By Dr. James M. Dahle, Emergency Physician, WCI Founder
We do a lot of FIRE around here. Our flagship course is called Fire Your Financial Advisor. Our WCI Network partner Physician on FIRE has dedicated countless pages to the concept of FIRE and retired from medicine at the tender age of 43. We've discussed the FIRE Movement, Lean FIRE, Fat FIRE, Morbidly Obese FIRE, Coast FIRE, and Barista FIRE. Today, we're going to talk about Fast FIRE. Fast FIRE is all about retiring faster than you thought possible.
What Is FIRE?
FIRE stands for Financial Independence, Retire Early. As a general rule, those interested in FIRE try to retire in their 30s or 40s instead of their 50s or 60s. That's a little tough for doctors and similar professionals who don't actually start working until their 30s (and often with large amounts of student loans), so maybe add 10 years to the above figures to adjust.
What Does It Take to FIRE?
As a general rule, FIRE requires you to combine 10-15 years of frugal living with some hard work, a decent income, and a reasonable investing plan. The idea is that if you save 50% or more of your income and invest it wisely, it will grow to a sum that will support you the rest of your life long before you reach traditional retirement age.
Do I Have to FIRE?
No. FIRE is for those who prefer Saturdays to Mondays. If you love going in to work, you don't need to FIRE. You should still save 20% of your gross income for retirement though, just in case you live long enough or become frail enough that you can no longer go in on Mondays. By doing so, you can likely stop working at some point in your 60s without a significant decrease in your standard of living. For you, retirement is just the backup plan.
That's all a bit tongue in cheek. Some people who FIRE truly hate their work and really don't want to do it anymore. But many who FIRE actually enjoyed their jobs. They just didn't like them as much as they liked their days off. So when work became optional, they quit doing it. Others retired to do different paid work. Most famously, this has included blogging, podcasting, and other online pursuits, but that's only because those FIRE folks are the most visible. Some criticize them as career changers, not retirees, but that's for the Internet Retirement Police to sort out.
What Is Fast FIRE?
The traditional (is the FIRE movement old enough to have traditions yet?) FIRE pathway involves coming out of college at about 22 and getting a good, solid job. Realizing that most people simply waste gobs of money, the FIRE connoisseur chooses not to do so. After becoming financially literate, our heroes carve out a massive chunk of their gross income (40%+) and invest it wisely, often in boring old index funds without the assistance of a financial advisor. Compound interest helps some, but most of the heavy lifting is just from brute force savings. Combining frugal living before and after retirement, our heroes arrive at financial independence relatively rapidly (10-15 years)—that time when their nest is approximately 25 times the amount they spend each year. Now, work is optional. Our heroes can keep working just as they were doing, cut back, change careers, quit completely, or simply start spending everything they earn knowing they've already won the game.
That's not good enough for the Fast FIRE crowd. Who wants to work 10-15 years when you could punch out after five years? That's Fast FIRE. And it's not possible for everyone. But it is possible for lots of people, including many of the readers of this site. Let me show you how it works.
How to Fast FIRE
The formula is not obvious to many, but it is still pretty simple.
Step 1: Make a Lot of Money
If you're just coming out of high school and don't know how to do anything but flip burgers, this probably isn't going to work well for you. There is simply a certain amount of money required to keep a roof over your head, wheels under your feet, food in your belly, and power in your cell phone. And that's assuming you stay healthy and uninjured. If you're married and/or have children, that minimum living amount is significantly higher. Now, you not only need to cover all of those costs, but you still need to have A LOT of money left over to invest each month.
While it's hard to pin down a minimum required income for Fast FIRE, it would be very difficult to do so without a six-figure income. And the higher that first digit, the easier it will be.
Step 2: Take Care of Business
This is where we talk about basic personal finance. You're going to need a bank account and an investing account. You'll need to learn to budget and quit using credit cards for credit. You're going to need to figure out what investment accounts are available to you and how they work. Pay special attention to the tax-advantaged ones like 401(k)s, Roth IRAs, HSAs, and 457(b) accounts. You'll need to know the basics of markets and mutual funds. You'll need to get rid of those things in your life that suck up your income. We're talking about credit card payments, car payments, and that couch you bought on credit. Remember those student loans? Yeah, they're not really compatible with Fast FIRE. Wipe those out. Any ongoing expense is fair game to be carefully examined, from your cell phone bill to your gym membership to your house cleaner. You don't have to get rid of all of them, but they all slow down the process.
Be careful of paying for big fat financial advisory fees, ongoing coaching costs, or expensive courses. Most of the education you will need is available for free. The inspiration and encouragement can be readily found on the internet, in the White Coat Investor communities, and in other locations. And if you're not interested enough in finance to be your own financial planner, this probably isn't for you anyway. If you're an employee, make sure you negotiate and renegotiate your contract and become a star performer. Get your bonuses. Always be looking for a better job. You can even consider geographic arbitrage—moving someplace that costs less, charges less in taxes, and pays more. If you're a business owner, make that business as successful as you can. Don't be penny-wise and pound-foolish, but run it frugally. Look to make partner where you can make more money than you would as an associate. Buy a practice that will allow you to double your income, even if it means taking on some more debt.
Step 3: Live Frugally
Remember, Fast FIRE only takes a few years. You proved in residency that you can do anything for a few years. The less you spend, the sooner you FIRE. If you're like most that head down this pathway, you probably can do and buy anything you want when you get there. You just can't buy it right now. Right now, you're going to be buying your freedom. Later, you can buy stuff and experiences. Let's say 25% of your income is going to the tax man right now. If you can live off of just 10-20% of your income, that should allow you to save 55-65% of your income. That's the range we're talking about for Fast FIRE. What does this look like in real life?
Well, let's take a dual-income professional couple. Let's say she makes $400,000 and he makes $200,000, so $600,000 total with $150,000 going to taxes. What would happen if they lived on just $50,000? Gasp! It can't be done! (Even though half of American households are somehow doing it.) That leaves $400,000 that can be invested each year. You can work a lot of investment magic with $400,000 a year.
Step 4: Cut the Tax Man's Share
Nearly all doctors think they are paying too much in taxes. Most of them are right. It's not because they haven't found that accountant that can magically find them new deductions, though. It's because they're not living their life in the way that Congress prescribes. By understanding how the tax code works and changing the way they live their financial lives, many doctors can cut their tax bill by 20%, 40%, or even more. This might involve one or more of the following:
- Maxing out tax-deferred accounts such as 401(k)s, profit-sharing plans, HSAs, and 457(b)s
- Opening up new tax-deferred accounts such as individual 401(k)s and defined benefit cash balance plans
- Investing in a tax-efficient manner
- Ensuring that legitimate business expenses are deducted
- Doing cost segregation studies on rental properties
- Qualifying one spouse for Real Estate Professional Status (REPS)
- Taking advantage of generous bonus depreciation laws
The less you pay in taxes, the more you have to invest. The more you have to invest, the faster your investments grow. The faster your investments grow, the sooner you reach FIRE.
Step 5: Work Hard
You thought you were already working hard. You're cranking on that budget. You're a star performer at work. That's not what I'm talking about. I'm talking about the work you do AFTER you get home from work. You see, most Fast FIRE folks have something else going on. It might be a business they're starting. Frequently, it is long-term rentals as they build a real estate empire. It might be a short-term rental business through Vrbo or Airbnb. It might be an online gig of some kind. Or just using the skills you already have to moonlight.
One of the biggest knocks against real estate is that it is a lot of work. That's why all the books, courses, and seminars have so much “rah rah, you can do it” nonsense baked into them. It's because you do need to be excited and motivated and confident to be successful, because you actually have to go do something. However, that hard work is an opportunity to add value. Yes, you had to go put in a water heater. But you got paid to do it. How much? Well, precisely as much as it would have cost you to pay someone else to do it. Same thing with finding and buying properties, finding and managing tenants, and so on. There are two inputs to your investment—your money (usually a significant down payment if you want that property to cash flow, and yes, you do want it to cash flow) and your time. Both pay dividends.
Step 6: Add Leverage
Unfortunately, all of that is not enough. Not for those who really want to FIRE quickly. You also need to add leverage. Leverage, aka Other People's Money, magnifies your returns, for better and for worse. Leverage is most frequently applied to real estate investments, but it can be applied to anything. You can borrow money to build your business faster. You can invest in the stock market on margin. You can drag out your student loans or mortgage for longer. A good case can be made for carrying debt in the amount of 15-35% of your investable net worth long-term. Fast FIRE folks may carry multiples of that for a few years. Obviously, there is risk here. If you don't want to take it, that's fine. Welcome to my world. I don't like debt now and never really did. Luckily, a 15-year “standard” FIRE path can easily be taken without much leverage at all. But if you really want to do this in five years, you're almost surely going to need to use significant leverage.
Step 7: Spend More Than 4%/Live Off the Income (Even Though It Is Risky to Do So)
Traditional retirement doctrine involves the 4%
Rule Guideline. Basically, this says you can spend about 4% of your investments a year (adjusted upward each year with inflation) and reasonably expect them to last at least 30 years. Reverse-engineered, this guideline says you need about 25 times your living expenses to reach financial independence. However, you have to consider where the 4% rule was derived from and what usually happens to someone spending that much.
That rule came from portfolios composed entirely of unleveraged large-cap stocks and corporate bonds. No leverage. No real estate. No small-value stocks, etc.
What usually happens to someone spending 4% a year is that they die after 30 years a whole lot richer than they were when they retired. On average, they die with 2.7X the amount they retired with. My point is that most of the time, you can get away with spending MORE than 4%. The reason you can only spend 4% is that sometimes Sequence of Returns risk shows up, i.e. despite having good average returns over your retirement, you get the crummy returns first while you're making withdrawals and you end up running out of money.
So what do our Fast FIRE gurus do? They invest in more than stocks and bonds, they continue to use at least some leverage, and they spend more than 4%. Since many of them are investing heavily in real estate, they feel pretty comfortable spending the real estate income. That is often 4-8% by itself. Are they taking risks there? Absolutely! Let's list them:
- Leverage risk
- Sequence of returns risk
- Investment risk
All of these risks are significantly higher than the ones taken by those on the traditional pathway. Is it worth it? Well, how much do you hate your job?
A Case Study
Let's go back to our couple above making $600,000 per year. Let's say they're a few years out of residency already, and they own their home and even have some equity in it. Their cars and student loans are already paid off. They decide that Fast FIRE is for them, and they are committed to doing it. They learn all about investing and real estate and retirement accounts, and they come up with their own written financial plan. They realize they have $138,000 in tax-deferred accounts available to them and max those out each year. They also put another $12,000 into Backdoor Roth IRAs each year. That leaves them $250,000 a year to invest outside of retirement accounts. They have another $100,000 in savings and figure they can safely borrow another $200,000 against their house.
Year 1: They invest $150K into stock index mutual funds in their retirement accounts and earn 8% on them. They take their $300K and buy two $450K single-family homes, putting 33% down on each. One, they rent out long-term; the other, they build out the mother-in-law apartment and rent both the main home and the MIL addition on Airbnb and Vrbo. The homes appreciate 3%. The long-term rental covers expenses and still spits out $5K in profit. The short-term rental did great and made $25K after expenses, not counting all the labor they put into it during the year. Meanwhile, they accumulate $250K so they can buy more properties.
End of Year 1:
- Retirement accounts: $162K
- Properties: $927K (not counting their primary home)
- Cash: $280K
- Debt: ~$600K plus their primary mortgage
- Investable net worth: $769K
- Investable net worth increase: $469K
Year 2: They put another $150K into retirement accounts and again earn 8% on their stocks. They buy a $1 million quadplex with a $280K down payment and rent it out long term. The properties appreciate another 3%. The short-term rental makes $30K this year. The first home makes $8K and the new property makes another $12K. It was hard work, but they feel pretty good at the end of the year and have saved another $250K to invest.
End of Year 2:
- Retirement accounts: $337K
- Properties: $1.985 million (not counting their primary home)
- Cash: $300K
- Debt: ~$1.3 million, plus their primary mortgage
- Investable net worth: $1.32 million
- Investable net worth increase: $553K
Year 3: They're getting a little tired of all this hard work at this point. They're technically already financially independent, given that they are spending just $50K a year and have investments worth $1.32 million. They could sell the properties, buy some boring old index funds, and ride off into the sunset spending $50K a year forever. But they're not done yet. In fact, they've decided after living like a resident for the last couple of years that they're done sacrificing so much. So, this year they're going to double their spending. They're still paying about $150K in taxes but are now going to spend $100K a year. They're still putting $150K into retirement accounts, so they are now only saving $200K a year to put into their rental properties. This year, they take their $300K and buy a $1 million condo near a mountain resort that they think will Airbnb well. Their properties appreciate another 3%, and their stocks make another 8%. The condo made $10K in profit, the other Airbnb made $30K, and the long-term rentals made $25K.
End of Year 3:
- Retirement accounts: $526K
- Properties: $3.075 million (not counting their primary home)
- Cash: $265K
- Debt: ~$2 million, plus their primary mortgage
- Investable net worth: $1.87 million
- Investable net worth increase: $546K
Year 4: It's getting to be a pain to manage all of these properties, so they have a long discussion about which route to go. They can hire a property manager to do it all, but this is going to cost the majority of their current real estate cash flow. Alternatively, one of them can cut back at work and do it. Since he makes less and enjoys real estate more, he decides to cut back dramatically at work. He is now only making $50K at work, but given all the time he is putting into real estate, they now qualify for real estate professional status, allowing them to use this bonus depreciation to offset their earned income. Their tax bill drops dramatically. Now they are only paying $20K in taxes. They still put $100K into retirement accounts and live off of $100K, leaving them $230K to invest in real estate. They're also starting to worry about all the leverage in their life, and their banker has told them they can't get another mortgage. So, they use their $265K and borrow a $50K piece out of their 401(k)s to buy a $365K single-family home. This is their first “paid off” rental property. They rent it out long-term and make $20K from it. The other rental properties bring in $70K. The stocks again make 8%, and the properties again appreciate 3%. Their mortgages are also gradually being paid off.
End of Year 4:
- Retirement accounts: $576K
- Properties: $3.543 million (not counting their primary home)
- Cash: $310K
- Debt: ~$1.95 million, plus their primary mortgage
- Investable net worth: $2.48 million
- Investable net worth increase: $610K
Year 5: They're feeling pretty good. In just four years, they've added a couple of million dollars to their net worth. They're increasingly concerned about owing $2 million on their properties, but they figure it is worth it given their goals. She has realized that medicine is not her dream at all and wants to cut way back herself and have a kid or two and be a stay-at-home mom. They start making plans to do that in a year. They decide to deleverage a bit this year but are still living on $100K a year. Their tax bill is about $50K thanks to bonus depreciation and REPS status. They stuff another $100K into retirement accounts and generate $200K in cash over the course of the year. They use the $310K they had at the beginning of the year and the $200K in cash they made during the year to pay off the mortgage on their primary home. Amazingly, they make another 8% on their stocks, and their properties appreciate 3%. Their investment properties have a cash flow of $100K this year and they use it to pay off their 401(k) loans.
End of Year 5:
- Retirement accounts: $838K
- Properties: $3.649 million (not counting their primary home)
- Cash: $0K
- Debt: ~$1.9 million
- Investable net worth: $2.59 million
- Investable net worth increase: $110K
Year 6: With the mortgage paid off, they now feel comfortable with her quitting her job. He brings in $50K this year working and the investment properties bring in another $100K. They live happily ever after with their debt automatically decreasing each year and their income automatically increasing each year. Meanwhile, those retirement accounts just keep growing and growing, backstopping the risk of something happening with their real estate empire and, most likely, going to those kids they now have time to raise and love. A few years later, he quits his job too, they hire that property manager, and they travel the planet while world-schooling their kids.
What If You Aren't Like the Case Study
While I used big broad numbers and assumptions that could easily be too high (or too low), that's more or less how it works. Naturally, as you read that, you likely noticed all the ways in which you are different from that couple. These might include:
- I don't make $600K a year
- I don't even own a home yet
- I still owe $350K in student loans
- I'm a single parent and childcare is outrageous
- I wouldn't want to live on $50K even if I could
- I don't hate my job, I just want a little more freedom
- I HATE landlording
That's fine. You could still adapt your situation, so Fast FIRE still works. Or Fast FIRE may just not be for you. Don't fall victim to the idea that you have to compete with anyone else to retire the earliest. This isn't the USMLE. It's a single-player game: you against your financial goals. I never had a goal to Fast FIRE, although we seem to have achieved it accidentally. Sometimes you get lucky and your real estate appreciates 40% in a single year, or your entrepreneurial pursuit pays off big. It's just as likely you suffer through a real estate slump or become a chronically failed entrepreneur. Maybe it takes you 10 years instead of five because you spent the first five paying off all your previous financial blunders. But I present this pathway as a potential option for you to take. It will require sacrifice in the form of a frugal lifestyle, at least for a few years. It will require hard work on an entrepreneurial pursuit, a lot of extra shifts, and some weekends dealing with real estate investments and their tenants. It will require you to take on significant leverage risk that could easily backfire if you're not very careful. But it is an option.
Why Are You Encouraging People to Leave Medicine? Who's Going to Take Care of Me?
The truth is that most doctors need very little push to at least cut back on medicine. When I survey them, 35% would leave medicine completely right now if they had the money. This is the target audience for Fast FIRE. Many of them aren't willing to sell the Tesla and the fancy doctor house to do it, but that still leaves plenty that are. Another 55% of doctors would cut back if they could. The Fast FIRE pathway might also be attractive to some of them. It doesn't take much extra income to cut back significantly at the main gig while maintaining the same lifestyle.
At any rate, I'm convinced that financially stable doctors are the best doctors. It is very difficult to provide the best care to patients when you are not sure you can make your mortgage and your student loan payment this month and feel incredibly guilty you can't afford to put your kids into the best schools and that you can't even make it to the school play without being paged away. Whether or not you choose to Fast FIRE, put a financial plan in place that is right for you and yours.
What do you think? Is Fast FIRE a good route to take? Or is it populated by doctors who should have never gone to medical school in the first place? How much leverage is too much? How long do you plan to take to reach financial independence? Comment below!