflation. But… I’ve known several people who want a company to “play with” in retirement and it never goes well for any of them. It doesn’t go well because a company is a serious asset that requires someone to be paying attention to it.

    Reply
  6. I’m curious about the franchise, which was mentioned a few times without details. You said you don’t plan on working in it, but usually franchises are synonymous with buying yourself a job (and usually not a very good paying one at that). Unless it’s a major passion, it seems like something that unnecessarily complicates your financial situation when your real earning power is through high paying jobs and simple investments.

    Reply
  7. 1) I don’t think it’s a problem to take a small mortgage into retirement. Enjoy that crazy low rate!

    2) no.

    3) keep maxing retirement accounts while you’re in a high bracket. I’d definitely consider taking a mortgage on your investment property and dump that cash into your taxable to beef it up. I personally think investment properties should always be leveraged. Maybe 50% is a palatable amount.

    Reply

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