By Anthony Ellis, WCI Columnist
After I finished my psychiatry residency in 1994, my wife and I and our 9-month-old daughter moved from Charleston, S.C. into our 1900-square-foot starter home in Michigan. We bought the house for $102,500 with a 9% mortgage. Our house payment was $900 with property taxes and insurance included. Our joint student loan debt would soon reach $120,000 with my wife’s graduate school debt. We had a negative net worth of about $250,000 that included $20,000 of credit card debt from living beyond our means during my psychiatry residency. We had not paid a penny toward my student loans. I was 30 years old.
Despite my weekend moonlighting that had doubled the household income in my third and fourth year of training, we were already spending future money that would come with my first real job. At the starting line at age 30, I had no investments and a mountain of debt, and we were already a family of three.
But the early 1990’s recession had ended, and we had a house. The grandparents were nearby. And I was making $178,000—real money. Things were looking up.
How I Began My Financial Education
Because of our consumer debt, I asked my first employer to front-load my salary by taking $1,200 off months 3 to 12 of the contract and putting it on months 1 and 2, making my first two monthly attending paychecks about $17,000 each. I quickly got a lesson in how the government assesses taxes due per paycheck resulting in a large amount of “extra” taxes taken out. I will never forget going to the accounting department to have them look at the clearly mistake-ridden check. The lady behind the desk in accounts payable looked at my paycheck deductions (about 35%) and told me it was correct. Yes, my after-tax paycheck was really supposed to be for $11,000.
I was surprised.
We quickly paid off the consumer debt, and I bought a book that appeared written specifically for me called, “Personal Finance for Dummies.”
Having gotten no financial education from my parents, who were both nurses, and none in public school, college, or medical school, I was certainly a financial “dummy” and needed help. I ended up getting a basic financial education for $16.95. I found out while writing this column that a used circa 1994 copy of the book is still available for a penny plus shipping. The foreword is by Charles Schwab.
After reading this book, I maximized my 401(k), bought a 20-year level-premium term life insurance policy, and paid off student loan debt across seven years instead of 10. We did that because the cost of living in Flint, Michigan was low and because we bought an inexpensive starter home and drove reasonably priced cars. We also didn’t take many vacations, so we could throw plenty of extra money at those loans. I also bought an “own occupation, flat premium forever” disability policy when I was 35. I was learning.
I eventually rolled the last $20,000 of our student loan debt into a refinanced mortgage at a lower rate to get more deductible interest. Back then, student loan interest rates were high, and the interest was not deductible. I was beginning to see the rules of the game. I would need an ever-improving offense (more income) and an even better defense (tax planning, tax-deferred accounts, and appropriate insurance products) if I ever wanted to retire before I hit 60.
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Finally Back to Broke—and My Next Steps
Fast forward to 2001. I’m 37 years old, and we have a net worth greater than zero and about $132,000 in our rollover IRA, all invested in mutual funds. Having paid little attention to earlier economic cycles, I became aware of the effects of recessions, being the primary wage earner for a family of four following our second child’s birth in 2000. There was an eight-month economic downturn that began in March 2001 that lasted through that November. This coincided with my first pay cut after seven years of dutiful service and raises. The proposed cut was due to an economic contraction that I had nothing to do with. It was my first physician experience with job dissatisfaction as a salaried employee with ever-expanding duties. After securing a new Medical Director position, my first job that started as a “staff physician” and ended as Medical Director and Department Chairman came to an unceremonious end.
But the most recent recession was ending, and still, things were looking up.
In a lucky twist of fate, I landed the Medical Director position at the new job, as they could not find a fellowship-trained geriatric psychiatrist to open a geriatric unit. This position came with a “physician executive” defined benefit pension plan that I knew nothing about, a 50-mile commute, and two hours a day in the car to listen to books on tape. With renewed vigor and focus, I reopened and staffed a wonderful unit for the treatment of late-life mental health issues, primarily Alzheimer’s, Parkinson’s and related dementias, and late-life depression and psychoses. The professional and personal development the job and commute allowed made up for the 227,0000 miles I drove in my 2006 Toyota Avalon, my first luxury car purchase as an attending (it’s still the most expensive car I ever purchased and it was a big step up from my 2003 Toyota Camry).
I did not factor in the commute costs when I took the job, but the 200 books on tape that I listened to did include a dozen financial titles, and I certainly had time to collect my thoughts before and after work. I even wrote and self-published a running book in 2005. It made no money, but I learned and stayed in shape.
Over the next 11 years. I made more financial errors, nonetheless. For example, I did not take advantage of the 457 plan the hospital made available, and for four years, I believed I could not be in the defined benefit pension plan and the 401(k) at the same time. My 401(k) plan retirement account tripled anyway from 2001-2009. The bear market of 2007-09 and the worst economic downturn since the 1930s reduced my accounts by half. I was 45 years old and looking at another 20 years of full-time work. I stayed the course and sold nothing.
It turns out that riding out the 2007-2009 downturn in equities was one of the best decisions I ever made. I also used that recession to refinance our house at 2.5% on a 15-year mortgage with minimal impact on the payment, cutting off nine years of interest.
I was no longer flabbergasted about the money I was making and where it was going. I, dare I say it, had become more tax-savvy and more sophisticated about money.
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Accelerating My Journey to Early Retirement
I had not heard of the FIRE movement, and I had not yet seen friends and fellow physicians die at a similar age or become disabled, as I did years later.
But I was accumulating more and more income, taking my first side job during the 2008 recession as my wages were stagnant. Later, I ramped this up after more pay cuts showed me that it was a bad idea to have all your eggs in one basket.
By 2011, the economy was recovering again, and I was looking for something new closer to home. There had been no new treatment options for dementia in a decade. The hour-long commutes each way—especially in Michigan winters—and a new “not-so-friendly” boss solidified my decision. This, along with, you guessed it . . . further pay cuts after years of dutiful service related to an economic downturn that I had nothing to do with. By now, the family had expanded to include four children, and I had become even more aware of economic cycles, the foibles of being an employed physician, and how life could “turn on a dime.” I knew I needed to get an even better offense with my side gigs.
Because of the market scare of 2008-09, I gave my retirement accounts in 2012 to a professional firm that managed them for me for a fee. Having sold nothing during the downturn, I was back up to where I had been in 2008. It was an interesting waypoint with $500,000 saved (remember, this was only a decade ago). I had earned and vested in the defined benefit pension from 2001-2011 that was worth about $25,000 a year from age 60 onward, making me feel a bit better about the future with that retirement money out of the market.
I ramped up my side gig, working weekends and holidays after moving to the new job in public sector psychiatry, treating the most severely ill patients in the city. I was no longer a Medical Director and was on the front lines in a tiny office. I was providing direct outpatient care to the least fortunate, and it was an eye-opening experience. The prior psychiatrist at the site had committed suicide. I have stayed in the public psychiatry sector since, except for a year as an assistant professor in a residency start-up in a Consultation/Liaison psychiatry role.
By 2016, I was not satisfied with the results provided by the large commercial firm that had been managing my accounts using a risk tolerance-based proprietary mix of mutual funds for a fee on top of the mutual fund fees and the yearly planner fee. I had found The White Coat Investor and read his book. I also read Dr. Jim Dahle’s blog posts each week, and my financial education kicked into a higher gear. The FIRE movement was well underway, and I wanted to see if I could accelerate my exit from full-time work, targeting my mid-50s as a potential jump-off point.
By this time, I had known five physicians or friends my age who had died or who had become disabled between the ages of 46 and 55. I also watched my healthy father-in-law contract a rare cancer, ending his 20 years of leisure and excellent grandparenting that had started when he was 58. My mind cracked open by how fickle life can be and how little we control.
After a year or more of thinking about it, I took my accounts back from the management firm, let my financial planner go, and decided to go all in with the main ideas of The White Coat Investor. Primarily these included writing a financial plan, choosing an asset allocation, maximizing all available tax-deferred accounts, increasing my side gig income (at times, I was making half my salary in side gigs just working weekends and holidays), and investing in Roth IRAs for my children from their summer jobs. It also included avoiding variable annuities and other life insurance investment products, making sure I kept my “own occupation” disability insurance, and re-purchasing a level term life insurance to last until I did not need to replace my income. I remember getting half the benefit for twice the premium on that policy at age 55. I also took advantage of geographic arbitrage by buying a smaller retirement home in a state with lower property taxes, a lower cost of living, and less expensive auto insurance. The mountain home came with a trail that was perfect for morning hikes.
I missed my target mid-50s retirement age by a bit, and I will be 58 when I finish my full-time work this year and we move to the mountains in North Carolina. These past four years, I have been the Chief Medical Officer for a community mental health center which has been a privilege. I took full advantage of the matching 401(a) and a 457(b), and I continued to stoke my SEP IRA with 25% of my after-expense side gig earnings.
At this point, it’s almost surprising that I’ve learned so much.
Having gone to North Carolina quarterly since 2016 to see our daughter and vacation there, we also worked on the retirement home. My eldest daughter now lives in North Carolina in her own home. Another daughter is finishing undergraduate college in the state and is looking toward graduate school. We will still have the youngest two at home with us. I have fully funded my children’s 529 accounts for years and no longer need to put more funds in them. For 20 years, these accounts and private or college school tuition were one of our largest expenses. Now, I don't have to worry about them anymore.
Luckily, I have benefited from the advice from WCI, the blog, and contributing columnists. I have also learned from the mistakes and small victories posted by others on the blog by those who do not always get it right but “get it right enough for it to work out.” I plan to work a long weekend now and again to delay fully funding our new smaller budget solely from retirement accounts.
Selling the large house in Michigan will supply enough funds to make up the difference between the budget and my very part-time wages, our planned 4% drawdown, and my pension. With a much weaker offense, I will up the ante on defense (tax planning and insurance), and I can spend more time on the end game: maintaining my health (and not dying) while helping our children establish themselves and avoid my mistakes.
Despite the recessions, the mistakes, and the pandemic, things are most certainly looking up.
What do you think? Is it possible for you to go from beyond broke to early retirement in less than 30 years? What other strategies could you use? Comment below!