I was browsing the Bogleheads forum a few weeks ago, the way I often do. One particular thread title caught my attention. “High Income Earner Humbly Seeks Advice”
I write for high-income professionals, and the humble ones are my favorites. I decided to take a peek to see if I could offer any advice. After reading through the post and mostly excellent responses, I didn’t necessarily have a lot to add — we Bogleheads know our stuff — but the sheer volume of information pouring in was a bit overwhelming, sometimes conflicting, and a whole lot to take in for the humble high-income earner who originated the post.
I reached out to username LongTerm1, who shall now be known as Dr. SW (short for Dr. Stealth Wealth, of course) and offered my assistance. If I was going to take the time to tie it all together and offer a few pieces of advice of my own, I might as well get a fascinating blog post or two out of it. We exchanged a few messages, he answered a few nagging questions I had, and I got to work creating an Investor Policy Statement for him.
He Earns $1,800,000 a year. He spends $70,000. Holy Stealth Wealth!
His Current Status
Before we start making plans for Dr. SW, let’s take inventory. Some key facts:
- He is a married, 38-year old specialty physician with two young children and a third on the way.
- He lives in Texas, a no-income tax state.
- Gross Income in 2016 (as reported on his 1040) was approximately $1.8M, up from $1.4M in 2015
- He has been in practice for three years, is a business owner, and owns the commercial property in which he practices.
- He has no student loan debt or mortgage debt on his home. He owes $225,000 on his office building.
- His wife handles the household budget of $70,000 a year. He simply writes her a check in January and she takes care of the rest. Although a few household expenses are run through the business (health insurance and cell phones), they are content with this budget and suggestions to treat or indulge themselves with more are met with a shrug.
- He writes a check to his protestant church annually, does some pro bono work as a physician, and is interested in medical volunteerism in the future.
His current assets (as of June, 2017) are as follows:
- $2,450,000 in taxable (mostly money market fund)
- $282,000 in Cash Balance Pension Plan
- $236,000 in 401(k)
- $90,000 in SEP IRA
- $11,000 in Traditional IRA
- $2,400 in Spousal IRA
That’s a grand total of $3,093,000 worth of invested assets, plus a paid off home, and a commercial property with additional equity. In other words, he’s got about 44 years worth of expenses at $70,000 a year. Even with a generous additional $30,000 budgeted for health care (currently covered by his business), he’s got over 30 years covered.
That qualifies as easily financially independent in my book, but Dr. SW isn’t interested in giving up this extraordinarily lucrative gig that he worked so hard for and enjoys for the most part.
No Hat, All Cattle
In The Millionaire Next Door, we learn that Texas has more than its share of “all hat, no cattle” types. The guys and gals who look the part and wear the hat, but have no cattle to tend to. In other words, they look like they have money, but they don’t. It’s the inverse of stealth wealth.
Dr. SW is no hat, all cattle. He likes to blend into his community, and like me, is uninterested in owning or flaunting luxury items. He may not be wearing a ten-gallon hat, but he’s got acre upon acre of figurative cattle.
He states he would like to work at least until age 50, more likely 55. Let’s plug some numbers into my compound interest calculator to see what he might expect from another 12 to 17 years of labor at this pace.
After Dr. SW deducts his tax-deferred investments of about $200,000 total into the cash balance plan, 401(k), and his donation to the church, let’s say the taxable income is in the neighborhood of $1,600,000. With federal income tax in the neighborhood of $600,000, they’ve got a million dollars left (and he’s already made close to $200,000 in tax-deferred investments).
After their $70,000 in living expenses are subtracted (let’s say rounded up to $100,000 for simplicity), they’ll have $900,000 to invest. Add that to the $200,000 in cash balance and 401(k) plans (his wife in on the payroll, as well) and they can invest about $1.1 Million dollars per year. Let’s call it $90,000 a month. The overwhelming majority of the money will be in the taxable account, so they’ll be able to keep their overall fees quite low despite the Cash Balance Plan, where fees can run several percent.
We’ll call tax drag 0.5%, calculated using a dividend from passive index funds of roughly 2% taxed at the maximum 23.8% long-term capital gains rate. What can he expect to have at age 50, assuming a 6% compound annual growth rate?
Sequence of returns could alter the numbers a bit here, but steady growth would give him about $24 Million at age 50. With 4%, he’s looking at over $20 Million, 2% gets him $17.5 million, and with no growth, a paltry $15 Million.
What if he works until age 55?
We’re looking at over $37 Million with 6% returns. In a flat market, he’ll have $20 Million, and if he can eke out 10% per year (not at all likely, but I plugged it in just for kicks) he’d have nearly $60 Million.
It’s fun to play with calculators. Don’t believe me? Plug a few numbers in the gray boxes and see what you can come up with. Dare to dream big!
Download this calculator and all calculators used in posts on the site with a free subscription to my e-mail list.
Like the decamillionaires gathered in the opening of The Millionaire Next Door, Dr. SW is not likely to change his ways, suddenly preferring Robin Leach’s champagne and caviar when he’s grown accustomed to a comfortable middle class lifestyle.
If he’s not interested in luxury goods and private planes, what does Dr. SW want? He wants a simple, sound investment plan. He would like to continue donating to his church. He would like a secure future, while letting his money continue to work for him. He would like to use his skills to do mission work someday.
I think we can deliver a plan that will help do all of this and more. With the income he’s got, this plan doesn’t have to be perfect. There’s no need to overcomplicate things. Of course, the income could change in a heartbeat with the changing tides in health care reimbursement, but it’s fair to say that Dr. SW is in a position to remain in very, very good shape for the foreseeable future.
Asset Allocation
In the Bogleheads thread, Dr. SW expressed a desire to have either 70% US Stocks, 20% International Stocks, and 10% bonds or a slightly less aggressive 60% / 20% / 20% split.
An argument can be made that he can easily afford to “take some chips off the table,” but the counterargument can be made just as easily. Even with a 10% bond allocation, he’ll eventually have 25 years of expenses in bonds alone.
Since he can easily afford either option, let’s choose the one that might help him sleep better at night — the one with 20% bonds. He’s already got the cash balance plan, which, as a fixed income product, we’ll lump in with the 20% bond allocation.
A 60% / 20% / 20% split works out to $1,800,000 in US Stocks, $600,000 in international stocks, and $600,000 in bonds. We’ll leave the remaining $93,000 as a healthy emergency fund and living expenses for the remainder of the year.
Using these numbers, the immediate moves are fairly straightforward.
If the SEP-IRA and traditional IRA can be rolled over into the 401(k), Dr. SW should go ahead and do that now, allowing for the possiblity of Backdoor Roth contributions in the future.
I like bonds in tax-deferred, but Dr. SW will also have [municipal] bonds in taxable, too. For now, I would exchange the contents of the 401(k) (and other tax-deferred accounts if not rolled over to the 401(k)) to a simple total bond fund like Vanguard’s VBTLX.
That gives Dr. SW right around 20% in bonds and fixed income.
The Taxable Account
Although most of Dr. SW’s taxable account is currently invested in a money market fund, he does have some individual stocks and funds that have gains and losses that mostly offset one another, with an overall total gain of less than $10,000. Dr. SW has two good options here.
The simple option is to simply liquidate the winners and losers so that they offset one another and keep the equities with the largest gains. Simpler yet would be to sell them all and pay a couple thousand dollars in capital gains taxes, but there’s no need to do that just yet.
A second option, which I feel is the better option, is to establish a donor advised fund (DAF) via Vanguard Charitable with his winners, and sell the losers for a loss.
The Vanguard DAF requires a minimum of $25,000 to start and grants doled out are a $500 minimum. Fidelity and Schwab have DAFs with lower minimums, so those should be considered as well, but Dr. SW has the means to stick with Vanguard, which is a company he’s invested with for several years already.
Taking losses will allow Dr. SW to take a $3,000 deduction this year, saving about $1,200 in income taxes, and additional losses can be carried over to additional years.
We want about $1,800,000 in US Stocks and $600,000 in international stocks in the $3 Million current portfolio. With a taxable account worth $2,450,000, this works out wonderfully. Buy $1.8M in the White Coat Investor’s favorite fund, VTSAX, $600,000 in Vanguard’s Total International Stock Market, and call it a day.
Of course, jumping in all at once can be nerve-wracking, particularly in this historically high valuation environment amidst one of the longest bull markets in history. Going all in is essentially the same as investing a windfall, although in this case, the “windfall” has been building steam for several years.
Typically, investing a lump sum beats dollar cost averaging (DCA) (investing smaller lump sums periodically over time) because most years (about 70% of them historically), the market goes up. If the market happens to drop over a period of dollar cost averaging, DCA turned out to be the better option.
A third option is to invest half, and dollar cost average the remaining half over six to twelve months. This essentially hedges the bet and gives the investor a return that is a hybrid of what he would have seen with either option. I like to recommend this strategy to someone who is on the fence between the two options in what is essentially a false dichotomy — it doesn’t have to be one or the other.
Additional Considerations
We’ve got a solid plan for the good doctor’s current assets, but we’re just getting warmed up. We haven’t yet touched on his children’s’ future. There’s been no mention of insurance. Asset protection must be considered, and we need a plan to invest the income that continues to come pouring in!
Continued in Part II, where we will address all those issues and more.
Would you have the discipline to limit your budget to a five-figure number with a seven-figure after-tax income? What recommendations would you have for the good Dr. SW? What would you do that income?
There’s a guy on Youtube that explains all the ways physicians can make the big bucks ( https://www.youtube.com/watch?v=Tqk_KEBrXvc&t=9s ). Highly recommend, i’ve now eclipsed 7 figs. This article is also useful.
Congrats on your success!
You’re among a very small minority — and there is no doubt some risks involved — but also significant potential reward.
You might also enjoy reading some from the 7-figure urologist.
Cheers!
-PoF
Awesome analysis and observation. At $1.8 M/year, which is $150k/month, I’m guessing that he must be an orthopedic surgeon. With that amount of investable money, I’d go for 50/20/20 with 10% cash allocation.
I love reading posts like this. I look forward to the day when Dr. SoS and I are able to live on less than $70,000 per year. Dr. SoS just started her practice a little over a year ago, so our combined income is paltry compared to Dr. SW. We have a mortgage, her student loan (which is more than our mortgage), and a 0% interest car loan. We budget $7,000 per month, which is more than Dr. SW, of which half is payments on these loans. I frequently comment to Dr. SoS about how much money we will have once our loans are paid. I believe their annual budget commendable and love to see others resist spending needlessly. More people should follow their example of earning, saving, and giving. We could start the “No Hat, All Cattle” movement!
With such a sizeable amount already in the markets, my only advice would be to stash future earnings in cash. If it were me, I would even pull at least half my money out of the market and sit in cash. We are due for a market correction and even if you sit in cash for a year or three, when it happens, it would be better to invest near the bottom than speculate near the top.
Nothing to do with the substantive money issues, but isn’t the saying “big hat, no cattle.” Same idea, but much better imagery I think. Great blog by the way. Just discovered the world of the FIRE concept and find this blog particularly helpful – I’m law not medicine, but this is a much better fit than the “retire to central america at age 30 with young children after living on raman noodles for years” type stuff that seems so prevalent.
Thanks, Joe!
You’ll probably find that the “fatFIRE” concept is more appealing to you, which is closer to what we’re planning.
Lots of ways to say “all hat, no cattle.”
From Wikipedia:
Alternative forms
big hat, no cattle
(US, idiomatic) Full of big talk but lacking action, power, or substance; pretentious.
Synonyms
all bark and no bite; all bluff and bluster; all booster, no payload; all crown, no filling; all foam, no beer; all ham, no let; all hammer, no nail; all icing, no cake; all lime and salt, no tequila; all mouth and no trousers; all mouth and trousers; all shot, no powder; all sizzle and no steak; all talk; all talk and no action; all wax and no wick; all motion and no meat; all show, no go
I gave away my copy of The Millionaire Next Door, but they probably did use the word “big.”
Cheers!
-PoF
I like the $x amount cut in Jan for household expenses akin to budgeting for a department/team/regional office.
Basically this is what I’m experimenting this year. I’ve set $30K to live off of this year regardless of top line.
I track my expense and anything left in the budget will go toward my Jan 2019 vacation.
My life, age, and financial situation has fortunately allowed me to experiment with this now that I no longer paycheck to paycheck. It will be interesting to see the result near the end of the fiscal now that I’m seeing my personal finances with a corporate-like lens.
As a medical student graduating in May, this type of money seems absurd (I say that with 100% respect as I can only imagine the sacrifices DSW has made- those I have yet to make in residency). Is it common for salaries like this to exist for any specialty..? Where I go to school (major eastern city), the attendings at my institution have commented on how they earn less than $400k in a surgical subspecialty.
No, it’s not common for any specialty, particularly in academics, although there are a number of 7-figure surgeons out there — it’s public information, so articles have been written about them.
In general, this won’t happen for an employee, but for an employer. If you own the business and make smart business decisions, taking on the extra risk, you may reap extra rewards. An excellent payor mix and lucrative specialty obviously help. But this physician is probably a 0.1%er among doctors when it comes to income.
Best,
-PoF
PoF,
just saw this in your last Sunday Best of 2017.
I didn’t have time to read through 70 comments, but maybe no one had the following idea.
He should put a couple of million in gold or other similar “real” assets. That’s a hedge against a wholesale decline or collapse of society. Heck, if he can afford it, why not? Especially given his relatively young age, this is not outside the realm of possibility. Catastrophic climate change looms large in the near future. 😉
Well, if society collapses, I think life will be pretty miserable, no matter what you’re invested in. I get the idea behind gold, but I don’t spend too much time contemplating doomsday scenarios.
Best,
-PoF
Half of the comments here are green with envy. It is amazing for all these people to tell him how to spend his money when they don’t even earn half of what he makes.
Instead of tweaking investments, he should be focused on asset protection and taxes. He makes enough that he will be rich without investing. How it is about adhering to Buffet’s rule: don’t lose money.
Indeed! Part II touches on asset protection, which is going to be very state and individual specific. I did not explore how much he takes as a salary versus distribution of profits. That would be something to explore with his CPA.
Best,
-PoF
“What would you do that income?”
I would accept PoF’s “Live on Half” challenge. 🙂
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Regarding the asset allocation, I am curious about the ratio between VTSAX and VTIAX. On the Boglehead 3 fund portfolio discussion started by Taylor Lattimore (great read, if you haven’t seen it), he suggests an 80:20 ratio. Looking at Vanguard’s Target Retirement funds, they are allocating roughly 3:2 between US and international funds. Betterment is split 50:50.
To me, it appears that there is better value right now buying international. What is the rationale for heavily favoring the US stocks?
Thanks!
Great question, Gene.
Recommendations on International holdings from incredibly savvy investors range from 0% to 50% of stocks. Bogle and Buffett don’t believe it’s necessary to hold any, but I like to be broadly diversified, and some very large companies are held overseas. Emerging markets can deliver solid returns if you can stomach the volatility.
I hold about 20% of my portfolio in international stocks, or closer to 25% of stocks, which splits the difference between 0% and 50% nicely.
I am familiar with Taylor’s thread on the three fund portfolio. In fact, Taylor has linked to posts of mine several times within the thread, including this article and this one.
Cheers!
-PoF
Thank you PoF. This article and your website overall are both excellent! Thanks for your time and efforts!
I have many similarities to Dr. SW, especially having investable funds on the sidelines currently.
The Shiller PE ratio is at 30 for US equities. The historical mean is 16.8. Internationally, countries appear to range in the mid-teens to low 20’s. I am dollar cost averaging into VTIAX and VTSAX, but leaning more towards international currently b/c of valuations. Don’t know if this is a good strategy, but the Shiller PE ratio worries me for the US equities.
And emerging markets are quite a bit lower than that. The CAPE in Russia is under 5. This map will give you all sorts of data to ponder.
I haven’t seen a defined investing strategy based on P/E or CAPE, but I have seen a retirement withdrawal strategy that showed some advantage to paying attention to the data and drawing down stocks or bonds depending on valuations.
Best,
-PoF
Correction: Taylor Larimore.
OCD and excessive. If you are making that much you can certainly spend a little more. Why spend the youngest most active years of your life living on 70K when you can live it up on 140 and still save a crap load. He will never spend the 30 mil or 20 mil and if he does things right neither will his kids.
I’m all for saving and investing well but this is overboard OCD behavior.
Anyone know his specialty so I can gun for it? I’m thinking it might be spine surgery?
I commend his wife’s budgeting skills. I’m used to getting a paycheck every two weeks which basically tells me how much I can spend. We follow the “pay yourself first” method, so essentially whatever is left in the paycheck is what we spend. Often there’s some left over, but it gives me a rough guide to what I can and can not spend. Occasionally an expense comes up that can not be covered immediately from what is in the bank (summer camp fees for three kiddos, basement waterproofing (grr)), and we generally float it on a credit card until the next paycheck. I’ve almost become dependent on having a regular infusion of cash into my accounts. With all my annual income in my account at the beginning of the year, I would worry that I was spending at too fast a clip or depriving myself too much and have tons left over.
Having only been in practice for three years, I wonder how long they have been doing this.
It is amazing how many people think living on $70,000 when you are debt free is somehow living a fugal lifestyle. They only can reference their own lifestyle that includes debt servicing. If you think about it, spending $70k is equivalent to about a $100,000 gross income which puts it in the top 25% of American households and the average household has debt to support.
If you have debt, it is hard to understand how low your costs go when you become debt free. I looked at my lifestyle and last year’s expenses and found the following (after removing my son’s college expenses, which we pay, and Dr. SW doesn’t have a kid in college yet so it makes the comparison more equal)
We are debt free and last year our living expenses were $90,000. That includes the following vacations:
2 weeks in Hawaii
2 weeks in Florida
2 weeks cruising the Mediterranean
1 week cruising Alaska
1 week river cruise
various other short trips.
You can live a very nice life on much less money when you are debt free. If you want to become debt free, pick up a copy of my book “The Doctors Guide to Eliminating Debt” and you too can live a great life on what other people might consider a small amount of money.
Dr. SW is likely working full time, while I was working half time so I had lots of time to travel.
While I applaud the fact that he and his wife have resisted lifestyle inflation and spend well below their means, I would hardly call them frugal unless the term is defined solely in relation to their spending potential. $70,000 a year is a ton of money when you don’t have a mortgage, car payments, child care, or student loan payments. Even their cell phone bills don’t come out of this money.
Even if they spent $3,000 on groceries and utilities (which would be almost three times as much as what we spend on similar expenses for our family of four–and we don’t consider ourselves to be particularly frugal), they would have an extra $3,000 a month to throw around! That’s tons of eating out or traveling.
They are definitely spending quite a bit of money on leisure etc. so I am not shocked that they don’t feel deprived. I wouldn’t feel deprived if I were in their shoes either. Kudos to them for figuring out what matters and what doesn’t so that they are able to align their spending accordingly.
True. Their spending is relatively frugal as compared to his income or the spending of his peers in similar professions. You could even say it’s being frugal without a cause, not that there’s anything wrong with that.
Since my family has a similar budget, I struggle to simultaneously convince the masses that we don’t spend too much while being accused by many physicians that we spend too little. As Ricky Nelson would say, “You can’t please everyone, so you’ve got to please yourself.”
Cheers!
-PoF
I was asked to comment about a statement somewhere in this thread that I couldn’t find. I haven’t read every word of this thread or the comments. The statement is this:
While a Backdoor Roth IRA may not matter much given the low limits relative to this particular person’s earnings, the only reason it wouldn’t be worth the very minor hassle would be if he had some huge traditional or SEP IRA he couldn’t roll over somewhere (or could only roll over to a high expense 401(k)) due to the tax cost of the alternative- converting it all to Roth.
You can certainly have a Backdoor Roth IRA and a cash balance/defined benefit plan at the same time. Been doing it for at least 5 years myself.
A cash balance/defined benefit plan is a great way to get a much higher tax-deferred (and asset protected) account balance and could be a great part of a financial plan for this higher earner.
I think a TR 2045 fund is a VERY aggressive asset allocation for a cash balance plan. I rarely see them with an AA more aggressive than 60/40, and often with one less than 50/50.
Great analysis and what a great situation to be in, 38 with so much in assets already- I agree FI has been achieved but understand the worry that children are still being popped out 🙂 I think $70K spending is very reasonable but once the children grow up depending on whether private school is wanted (that’s another what, $25K per child?) spending can go up too.
Not to be a kill joy, but some 27 year old hot 110 pound women with almost believable breast implants is going to take a serious stab at 38 year old dream husband here before this game is over! I’ve seen it a score of times already.
Alimony and child support will be high, and the judge won’t care a wit about the 70k she used to live on.
If you are worried about the market, you are worried about the wrong thing.
So keep wifey happy ?
This is a great reason for DrSW to keep his wealth stealthy.
This guy’s story sounds a heck of a lot like my own actually, with the major difference (in his favor) is that he does not have partners in his businesses where as I did. If I were to chat with him and tell him he is talking to his future self 8 years in the future I’d ask him if he is truly happy and what his passions are outside of work. Sounds like he probably is, but there is going to come a point pretty soon (as it did for me) that the marginal utility of extra dollars don’t mean that much. I’d also tell him to keep the gravy train rolling, because you certainly don’t know when the day is going to come that you decide to hop off. I can unequivocally say though that 2+ years into walking away from a 7 figure income, I’m happier than ever and I’m in the best shape of my life. I was the guy who ran the numbers and said o.k. at this pace I’ll hit 20M by age 52 without any market appreciation and a stupidly conservative portfolio…but what the hell is the point? To keep score? I’d be old and probably fat like the rest of my contemporaries, and probably think it takes $30M to be happy and have financial independence. Life is way too damn short, add to the cattle, figure out what makes you happy while building the war chest (hey cool if its making truckloads of cash, but I doubt you’d rather be in an office than hiking the Grand Tetons or surfing in Costa Rica), sell the cattle, then start taking advantage of the days you are blessed with moving forward.
Good for you. I don’t think I have read your story? If you are willing to share…. did you retire completely or change or downshift?
I haven’t really published my “story” per se, but may some day. Its a little lengthy to write in the comments section but it is sort of the typical “it takes 15 years to make an overnight success” type deals. Sort of like a doctor going through all the specialty training and coming out the other side with massive earning potential, that was me in my line of work in the manufacturing industry. I totally get the feeling of being happy in your current set up especially when you are stashing $1M year away, it just feels good! When I had the opportunity to exit a couple years ago, it wasn’t with the intention of retiring forever. I had actually gone overseas to look for a new company to purchase or invest in, then bring back to the US once my non-compete was up. I took a little snowboarding break to japan in between doing my due diligence at some prospective companies and I remember how happy I was when I got off the plane back in Shanghai, then while in line to go through customs and immigration I noticed something very interesting. Everybody in line was between the ages of 35 and 70…all disheveled, mostly overweight, and not a single smile on anybody’s face. Now I had just spent a few weeks traversing through Costa Rica, and hanging with friends in Asia, and I thought to myself…what in the hell am I doing!?!? I had already won the game, why go back to the same life right away…so I decided to take a break. There is a lot more to the story, but fast forward a couple years and I’m happier and healthier than ever, and hopefully have learned a few things about myself along the way. My non-compete ends at the end of this summer and I may start another entity doing something similar to what I did before for fun, but it sure in the hell will not interfere with my fun and traveling, exercising, and spending time with the people who mean the most to me. I spend 1/3 of what I thought I needed to budget for while I was working and live like a king. I honestly think sometimes I’m living in a fairy tale because life is just pretty damn amazing, and I really don’t miss the big paychecks because I’d never really spend them anyway!
That’s a great story, grbkeb. A bit of a twist on the “once you’ve won the game, why keep playing?” line that I usually see in reference to a safer asset allocation for wealthy individuals (which I fundamentally disagree with — for myself, anyway).
Thank you for reading and contributing to the conversation. Cheers!
-PoF
Awesome story, thanks for sharing Dr. SW and PoF!
I feel like the check thing is unfamiliar to many, but I know from my advisor experience many men that did this. There wives would even call to make sure the check was there. I believe a few cases it was a shady transaction, but when communicated effectively, it seems to work just fine.
I commend you on your plan and I agree with PoF’s plan so far. I will really be looking forward to planning with children, insurance, and what your future holds. There will be a large nest egg there than can be used for so many different goals/ideas.
Continued Success Dr. SW
Every January, I write my wife a check, too. It’s for $5. I holler “Good Luck” as I head off on a two-week ski vacation.
But seriously, whatever works for families is OK by me, as long as both partners are on the same page.
Stay tuned for Part II!
-PoF
Wow, what a story. Like many have mentioned I think it’s awesome to see individuals that don’t allow their income and future increases to directly influence their lifestyles.
Impressed to see a budget at $70K a year especially inTX where still property taxes are ridiculously high. In addition, it would be interesting to know how Dr SW managed to go through med school all those years and coming out ahead with no student loans. Also, curious on how he was able to get rid of his mortgage.
Last but not least, appreciate PoF sharing the story!
It is quite a story, and I figured it would be a popular one. Hence, the post!
I don’t know that he got out of medical school without debt, but he’s been working for three years. With that level of income, he could have paid off massive student loans and quickly paid off a mortgage if he didn’t pay cash for his home.
Best,
-PoF
First, I want to introduce myself. The author of Physican On Fire was nice enough to invest his time and knowledge in my individual case. I wanted to take a few minutes and answer some of the questions each of you have posted.
What will I do once I reach FI? Once I retire? I want to be honest. I don’t feel like I have reached FI because my expenses could change… like tomorrow. I am also at the beginning of my career so reaching FI seems like a distant thought at this point. I have never thought about it- probably why I don’t feel like I have reached a goal. I need to accumulate and stay focused on my family/career. Please note that I am at a different point in my career…. my wife and I are still having children and so many of life’s variables are unknown.
$70K check written to my wife. I need to be completely honest with each of you. I had the opportunity to have lunch with my wife today and we read the blog together for the first time. My wife and I looked at each other and literally burst out laughing. I mean this in the upmost respect, and I am so thankful that my wife and I can find humor in our situation but my wife and I are on the same page when it comes to our family budget (which we set together annually based on previous year and expected expenses), how she takes care and spends accordingly to cover expenses/needs, how we both laughed because we don’t feel like we do without (remember- house is paid, cars are paid, health insurance and some expenses are through the business… those are all major costs). We simply write a check out of the business account as part of my salary to be done with that aspect for the year. My wife is better budgeting the family money and I honestly do not have time to be paying a cable or electric bill. Someone had mentioned “allowance”- an allowance is “earned,” my wife works very hard for our family but we don’t consider this an allowance. We are both accountable to each other for our wants/needs. Seriously…. it’s our money and she knows how much money is invested, where it’s going, annual salary (knows how the business does monthly) and our givings to the church. As a couple, we have our issues- but communication about money makes life easier. My wife and I do not feel like we do without. We try to surround ourselves with people of similar interest.
I think there is a difference in frugal and living within a budget. My wife and I set the budget and need something to work towards. If life happens and something comes up… of course we would take care of that expense. We live below our means and feel blessed to be so happy as a family. I have no worries about my family unit staying together, staying strong and remembering what is important in life.
1. Yes I wish I could invest all the money at once but it scares me at market highs. It’s hard when I didn’t grow up around this kind of money. 2.Vacations- I need to do more but we all do. Hard to travel with a pregnant wife. I just took off 8 days and traveled. 3. Someone mentioned spending money on myself- no time. 4. My accountant recently said that he felt a backdoor ROTH is not worth in my situation. He said I couldn’t do a ROTH because of the defined benefit plan. I could contribute after tax dollars to an IRA and convert but he didn’t think it would matter in my situation.
My situation is real and I value constructive advice. In all seriousness, this is hard for me because it’s very unfamiliar territory.
The whole “check” business every January is a little weird to me. I know it works for them, but it’s still weird. I can understand him wanting to work until 50-55 because he enjoys it. He also seems like he has a good work-life balance, but since money is obviously not an issue why not have slightly more ‘life’ and less ‘work’, especially as his kids are still young?
I agree with the work / life balance piece — I’m 11 years into my career and slowing down to a part time schedule this fall. Such a schedule may be difficult or take some creative thinking.
He may never have the 4-hour workweek, but I imagine reducing it to a 40-hour workweek could do wonders for the family.
Best,
-PoF
Doesn’t he already have the opportunity for a zero hour work week? He is financially independent by any measure. And after only 3 years! Must be some sort of record.
I suppose he could drop to zero hours, but his salary would drop to zero as well. The concept of the four hour workweek is to contract out all but the most essential work while maintaining income. There could be a way with clever use of physician extenders and locums to drop hours dramatically while maintaining significant income.
Wow, that’s a pretty amazing story. It’s unusual to see someone who made it through such an extreme effort to have an opportunity at an opulent lifestyle decide to live off of $70k a year.
If only those people who made $50k a year could manage to live off of a mere $70k, rather than going deeper in debt to keep up with fast fashion, the car of the year, a new iPhone, etc. It’s amazing how quickly it adds up, and even more amazing what self-control it must take to barely spend any of it.
Holy smokes! That’s one estate planning problem to have! I am curious to see what specialty he is in and how many hours he works a week!
Moe my friend ought to take a page from his book.
I think we all are curious as to the details, but given how much he’s shared online and allowed me to share, I know he does not want his identity revealed. It could be bad for business.
PoF your plan seems sounds for his family. I sometimes help physician friends in need with the same excercise. I find that it helps me as much as them because I can brush up on my plan, keep the knife sharp if you will. In fact, we just hired a new partner and we’re going to chat next week at his request.
I agree that the backdoor Roth is a drop in the bucket, but it’s a double tax free drop that he should take for himself and spouse. It doesn’t add “paperwork” more than 5 minutes of clicks on vanguard or fidelity each year and a tax form that states its a non taxable event.
I think the 20% bond is a good number. He needs bonds for all the right reasons and 20% gets some risk adjusted return value without sacrificing too much in return. He doesn’t need returns at historic levels anyway, he just needs 3-4% if that to be fine! So do as Bernie says, take some risk off the table after he has won the game (which he has) and give him 20% bonds. I would do treasuries and munis maybe 50:50, intermediate duration.
I think your 20% international exposure is also good enough to capture those diversification benefits without too much exposure. I always think of the “Acres of Diamonds” chapter in Bogle’s Common Sense and downward adjust my international numbers….cause were talkin’ bout ‘Merica here!
Great Post tracking your thought process in helping out those in need. Just decrease you numbers an order or magnitude and it pertains to most docs!
I thought of this before…I mean in my dreams… would I be making seven figures but yeah. I would probably stick to about the same number, maybe like 50-60K for me, my husband and my dad. $+20K if we have a kid. I don’t think you can take the money sense / frugality out of some people 🙂
Yes, I saw a post from him. It is good to know he is a real person because part of me wondered. That is how unusual the situation is. At any rate he doesn’t need financial advice from any of us. He is rich and will be richer no matter what he does. He acts like he didn’t know he is FI? Really? I do like the idea of fixing your income though. We do that too but rather at the 2 paychecks per month level rather than an annual stipend. His wife is probably better at budgeting than we are. We would blow the money before summer was over each year!
I look forward to sharing your “fixed income” approach to budgeting / saving in tomorrow’s guest post.
Cheers!
-PoF
At his income level complexity is unnecessary. Why do a back door Roth? So the doc gets to have $100K at some point in his Roth account. It accomplishes very little for him/her but adds increased paperwork and complexity that his accountant may not understand.
The other point is that he may be too risk averse for 20% bonds and just not know it. Otherwise he would not have so much cash sitting in a money market account. Maybe an asset allocation of 50/50 would be more ideal with such large sums of money until this physician lives through a bear market and understand themselves better. The ability to take risk is there, but there is no need and there may be very little willingness.
Lastly, I may just consider a target date fund or lifestyle fund for this physician because they are simple. 1 fund, low fee, low complexity. Doing a 3 fund portfolio involves rebalancing and a slight increase in complexity that this physician may not need or want.
I love the idea of a DFA and donating appreciated shares. This doc should probably start a foundation at some point if that is their goal.
Personally with that kind of income I would hire 1 or 2 PAs or NPs to make my work life as easy as possible so that I can spend more time with the family.
Lastly, this doc has golden handcuffs. Just 2 years savings makes them financially independent. How do you ever quit from that kind of money? More interestingly, how do you not inflate your lifestyle even a little? Great post and thanks for sharing.
I would be surprised if he doesn’t already have PAs and / or NPs working for him, but I don’t know the particulars of his situation.
Skipping the backdoor Roth and going with a balanced or target date fund would make things even simpler, but I also like optimization, and I can tell Dr. SW does, too. Some of that may become more clear in Part II. He certainly has optimized his income!
Best,
-PoF
Based on my time in Houston and what’s posted here, he must live in a very small town in Texas, or have already paid for an expensive house in a suburb of a bigger town with good schools.
The discipline to spend so little relative to income is extraordinary. It makes me wonder if he’s working so much he doesn’t even have time to spend anything.
I think you’re on to something with that last statement.
I’ve known a few people like this, who are very high-income with average lifestyles, but they are usually completely in love with their work and have no intention of quitting, ever. The money is only a side effect, not the goal (and most of them use the money for new business pursuits or donate a ton to charities that mean a lot to them). I also found the part about writing his wife a check for the household every January to be a bit unsettling. I wonder how other men vs women feel about this.
I found the check part very odd. I suppose that they could have a mutual agreement to live on that amount, and that by writing a check for the yearly expenses and thereby keeping all other money in a location that’s difficult to spend, they will be unlikely to sustain significant lifestyle creep.
The average lifestyle in Texas basically defines lifestyle creep. Maybe they’re just so cognizant of the desire to avoid it they want spending of any kind to be a conscious, forced decision.
On the other hand, it’s also possible it’s his way of controlling what he considers an appropriate amount for the wife to have at her discretion and to control things beyond what most of us would consider normal. Write one large check and don’t use credit cards, and then there isn’t an option to spend more than $70k.
The family perspective here would be interesting. As mentioned earlier, he must not have the time or desire to do anything right now but work. Indulging in a nice vacation/experiences for the family periodically would still keep his spending low relative to income and not impact their short or long term future in any way.
I respect the discipline, but I would be really interested to see what the budget contains right now. Perhaps with no debt and minimal fixed costs, that $70k is already paying for first class flights to Europe.
I’ve got a guest post tomorrow that essentially talks about doing the same thing — give yourself enough to live on comfortably (in this case, it’s his wife since she pays the bills) and invest the rest.
Dr. SW’s thoughts are below.
Cheers!
-PoF
Impressive that he is earning so much and living modestly, though $70K a year without debt is a reasonable lifestyle.
I do not know any speciality paying out that much or maybe I have not looked hard enough for the right job. Talk about geographic arbitrage- no state income tax , higher physician pay, and cheaper cost of living!
He will be fine. I am glad he is taking time to join Boggleheads and learn more about what to do with his money. It will make him much more secure going forward.
You won’t find a job like that very easily on your own. You’ve got to create it. Be a doctor, business owner / entrepreneur. Although I have heard of cardiologists earning 7-figures. I’m sure they work hard for the money, but it’s not unheard of.
There is some discussion of jobs like his on this WCI forum thread, where other docs guessed at Dr. SW’s profession.
Cheers!
-PoF
Has Dr. SW already decided who will benefit from the DAF? Maybe some more land as a hedge could be an option?
I like the idea of land. I happen to be looking at some land for my family and I in a couple days!
I know his church will be a recipient of some DAF funds, and I’m sure he’ll find other causes near and dear to his heart as the balance grows.
Best,
-PoF
We bought some land and I find tremendous humor that we are considering putting cattle on it. Right now we lease it out (not a good investment) for crops. I’m hoping the land appreciates and my family could build a permanent residence on it someday. Desirable location and I think it would be great for my kids to grow up around cattle/tractors and living in the country. My concern is time. People have scared me saying it will take 4-5 hours to cut the grass and how much work it will take to tend to the land. Right now everything is done by the family that leases it.
That’s great to hear! You’re one step ahead of us. Don’t worry a bit about the time required to mow it. You can pay someone to mow the lawn at a rate less than 10% of your own hourly rate. Time is money. Money is time. But your time is more valuable than most people’s, so take advantage of that arbitrage.
Cheers!
-PoF
We own one farm. 20 acres. We lease 2 others. 13 and 55 acres. Sometimes my husband cuts them and sometimes he hires a guy. You can harvest hay. We have 20+ cows. My husband enjoys this. I consider it his project. I think people are around who like to do this stuff and can be hired cheaply. No big money here.
Wow, essentially a post tax savings rate of 90% and pre-tax savings rate of 95%…. not too shabby 🙂
I love the “no hat, all cattle” comment PoF. I echo some other people’s thoughts… with 20+ million in 20 some years, what are his thoughts?
Wow! Incredible story. This is what you call frugal living or leaving wayyyyy below his means. I wonder if he lives an incredibly cheap area of Texas. I live in Dallas, which is considered one of the lowest cost big cities in the US, and I’d find it hard to live on $70K with a family of soon to be 5. He does take healthcare out of the business, so that would probably help a lot.
Thank you for sharing!
With health insurance taken care of AND a paid off mortgage, it should be possible to live a great lifestyle even in a HCOLA. He has enough income to cash flow a new car and his kids’ college education easily when it comes time so there aren’t a lot of other big expenses left if you’re frugal.
I’ll be covering the kids’ education in part II. And I agree, $70,000 in a low cost of living area can be a comfortable life — our budget is quite similar.
Cheers!
-PoF
Some of his story just doesn’t sit right with me. Does his wife know how much money he makes? The “writing her a check in January” part seems really odd to me. It sounds awfully like giving an allowance of an amount he deems sufficient for the year with perhaps minimal input on her end? Even if she does have full awareness of and equal say in their financial situation, I also am confused by his high-income and professed desire to do good. If I were in his shoes, I would give my employees a very high salary, charge less to my patients, and work less to spend more time with my family. Nobody needs that kind of money. As a lawyer, the people who earn that kind of money often work long hours and the stress and time breaks up their family. I would focus on his greatest assets – the ability to work less and spend more energy and time on his family.
As an MD who opted to be a SAHM, I am also questioning that detail.
Also, 2K in spousal IRA?
he is wise to ask for help before she does.
Thankfully, that isn’t for you or me to decide.
Because no one knows their personal details, I am more than willing to give his wife the benefit of the doubt that she is smart enough to know their family finances.
See Dr. SW’s comments below. Their money is considered together, and she knows the income and agrees on the budget, which can be flexible. They base it on what was spent to run the household the year before. I imagine the budget will be a bit larger with the addition of a third child next year.
Best,
-PoF
So great to see someone still hold to a fairly frugal lifestyle with that high of an income. It would probably be more common to make $1.8m and spend $2.1m. It seems he and his wife have their priorities well-defined, and they’re keeping their eyes on the prize. Rock on!
Yeah, I don’t think you’ll see Dr. SW on MTV Cribz anytime soon. He’s got great willpower, and frankly, I think he’s too busy to spend a whole lot of money.
Wow, very impressive on all fronts (income, desire to work, and budget)
I am all for living within means, but 500k a year would still be well within his means! Pretty cool situation.
Personally I would be slightly more conservative with that amount of money than I am with my own today. Might even follow the age in bonds rule (that I generally disagree with) up to a 60-40 split.
With that kind of cash he could take some flyers on starts ups that he believes in.
I tend to think in the opposite manner — when you have way more money than you’ll need, I like to be aggressive with the overage. Might as well see how big it can grow — after all, it’s money you can afford to lose.
Best,
-PoF
I am not sure of his speciality but I would be concerned that his income will drop because of changes in reimbursement patterns. Therefore it makes lots of sense to maximize savings now. He sounds like he is working very hard and he may decide to walk at an earlier age than he thinks.
In this situation I really do not think his ability to do a backdoor Roth will make much difference to the big picture. I remember reading this. I think you linked it on the WCI forum. If you could convince him to come to the WCI conference an introduction to Bernstein might appeal to him and take care of his paralysis. (HA. I was thinking of his inability to invest the MMFs but Bernstein is a neurologist.) Maybe he needs to buy a ranch and tend cattle in early retirement.
The WCI conference is now full with a growing waiting list, so he may have to wait until the 2019 version to join us, unfortunately.
I still like the backdoor Roth option, but in the grand scheme, it won’t make a huge difference, but I optimize whenever I can. He has started Roth IRAs for his kids (addressed in Part II), so I don’t think a backdoor Roth would be too much trouble (as long as he’s eligible).
Best,
-PoF
I don’t think Bill has seen a patient in a very long time.
It was a joke. I know Bill is a former neurologist.
If he is looking at $20-30M at the end of his working career, the biggest question—one that he hasn’t answered in much detail here—is what next?
Is he really concerned about a secure future? I’m sorry, but that gave me a bit of a chuckle, especially with his annual expenses 🙂 With his kind of cash, he could create a formidable charitable foundation himself. But what exactly will he do with his money and time? In my opinion, this is the most important consideration going forward.
I agree — his current focus is simply on getting his money invested in a simple and effective manner, but once he’s got a good handle on the financial aspect of his life, I think he can turn his attention to those bigger questions.
Cheers!
-PoF