[This post is written by and was originally published on the Physician on FIRE website. I thought it was interesting the first time I saw it, but it has come to mean more to me in the last couple of years. While we certainly spend more than $70K/year, Katie and I do spend a small fraction of our income (we save, give, and pay in taxes more than we spend in a given year.) Yes, it takes discipline, but laying a financial foundation BEFORE the big income hits goes a long way.]
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.
- $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.
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 possibility 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?
Most importantly: is his family protected with life and disability insurance coverage on him and spouse, and more complicated are his kids protected from the unlikely but awful risk of losing both parents with no ongoing guidance for being extremely rich little orphans. A fellow with this much money mostly in cash concerns me that he is similarly ignorant of the insurance and inheritance issues we more regular followers (who I think would never in his position be in mostly a money market account) have already addressed or at least considered.
This family’s frugal spending is impressive. I suspect that the 70k is for running the household, such things as utilities, groceries, and clothing. Things like new vehicles are probably not included in that number, but the low budget is still impressive.
Our income went way up after I started my own medically related business. This happened in a later phase of my work life. Our spending is now quite high in my view, but is somewhere in the range of 10-20% of income. We don’t have any formal budget. Taxes are over 40% of income. When your income tax bill alone is many thousands of dollars a day, it doesn’t really matter any more if you go to a more or less expensive restaurant for dinner or stay in a nicer hotel on any given day.
The rest or our income goes to investments. Before starting a business and having an extreme income, we saved more like 20% of gross income each year. Now we save roughly 40% of gross, and our net worth has been increasing by a couple million per year between new investments and growth of assets. If business is good and the high income lasts for another 5 or 10 years, we will end up in the ultra high net worth club. These days we think about more charitable giving and what type of legacy we want to leave. I am currently working on finalizing my list of 20 charities that I want to support this year in a significant way.
As far as taking care of financial business looking forward, I do still have disability insurance but I don’t really need it any more. The term life insurance policies we took out in the past are expiring sequentially, and we are not replacing them. We don’t want to fund trusts for our children, at least not yet. One child graduated from college and already has a very successful career and a high net worth in her 20’s. The other one is finishing college and working, a bit too slowly in our view, but they each have to find their own path.
Now the areas we need to focus on are a solid plan for passing on ownership and management of the business, and a more sophisticated estate plan. I am behind to some degree on those issues, but in any case, the family will be fine no matter what happens.
That sounds familiar. Congrats on your success.
I remember the original forum post from that guy. I know people like that in real life. There were some skeptics that wondered if it was fictional, but I don’t think so.
I was too lazy to reach out him as I planned to do. PoF beat me to it and did an awesome write-up.
I wonder if PoF or someone could reach out to the guy for an update. This could be the start of a fascinating case study over time. How much more does he spend now? Same income or higher? Net worth grow more than expected yet?
I would reach out but…. well, I need to snack and then take nap. LOL
I agree. It’s been a couple of years, and I have not kept in touch, but could easily reach out to him and see how things are going with his career, life, and goals.
Cheers!
-PoF
i agree follow up would be interesting. at the time 2017 he had two young kids and another on the way… college savings set aside wasn’t listed so there will definitely be more in his 70K budget when they all hit college if he intends to help pay for it (though he likely wouldn’t need to use a 529 but it would help with his tax burden probably to pay for school partially with tax free gains rather than income). The kids will eventually be more expensive too… (braces, summer camps, cell phones, etc).
There are definitely specialties where you can bring home the bacon like what this guy does. You just have to be in the right place at the right time and have a knack for it.
Somewhat unrelated to the point, but if I cut a check to my spouse annually for household expenses, I would be accused of subterfuge or impropriety. To each her own own, I suppose.
Great inspiration nonetheless.
Reading your new book. The mathematicians say the one yard line call was the correct one, however the outcome was poor. You can make a good decision and still get a bad result. Read this article:
https://www.annieduke.com/how-to-make-the-right-decisions-even-when-you-dont-have-all-the-facts/
You’re not the first to make that argument. I disagree. Best running back in the NFL. One yard.
But the clock stops with an incomplete pass. Is that like saying ordering a CTA for a suspected PE on a patient with a normal creatinine was a bad decision if the patient develops acute kidney injury? You made a good decision ordering a CTA but you had a bad outcome due to a low probability event.
They had 28 seconds. They could have done at least two runs if not three, especially if they went toward the sidelines. Run, spike, run. I can’t remember if they still had a timeout or two. I know there’s some controversy here, but I still think it’s a fantastic example to illustrate my point of docs making things overly complicated.
I would agree with your last statement. Annie Duke May not know all of probabilities and perhaps the coach did over think it. I don’t know enough of the facts, but found Annie Duke’s viewpoint intriguing. Is there a conclusion in the football literature on this? Has the coach commented? BTW I truly love Jonathan Clement’s foreword to your book. That guy has a real way of thinking. His comments about delayed gratification are insightful. I like the individual vignettes. They really jump out at the reader and resonate with the reader. I like doc books where they bring in parallels with medical concepts.
There are myriad better football examples. So why pick one that is mathematically incorrect?
Sure they could have run. Maybe he gets tackled for loss, maybe he fumbles. You have to look at all possible outcomes and their relative likelihood. Not just what happened, or what you think might happen. So when you go through that exercise, maybe the run is a little better (it depends on the assumptions you use, which are somewhat debatable), but it’s not that different from the pass option. More egregious and obvious errors are made frequently in football.
Don’t like my book, don’t read it. When you write yours, pick a better example. This line (and place) of criticism is bizarre. I mean, this is a comments section on a post I didn’t even write.
It’s pretty funny actually. The feedback I got on that section from 30 reviewers was take it out because non football fans won’t understand it. I got zero feedback that I should have picked a different play. I don’t know how much NFL you guys think I watch, but if it didn’t happen in the Super Bowl, I probably didn’t see it.
I hate the use of the word someday. Doing medical volunteerism requires some intentionality. It seems like this is common in the FIRE crowd. Listened to a podcast that said he would like to spend his time at his church and volunteer someday. Why someday? Why not today? Why wouldn’t this doctor volunteer this year? If he gets a diagnosis that he can’t practice tomorrow, this goal is gone.
Well the if the FIRE crowd was all about the now. They would be spending a lot and living in the moment and not really saving, because they could get that diagnosis and not be able to enjoy all the wealth that they accumulated. Then there would be no FiRE crowd at all.
The short answer is that you have to balance future goals with the present. I could imagine a profitable one man operation like his being very likely to fall apart if he isn’t there all the time. Who knows? I’m sure, at least on a subconscious level, he has considered significant volunteerism in the present and he’s decided that it’s better suited for the future (and yes, there is a chance it may never come, but you’ve got to play the percentages). I don’t think there is anything wrong with that.
His actuarial risk of dying before he gets to the volunteering part of his life is extremely low. Should he make significant changes in his life to avoid that tiny risk. Maybe , maybe not. It’s just personal preference and there is not really a wrong answer.
I understand what your saying, but I think “someday” is intentional as well. I am in the same boat of “someday” wanting to do mission work but my reasons include:
1) Needing to spend the time learning the techniques necessary to perform the work without the equipment I am afforded here.
2) More importantly, with young children at home, heaven forbid something happen while I am in a third world country and don’t come back. This would be a huge strain on my spouse both mentally and financially in the present, and less so once the kids are in college and I am still in my prime working years.
At 38 years of age this guy has time to do the work he is hoping to do.
2 is covered with life insurance. You’re running that same risk every time you turn the key in your car. 1 is not insignificant, but you can bring equipment with you.
What’s this doc’s specialty and type/details of practice? You all do realize, of course, that a doctor who makes 1.8m a year is in the top 1% (or higher) of all doctors on the planet.
WCI or POF Can you do a post on how to make 1.8M a year at age 38 as a physician? also what was his speciality?
Own your own business and live somewhere with little competition. He doesn’t want to reveal his specialty due to his desire for anonymity, but don’t assume it’s one of the usual suspects.
Cheers!
-PoF
You can make this amount as an employed physician also. You just have to be willing to live in a place where most people refuse to live. Look at the Form 990 tax filings of your local hospital and you would be surprised at what some employed physicians are paid.
As if there is a formula that can be written in a blog post.
But the general idea is to pick a specialty with procedures that pay really well, own your own practice, make your practice really efficient (and even hire underlings-employee docs and APCs), make your payor mix as good as possible, and then work really hard.
Great article! Given his Protestant Christian background he may also want to consider the National Christian Foundation for his DAF. We offer great help with giving strategies too. God bless!
Honestly, my initial reaction is loosen up the pursestrings. Could easily spend 3-4X current annual spending and still save massively for early retirement. At some point, it’s clearly possible to be too frugal. We only live once. And life can unexpectedly and unpredictably change in a hurry.
I really like what PoF said about this person not really needing to “take chips off the table.” This is a great illustration of the problem I have with Bernstein’s “if you’ve won the game, stop playing” saying. Clearly this doc has won the game, but there’s no need for him to take on more bonds than he has now. He could easily be 100% in stocks if he wanted to. In a short period of time, he could actually be 100% in bonds. When someone has truly ‘won the game’, they can have just about any halfway reasonable AA and be fine.
Congratulations to Dr. SW; He/she came, saw and conquered , i.e., took advantage of what life and work presented. No blame there. Even so, this physician demonstrates part of what is wrong with American medicine. Public awareness of such highly paid docs creates animosity for all of us. The growing wealth disparity in this country is going to become more damaging to social stability. The ‘in thing’ in medical circles now is identification and discussion of how physicians are so stressed out, leaving the profession due to under pay and stress, etc. This is all discussed in much of the medical media . . . without any recognition that people with low or ordinary incomes with families to support have as much if not more stress. Makes us docs look like a bunch of whiners. Another way Dr. SW is offensive is how much more he makes than those of us in primary care grinding it out in the trenches. Is his value that much greater such that he warrants the massive income? Hey, don’t ‘shoot the messenger’ as I’m happy for him and impressed but these comments do reflect what his fellow citizens are thinking about his taking advantage of a broken system.
He identified a need in the market and offered his services. Do you want to get paid more? Then go do something unique. Absolutely nothing about any of this is “offensive”. [Ad hominem attack deleted.]
Apparently, the market has determined that his/her work is worth what s/he is getting paid.
There’s a prominent primary care doc who is a physician finanicial blogger who once had a 7 figure income. Rather than be jealous of another doc’s income, why not do what he did?
Same message to those offended by the fact that others make more than they do. While not everything is under your control, in my experience, people underestimate how much control they have over their income.
I think it’s a disservice to post this kind of example when essentially every physician who works for piece of his/her CPT production in America knows that he’s either earning that income on the labor of others, or he’s massively up-coding the services he provides. There is a practical limit to how many units of work one can stuff into a 60-80 hour work-week, even if one is a neurosurgeon. Perhaps everything he does is paid in cash, so he has no anchoring to contractual reimbursement. Doing the math on this kind of income for investment purposes is a waste of all of our time; this guy can afford to shove his money under a mattress and never take the least bit of risk; even the erosion of inflation won’t touch this person’s security, even if he wants to live a relatively extravagant lifestyle, which you say he doesn’t. He will have escaped gravity in under 5 years, even with no investment acumen whatsoever. How about examples that are meaningful to the rest of us whose primary goal is to deliver service, not own a gold mine.
How about this recent post?
https://www.whitecoatinvestor.com/how-to-build-wealth-on-150000-per-year/
And of course the guest post box is open to all. If you’d like to share your example, please submit a guest post.