The original title of this blog post was “What to Do If You Are in a Big Hurry”, but I opted for this more clickbaity title in hopes that more of you will read it. It is no secret that I am a big fan of getting rich slowly. Over the course of a full career, it is relatively easy, heck, almost guaranteed, that a physician can become a multi-millionaire and maintain their standard of living in retirement simply by doing the following:
- Earning an average income for their specialty
- Paying off their student loans in the first 5 years by living like a resident until they're gone
- Carving out 20% of gross income for retirement savings
- Placing that money into retirement accounts as much as possible and in taxable accounts thereafter
- Investing that money into boring old stock and bond +/- REIT index funds
- Staying the course with their career, marriage if any, and their investing plan for the next 25-35 years
However, many of you are in a hurry. You might be in a hurry because you hate your job. You might be in a hurry because you do not actually want to work full-time for your whole career. Maybe you are in a hurry because you would feel more financially secure if you were financially independent earlier. Maybe you are in a hurry because you want to retire early or go do another career. Maybe you're in hurry because you didn't actually do the above. Perhaps you didn't save anything for a decade or have been dragging out your student loans. Or have been divorced once or twice. So what are your options? There are actually quite a few. I frequently give doctors the secret to getting rich:
- Make a lot of money
- Don't spend a lot of money
- Make your money work as hard as you do
So we will use those pearls as the framework to examine your options.
# 1 Make a Lot of Money
In my opinion, if you are in a big hurry, your best option is simply to make more money. Frankly, I think most people dramatically overestimate the difficulty of doubling their income. Now, while it may be harder to double your income if you are a high paid surgeon working 60 hours a week than if you're delivering pizzas, it is certainly still possible. All else being equal, the more income you have, the more you can save and invest.
1a Boost Clinical Income
I have always been amazed to see intraspecialty income differences that are larger than the classic interspecialty income differences. Here is the specialty compensation chart from the 2020 Medscape Compensation Survey:
While there is an impressive difference between the average pediatrician who makes $232K and the average orthopedist who makes $511K, I know both pediatricians and orthopedists who make twice those averages. While the exact methods vary, the usual formula involves one or more of the following:
- Owning the practice
- Having other docs or Advanced Practice Clinicians (APCs) working under you
- Working a lot of hours
- Optimizing your procedure/pathology mix
- Optimizing your payor mix
- Negotiating hard with insurers, employers, etc.
1b Become an Entrepreneur
Perhaps an easier, but less reliable, method of boosting income is to become an entrepreneur. Lots of doctors, scared by their income drop during the COVID pandemic, became very interested in side gigs, passive income, and entrepreneurial pursuits. The most successful of these do not lend themselves well to just following a formula (every entrepreneur gets rich differently) but there is no doubt that if you can pull this off that you can certainly shortcut the process to financial independence. Katie and I knocked off almost a decade from our timeline to FI via The White Coat Investor.
1c Combine Investments and Second Job
Lots of franchisees and real estate investors love to tout how their investment returns are higher than they would get with more passive investments. What they often fail to mention, however, is all the time and effort they are putting into these “investments”. There is nothing wrong with that, of course, so long as you acknowledge that part of your return is coming from your work. It still boosts your income and speeds you along your way to your financial goals.
# 2 Don't Spend a Lot of Money
This is often the most disappointing method of speeding up your progress. It is hard for most to get super excited about spending less money. I'm going to let you in on a couple of little secrets.
First, it is also hard for most to get super excited about working more or taking on more risk. Spending less involves zero risk and zero additional work.
Second, spending less works on both ends. Not only do you have more money to invest now, but you need less money later to maintain that level of spending. This is the reason why Mr. Money Mustache's famous chart is so dramatic and inspiring to the FIRE crowd:
Note that the left column in this chart is net pay, not the gross pay figure I typically refer to when telling you to put 20% of your gross income toward retirement. Combining # 1 (make more) with # 2 (spend less) can be very powerful.
# 3 Make Your Money Work as Hard as You Do
Now we get into the meat of the post. You have a partner in this quest for financial success. Your partner is your money. In fact, this is the essence of capitalism—that your capital, or savings, can make money at the same time you do. At a certain level, your money can make even more money than you can. Unfortunately, many of us do not have our money working as hard as we need it to. Here are some ways you can get your money working a little harder than it is now. None of these are a free lunch, but they are likely at least part of your solution if you are in a big hurry.
3a Reduce Advisory/Management Costs
I have demonstrated before that becoming your own competent financial advisor and investment manager can be worth a lot of money. Let's put it in terms that are easy to understand. Let us compare two doctors that are exactly the same. They earn 5% after inflation on their portfolios before advisory fees, save $50K/year, and need $2.5M to be financially independent. One of them pays an “industry standard” 1% of assets under management to an advisor. The other has learned how to make a financial plan and manage her investments just as well as the advisor could do and so keeps that fee. How much longer does the first need to work in order to reach her goals?
With advisory fee: =NPER(5%-1%,-50000,0,2500000) = 28.0 years
Without advisory fee: =NPER(5%,-50000,0,2500000) = 25.7 years
If you can be your own (competent) financial advisor, you get to your goal 2.3 years faster.
3b Use a More Aggressive Asset Allocation
Here's an option that a lot of people choose, for better or for worse. The more compensated risk you take with your portfolio, the higher your expected returns will be. Obviously, you can get burned doing this, as expected returns are not always actual returns. But it basically works like this:
Based on Vanguard's basic portfolio models, from 1926-2018, the following asset allocations (stock/bond mix) had the following returns:
- 100% Stocks: 10.1%
- 80/20 Stocks/Bonds: 9.4%
- 60/40 Stocks/Bonds: 8.6%
- 40/60 Stocks/Bonds: 7.7%
So what does that mean if you are in a hurry? Well, if you increase your stock to bond ratio from 60/40 to 80/20, how much sooner can you retire? Again, let us subtract 3% for inflation and assume you are saving $50K/year and need $2.5M in today's dollars to be financially independent. We'll also make the big assumption that future returns will resemble past returns.
60/40: =NPER(5.6%,-50000,0,2500000) = 24.5 years
80/20: =NPER(6.4%,-50000,0,2500000) = 23.1 years
By taking on more risk, you just cut 1.4 years off your career. Aside from the possibility that taking on this additional risk does not pay off, there is also the issue that you cannot handle the additional volatility inherent in the riskier portfolio. Selling low just once during a market downturn will definitely add more time to your career, despite the additional returns the rest of the time.
There are other ways to add risk to the portfolio. You can choose riskier stocks, such as small and value stocks. Just be aware that just like taking on more stock risk, this doesn't always pay off. See the last decade for details. If you are not super comfortable with the stock market, there are other risky assets with similar long term returns, such as real estate.
3c Use More Leverage
Another method frequently used by those in a big hurry is leverage. Real estate investors are very much aware of this feature. If you pay for a property with cash and it doubles in value over a couple of decades, you have 2Xed your money. If you only put 20% down, you will 6X your money (actually a little less since you've been paying off the loan over time). Of course, leverage works both ways. If you pay in cash and the property falls in value 20%, you lose 20%. If you only put 20% down, you will have a total loss.
So you need to be careful with how much leverage you use on any given investment as well as the overall leverage in your life. Frankly, most doctors are entirely too comfortable with debt. But there are some guidelines out there for how much leverage is a reasonable amount for those who choose to take on that risk. With real estate, you generally need to put down about 33% in order to ensure the property is cash flow positive. You can also leverage those boring old index funds, but margin accounts are limited to 50% leverage due to Regulation T. (If you don't understand why, see 1929 for details.)
Since money is fungible, however, you can use leverage from any part of your financial life to increase your leverage. You don't have to borrow against your investment property or your portfolio. You can borrow against your house, your car, your credit cards, or even your cash value life insurance policy, all with different terms and interest rates. So how much is reasonable? I think Thomas Anderson gives some good guidance in his “Value of Debt” book series. He suggests, at least if you are within 20 years of retirement, that you limit your debt to 15-33% of your total assets. So if your total assets are $2 million, you should have between $300K and $667K of debt. Obviously, that is less than half as much as many real estate investors have and most young doctors already have! If you decide to use leverage to speed up your financial progress, keep in mind that nobody ever went bankrupt without debt.
3d Leave Less to Heirs
Here is another option for those in a hurry—just leave less money to your heirs. Most people leave a lot of their nest egg to their heirs. It isn't necessarily intentional, it is just a function of using standard investments to fund their retirement. If people are invested in real estate, they tend to just spend the income and their heirs inherit the full value of the property. If they own their house in retirement, they usually don't borrow against it, and so their heirs inherit the full amount. If they have a mutual fund portfolio, they're likely taking out something like 4% of it a year to ensure it lasts throughout their retirement of unknown length. On average, that strategy leaves 2.7X your original nest egg amount to your heirs. And half the time, you leave more than that! They might have cash value life insurance, and usually leave the death benefit to their heirs. At any rate, if you want to be done sooner, you can simply use a different retirement income strategy that leaves less to your heirs.
- You can buy your own pension (i.e. a Single Premium Immediate Annuity—SPIA). In exchange for a lump sum of money, an insurance company will pay you a benefit every month until the day you die. This will put a floor under your retirement savings and ensure you never run out of money. But your heirs will not receive any of those dollars you put into the SPIA.
- Living off your IRA or other investments to delay Social Security to age 70 works similarly—you have more to spend if you live a long time in exchange for a smaller inheritance for your heirs.
- You can live off your home equity, either by selling your house and using the proceeds to rent or using a reverse mortgage.
- You can borrow the cash value out of your whole life insurance and spend that. Yes, your heirs will receive less, but you can retire earlier and still have the same retirement lifestyle.
All of these techniques involve taking money from your heirs and using it to shorten your career. It's your money, so it's your decision.
3e Become More Flexible
Similar to 3d, it can be amazing how much less money you need to sustain your retirement if you can be very flexible with your spending in retirement. If most of your expenses are variable and can be cut back in the event of market losses, you can actually spend significantly more than 4% of your portfolio each year. Meaning you can retire with less. Meaning you can retire earlier.
3f Roll the Dice
Finally, there is a strategy that many employ but that I cannot really recommend. I call it rolling the dice. It involves taking on unwise risks in hopes of a big lottery-like payday. Spending a lot of money on the lottery would fall into this category. Putting a lot of money into a speculative investment would also qualify. Consider something like Bitcoin. Now I'm not talking about somebody who is putting 2% of their portfolio into cryptocurrency and 2% into gold as some kind of an inflation hedge. I'm talking about dedicating 50% of your portfolio to Bitcoin or trying to market time silver or buying a bunch of highly-leveraged empty land on the edge of town. It's possible your bet will pay off, but considering the risk that it does not, I do not think it is worth it, especially given the relatively guaranteed pathway discussed at the top of this post.
The investor matters more than the investment. I would counsel you to be patient in your quest for financial success. Patient investors are usually better investors and make more logical and less emotional decisions. But if you have a need or desire to speed the process up more than the standard pathway, consider the options above.
What do you think? Are you in a hurry? Why or why not? If so, what have you done to try to speed up your progress? Comment below!