[Editor's Note: This is a guest post I'm really excited about. Andy Walker, MD, FAAEM is a recently retired emergency physician. Like many of the best guest posts on this site, I solicited this one after learning of the writer's expertise on a particular subject matter. The post runs a little longer than most, but I thought it would be less inspirational if I split it into two posts, and I think you'll find it worth your time to read the whole thing. I really enjoy hearing about and publishing the stories of financially successful physicians and in order to further encourage these types of guest post submissions, I'm going to ask readers to be particularly polite in the comments section today. By way of disclosure, Dr. Walker and I have no financial relationship.]
Early Retirement Is Still Possible
I recently retired from the practice of emergency medicine at the age of 53, and I was asked to write about how I managed that. A bit of it was luck (bad luck, actually), most of it was common sense, and most of it can be found in The 10 Commandments Of The White Coat Investor. I also want to tell you why I did it, but first things first.
Frugal, Frugal, Frugal
I learned responsibility and the basic philosophy of safe, conservative financial management from my father, who was president of one of the few banks in my small hometown. One obvious example of his frugality is that the man never bought a new car – and neither have I. I guarantee you this: if those who run the small and regional banks in this country were running the big national and international banks, there would not have been a mortgage bubble or financial meltdown! My other guide has been John Bogle, founder of Vanguard, whose investment advice I follow. More about that below.
Live Below Your Means And Minimize Debt
First of all, live beneath your means. If you don't commit to this first difficult step, nothing else will matter. As soon as I graduated from medical school, while still an intern, I started paying off my educational loans. Even then I never failed to pay off my one credit card in full every month. Now that I have more than one, I still pay them off each month. If you find yourself using credit cards for credit rather than convenience, you should get rid of them and pay for everything in cash. It is much more painful to hand over cash than a credit card. By the time I was 30, I was out of debt except for a mortgage. That didn't last long, however, because I got married that year – but I paid off my wife's educational debt even more quickly since I was then making an attending's salary instead of a resident's.
Don't Buy Too Much House
My wife and I continued to live beneath our means, which is another way of saying we never spent all the money that came in. Although simple, that is not as easy as it sounds – especially when you are shopping for a house in a real estate market that seems to have no ceiling, with a wife who has very specific house-related dreams she wants to live out. Nevertheless, it must be done. My father always told me that your mortgage should not exceed twice your annual income, and we lived by that advice. I am sure that many people who are now upside down on their mortgages wish they had followed that guideline. Living beneath your means, while saving and investing the difference, is the foundation on which all else rests. Don't be a slave to your mortgage, or to any other debt.
Have An Emergency Fund
After paying off debt, the next task is to save at least three months worth of income in case of unexpected emergencies – and there is always something unexpected coming up. I think emergency physicians should save at least six months worth, because our jobs are inherently unstable. An ED contract can change hands anytime, causing the loss of a job.
Maximize Income and Save For Retirement
Next comes saving for retirement. As you can see, this is a lot of saving – meaning 20% or more of your monthly income, not including any contributions to a retirement fund from your employer. One thing that helped me, and here is where bad luck came into play, is that my wife and I were unable to have children. That freed up a lot of money for saving and investing. Our task was also made easier when I went from an academic job to a democratic, independent group at a community hospital. Although the job change came with a roughly $70,000/yr raise, including benefits, we didn't buy a new house or make any other dramatic lifestyle changes. We loosened up the purse strings a bit, but mainly we saved and invested. And, by working for a democratic group rather than a corporate contract management group, I was able to reap more of the fruits of my own labor. Are you working to enrich yourself or someone else?
Use Index Funds
From my father, John Bogle, and Dirty Harry Callahan (Magnum Force) I learned that “A man's got to know his limitations.” Actively managed mutual funds lag index funds 75% of the time. Although some professional investment managers are arrogant enough to think they can beat the market, they are usually wrong. Those who try to time the market are usually wrong. Investing is a long-term game. Speculating for recreation is one thing, investing is another.
If you can't predict the market, you certainly can't control it, and you can't control inflation either. What you can control are the costs associated with investing, especially fees. That is why I favor index funds – very low fees and low taxes. Read any book by John Bogle to learn about this, as well as asset allocation – the spreading out of your eggs into many baskets. Again, you can't predict the market, and broad asset allocation (diversification) is the way to ride out the inevitable ups and downs. That reminds me: never panic and sell after the market crashes. That just locks in your losses. Once the market has crashed, it is too late and there is no point in getting out unless you are doing it for the tax deductions. If you needed that money in the near future you shouldn't have had it in stocks anyway, so don't forget to rebalance your portfolio once a year if a professional isn't doing that for you.
Rebalance The Portfolio
Failing to rebalance my portfolio as I aged is one of the two investing mistakes I made. I always planned to switch to half-time work in my fifties, but my asset allocation was that of someone who was going to retire at a more typical age. So, when the market crashed in 2007-2008 my portfolio lost about 40% of its value. I should have had more money than I did in bonds rather than stocks. Fortunately those losses have been reclaimed, and now that I am actually retired my asset allocation is much more conservative. Nevertheless, there is a good actuarial chance that either my wife or I will be alive in 30 years, so even now the percentage of my portfolio in stocks hovers at 30-40%.
Don't Buy Cash-Value Life Insurance
The other mistake is that I violated Commandment V: Thou Shalt Not Mix Insurance and Investing. I had exhausted the other available tax shelters, wanted to make sure my wife was taken care of if she outlived me, and wanted to leave gifts behind for family and the handful of charities that are important to me; so I let an insurance salesman talk me into buying a “variable universal” life insurance policy. This not only provides life insurance, it provides tax-free income if you put enough money into it in advance. Sounds good, doesn't it? It isn't. The fees are more than double what I would have been willing to pay had I understood them, and the investments have underperformed the market – hard to do considering how poorly the market has done over the last decade. You are far better off buying term life insurance and investing separately.
Give To Charity
Fortunately, the excellent estate planning of my father and mother allowed me to overcome those two errors, and inspired me to do my own estate planning – something I always meant to do but never found time for (just like rebalancing my portfolio). Just as you plan for life, you should plan for death. This is critical if you have children. Even if you don't, it will give you a sense of comfort and relieve your family of a painful burden, while leaving a legacy of ongoing good work if you leave some of your estate to charity. In fact, I urge you to donate consistently to charity now. It not only does good for others, over time it makes you a more responsible money manager.
You May Want To Quit Your Job Sooner Than You Think
Every January, as I start to gather data for filing my taxes, I review my financial position. Last January I suddenly realized that I could not only go part-time, I could retire completely if I wanted (meaning I had enough saved/invested that I could live well for a year on 5% of it). That was important, because over the last year or so I had become increasingly unhappy at work. For most of my life I have looked forward to going in to work, and thought I would never retire completely until I was physically or mentally unfit for emergency medicine. Over the last couple of years, however, my work environment has deteriorated badly. The company that owns my hospital was taken private, and the owners took on so much debt that they went on a cost cutting binge. It went so far beyond cutting waste that our ED no longer had adequate nurse staffing and lacked essential supplies and equipment, with quality and even safety being affected.
The final straw was the electronic medical record (EMR) and computerized physician order entry (CPOE) software that the hospital inflicted on the ED, over our objections. Even after we got over the learning curve, these still drastically reduced patient flow – increasing waiting times, keeping patients angry, and making the ED an extremely unpleasant place to be. What's more, the EMR produced a nearly incoherent medical record – leaving us at risk legally and causing complaints from the in-patient physicians (who were also ignored by hospital administration). Even worse, the CPOE software was downright dangerous. It was as though it was deliberately designed to generate errors. I saw more drug errors and near-misses in the year or so I suffered with CPOE than in my previous 26 years of practice. I no longer had to work, no longer enjoyed work, and saw my ED as a lawsuit waiting to happen – so I quit.
More To Life Than Medicine
I have been retired for only three months, and I may eventually go back to work part-time, but I have been surprised at how little I miss emergency medicine – especially since I used to love it. Money may not bring happiness but it does bring freedom, and freedom is pretty damn good. So I encourage you to live frugally, save aggressively, invest wisely, give charitably, minimize debt, and be free.