About three years ago I wrote about what you should do if you get a windfall. I just went back and re-read it. It's a good article. However, it is written mostly from a theoretical point of view. That was the only way I could write about it, since I had never really had a windfall at the time. However, today we're going to get a little more personal.
Lump Sum Windfalls Versus Income Windfalls
There are really two kinds of windfalls out there. The one we usually think of is a big fat lump sum, such as an inheritance or lottery winnings or exercised stock options. However, there is another type of windfall, an income windfall. This is when you get a dramatic increase in income that you did not expect. Most doctors experience a dramatic increase in income once in their life- when they leave training, but that is an increase they've been expecting for years, and is one of the main reasons they went through all that school in the first place. But imagine, if you will, another increase in your income that you did not expect. That's an income windfall.
My Income Windfall
In the last couple of years I've had two income windfalls. You see, when I left the military, my financial plan was to make $225,000 per year for the next 15-20 years, save $60,000 per year, and then become financially independent in my early 50s. It was a good, conservative plan with reasonable assumptions. That was what it was going to take for me to come out ahead financially leaving the military. If I didn't make that much and save that much, I would have been better off (financially anyway) spending 16 more years in the military and getting a military pension with Tricare (free/low cost healthcare for the rest of my life.)
However, it turns out that as a partner in my private, democratic emergency medicine partnership, I make a lot more than $225,000 a year. In fact, the income for the average emergency physician has gone up fairly dramatically in the last 5 years. The 2015 Daniel Sterns survey indicates that the average emergency medicine partner makes $343K, and it turns out we're above average thanks to a well-managed group with good insurance contracts, good documenting/coding/billing habits and a decent payor mix. This year was particularly good to us.
In addition, I have this little business on the side where I type a few random words into the internet, and a bunch of money comes flooding back. I even wrote a book and random strangers just keep buying it. In 2014, that little business was the equivalent of being married to a primary care doctor. In 2015, it was the equivalent of being married to a well-paid specialist. While I work hard for both of these sources of income, and try to provide as much value as possible to my patients, readers, and advertisers for that income, it turns out that both have paid me far more than I ever would have expected five years ago. I have an income windfall.
While a good problem to have, this income windfall leaves me with a dilemma. I started the blog and book under the premise that doctors make plenty of money and if they manage it well, they can be financially free relatively early in life. My wife and I became millionaires seven years out of residency (ages 38 and 35 respectively) purely based off physician income, which averaged $180,000 over those seven years. Neither the book nor the blog really had anything to do with it, other than helping me make smart financial decisions.
But at the present rate of growth (or even at 1/4 the rate of growth) of WCI, I will soon be making more money outside of medicine than inside of medicine. Thus the dilemma. Do I continue to advise readers to stick with medicine, investing 20%+ of their gross earnings into classic investments like stocks, bonds, and real estate? Or should I tell readers to do what I did, embracing their inner entrepreneur to discover a way to become wealthy even faster?
It took me 4 years of college, 4 years of medical school, 3 years of residency, 4 years of paying back Uncle Sam, and 2 years as a pre-partner (17 total) to get an income equivalent to what I now get after screwing around part-time on the internet for 5 years, a large chunk (but nowhere near all) of which is completely passive. I feel a bit like Mr. Money Mustache. He blogs about how he and his family live on $25K a year and you can too, all while he has a website ten times as popular as mine which is almost surely generating hundreds of thousands per year (and if it isn't, it's only because he has chosen not to.) [Update prior to publication: My wife says I shouldn't minimize the amount of time, effort, and passion I pour into the site. “Those aren't just random words,” she says. “I certainly can't do what you're doing there and neither can most other people.”]
I suppose I'll continue to write about both ways to become wealthy. My original plan was working. It was working just fine. We would have still become financially independent in our early fifties. But here I am at 40, financially independent of medicine and now practicing only because I love it. I'm not completely financially independent (i.e. I still need to work at something), but if this nonsense keeps up much longer, I soon will be. That's because, aside from a brief manic splurge of spending in 2014, we're really only spending like we did on 70% of a pre-partner salary (a high five-figure amount after tax.) The rest of this income is going toward other places. And that's what the rest of this post is about.
Taxes, Taxes, Taxes
A higher income is mostly great. But it comes with a very serious downside, and that's an obligation to Uncle Sam. Most types of income are taxed, but perhaps none so high as earned income, on which you pay income taxes at your regular marginal rate, plus payroll taxes (including the PPACA taxes) and then when you spend it, sales taxes, and depending on what you buy, maybe even property taxes every year while you own the property. So my first word of warning to you, dear reader, should you also have an income windfall, is that your tax bill is going to be far higher than you think. As a practicing physician, I have been in the 15% federal bracket and the 0% state bracket (if you're interested in that, I can get you in touch with a recruiter.) I have now also had the experience of not only being in the top bracket, but also of having nearly all of my exemptions and credits and many of my deductions phased out.
If you also pay charitable contributions as a percentage of your income (think “tithe”), you can add that on top of your taxes. It's quite possible that 50-60% of each dollar of that income windfall will not be going into your pocket. Plan accordingly. Despite paying 10% more than I owed last year using estimated quarterly tax statements, I fully expect a massive additional tax bill in April. When you combine that with my 2015 defined benefit plan contribution and my 1st quarter estimated tax payment for 2016 all due at the same time, it will probably feel like I've got the sword of Damocles hanging over my head for the first four months of the year, hoping my income for that year is enough that I don't have to sell investments to pay the tax bill for the previous year. It's tricky to estimate your tax bill with a rapidly rising income.
Giving Back
My overall attitude toward money is one of stewardship. I subscribe to Bogle's “Enough” philosophy rather than Trump's “Never Enough” philosophy. I only need a certain amount to be happy, and beyond that, it doesn't make me any happier. So I like to imagine that I'm merely managing the money (for family, God, society etc) trying to put it toward its best use. So while some of this income goes toward meeting my financial goals (more on that below) a significant portion also goes toward others. For me, that means giving to charities I support, funding the WCI Scholarship, starting college funds for nieces and nephews, and providing jobs for others (the whole “teach a man to fish” philosophy.)
Lake Powell Fun
Splurging
But I'm also human. So I spend some of my income windfall. There's no way I would have been able to purchase that boat with cash this year and meet my other financial goals on just my physician income. WCI paid for the boat. Likewise, if you have an income windfall, it's okay to spend some of it. But unless you are very sure the income will continue, I would encourage you to spend it on one time items rather than obligating yourself to ongoing required expenditures. That is to say, blow it on a vacation, not the down payment on a vacation home.
Accelerating Financial Goals
The main use for this additional income is accelerating our financial goals. All of our financial goals have an endpoint. When I get enough into the kids' college funds, I'm going to quit putting money in there. Sure, I might increase the goal a little just because, but it isn't a bottomless pit. Same with their “20s” funds. This is non-529 money they can spend on anything they like- a wedding, a honeymoon, missionary work, a summer in Europe, a car, more education, a house downpayment etc. I view this as getting part of their inheritance when they can really use it (i.e. your 20s) rather than when hopefully they won't need it (their 60s.) The mortgage payoff fund is exactly the same and is probably the last debt we'll ever have. Even retirement can be funded in advance.
By putting this income windfall toward financial goals, we reach those goals literally years sooner than we had otherwise planned. One great benefit of putting windfall income toward financial goals (rather than spending it) is that if it turns out the income windfall is only temporary, you don't have to cut back your lifestyle after it's gone, and you're still much closer to your goals. Of course, reaching those goals further reduces your need for future income. If I pay off my mortgage, that's $2500 less I need to make every month in the future even if my income gets clobbered. If I have “enough” saved for college, then I no longer have to have sufficient income in the future to save for that. And if you can reach financial independence, you can also drop costly life and disability insurance.
Make Sure You're Living The Life You Want
Perhaps most importantly, it's a good idea to take a look at your life and ask yourself if that is how you would be living if you had all the money in the world. If it isn't, see what changes you can now afford to make. For instance, I kind of hate night shifts. It's mostly different medicine with a different population of people (more psych issues, more drug abuse issues, more undiagnosable abdominal pain etc.) There's probably more liability and certainly the services of the hospital and consultants are less available, increasing risk and decreasing patient satisfaction (and my own.) Nor do I enjoy forcing myself to stay awake at 3 am. And most importantly, I don't like the 1-2 days it takes me to recover afterward. So I'd love to drop them. My group pays a large night shift differential, so there is a very real financial cost to doing this, but since I currently have plenty of income for my needs, wants, and reasonable financial goals, I can afford to drop them and will be doing so soon. If you have an income windfall, take the opportunity to change the aspects of your practice you don't like.
My daughter getting ready to drop into Pleiades Canyon
Likewise, I really like going on adventurous trips and spending time climbing, skiing, and biking in the Wasatch mountains near my home. Long-term blog readers have figured out I pretty much go on vacation for a few days every month. It might just be visiting family or it may be a big vacation to Europe, but more commonly, it's a trip to go boating, climbing, or canyoneering with friends, family, or both. But if I try to wedge in two of these trips in one month, especially if I'm also traveling for WCI, then the month gets really full and my kids start wondering where I'm at, and I like being there to help them grow up as well. So I'm cutting back on my shifts a bit. Unfortunately, that requires 9 months notice to allow the group to hire someone to work “my” shifts. If you have an income windfall, it gives you an opportunity to reset your work/life balance.
Additional income also allows you to jettison chores you don't like. For example, if you hate mowing the lawn you can hire someone else to do it. I hired some house cleaners this year, because we have a new baby and I didn't want to do any more cleaning than I already am. I'm also not a fan of working on our cars or boat. So now I pay someone else to do it. If you have an income windfall, eliminate your onerous chores.
I know this post is lengthy, and that this particular post is more personal than most, and I certainly hope it doesn't come across as “humble-brag.” I happen to believe that blogs are best when they're personal, and these are the financial issues (i.e. first world problems) we're currently wrestling with. I sincerely hope you get to wrestle with these issues at some point in your life as well. Hopefully you found something in this post you can apply to your life, whether it is practical advice for dealing with your own personal income windfall, another reason to feed your inner entrepreneur, or just a little inspiration to learn a bit more about personal finance and investing than you now do.
What do you think? Have you had an income windfall? How did you use it? How did you keep from increasing your lifestyle to consume the additional income? Comment below!
I would look at the WCI website as a windfall income, because I suspect it won’t last forever. How long until you start recycling content? There is only so much that can be said on financial matters (unless you are Dave Ramsey, but you have a much narrower audience). Your archives are gold. Too much light content to fill up space and posting deadlines may dilute your product and make it tough for the reader to find usable information. Monetize it while you can.
I thought that three years ago too. I currently have 3 months of new content written and not published and get more in my inbox every day! I now no longer worry about ever running out of content. Have the basics been said? Sure. They were all covered in the first three months. But there’s plenty more to talk about and read.
But I agree there is always the potential for income to go down. Seems unlikely to go down dramatically though with a new crop of medical students graduating every year.
Medical students, residents, and attending doctors will spend big money on the latest edition of board review study courses and other textbooks. So you do likely have a continuous supply of new readers and potential users of your advertisers.
Congratulations. I am very happy for you, and you deserve it- your writings are great and I have recommended them to a number of younger doctors.
One issue you will have as you have more savings. At some point between your life’s savings, and the variability of the stock market, you will probably get in the mind set, at times, of why do a shift (especially considering your new tax bracket) when the amount you earn is such a very very small part of your already established savings that it the income is virtually meaningless. I retired at 65 after a great career but found that just the change in the market in one day was much bigger effect (either positively or negatively) than anything one would make in even a 12 hour shift, or many weeks of work.
If you need to work to keep your mind active, it is fun, and/or you like being around the people you work with, that is a reason to continue. But if you can find other things that do that even better it is something to think about.
I’ve had that effect going on for a long time. A 1% change in a million dollar portfolio is $10K, far more than an emergency doc makes in a shift, even a painfully busy 12 hour one. The market sees 1%+ changes many times a year.
One Boglehead, Livesoft, uses that daily market change number as the amount of money you can blow on anything you want without feeling bad about it. It certainly isn’t a method of determining when to quit working. Like I said, a million dollar portfolio has frequent $10K daily swings, but still only supports an income of ~$40K a year.
Congratulations on the windfall. My “windfall” was a promotion to lieutenant from sergeant, resulting in a 35% raise over the last seven years. I invested the majority and agreed to use a small part to pay the difference between public and private college for my daughter. The promotion also eventually got me off graveyard which you know is a whole other ballgame in medicine and law enforcement. This “windfall” will go on, as it has permanently increased my pension.
Private college on a LT salary. I’m impressed.
I’m a 40yo ophtho making 750K gross. I save about 15% gross. I’m definitely worried that I spend so much of my income. It will be tough to scale back in retirement(other than saving on no more retirement contributions, no more private school tuition) My wife has started an MLM business (18 mos in) and I am excited about how it will enable me to slow down (but maintain our current high expenditure lifestyle). I would love to see a column about spouses and MLM and SoloK contributions, tax write-offs, and other ways to maximize retirement(short term rental vacation properties- income and tax write offs (has already been discussed on your blog))in high income/high expenditure settings(the best of both worlds right?)). I would love to see posts on making a ton of money…..spending a ton of money….and still finding enough loop holes(MLM spouse business(tax deferred account via SoloK and write offs)/tax deductible investments (second home- short term vacation rentals) to secure a financial future/reasonable retirement age. My wife’s MLM is definitely my “windfall”. What other things (anything?) to consider with high income/ high expenditure lifestyle? Already doing all the right things with the 15% invested (max profit sharing, index funds, Backdoor ROTH, Stealth ROTH (HSA), 529s, SoloK for spouse MLM, small amount to a taxable account (still maintaining “lifestyle”). I worry that my lower income partners are doing all the same things but living on less! Can I have my cake and eat it too?
A few comments. Unlike you, I’m relatively new to this amount of income. My retirement plans call for something like $100K a year of income. Certainly less than $200K. I have a hard time figuring out how I would spend $750K*(1-0.15)= $638K. I could have a whole fleet of wakeboats I guess!
I say all that mostly to say I think you are very appropriately worried that you spend so much and I agree it will be tough to scale back if you wait until retirement. I mean, think about how large your nest egg will need to be to generate $638K in retirement. The rule of thumb (which comes with all the issues associated with rules of thumb) is to multiply that by 25. That’s $16M. Since you’re saving $112K a year, you should be able to reach $16M in real dollars in about 42 more years. If that doesn’t sound very appealing to you (and it wouldn’t to me) I would suggest cutting back NOW. For example, if you could figure out how to live on $200K a year, you only need $5M to support that. If you live on $200K a year now, you could probably put away $300K a year. At $300K a year, you’ll hit $5M in about 12 more years. That sounds pretty good to me.
But yes, I’ll be writing more about issues related to people with your income now that I get to experience them. By the way, I generally recommend a 20% savings rate.
I’d take a look at this post too:
https://www.whitecoatinvestor.com/percentage-of-current-income-needed-in-retirement/
Bottom line: I think you should save more because you make more. You’re doing a good job maxing out your tax-advantaged accounts, but there are also people doing that on a much lower income than you have. You also need to be investing a significant amount in a taxable account and making sure you’re spending your money on the things that will truly make you happy. For example, you talk about wanting to slow down. Which is most important to you? Spending $450K a year instead of $350K a year or being able to retire a decade sooner or work one day less a week. Something to think about.
Congratulations on the entrepreneurial success, especially the part of being on track to exceed the mean ER doctor income. (I guess that if I liked ER medicine a little more and knew that it could generate a surgeon’s income, I would have picked it). Also impressive that your Whole Life post still gets serious traffic even after all these years–it’s clearly ticked off a few people who keep the commentary alive.
At the end, I hope that we all get to continue doing what we love, whether it is medicine or something else. Having enough money to fund our lifestyles and family would be nice too. 😉
WCI can you comment on how you structure your children’s “20’s funds”
UGMA accounts invested in 100% stock index mutual funds.
Congratulations Jim,
I am interested to pick your entrepreneurial side. I am a physician and am planning on starting a blog (not finance) which can be monetized with ads and thinking about writing a book.
1. How did you learn marketing? (podcasts, guest posts, how did you get your word out there?)
2. How did you write your book? (publisher? self published?)
3. Looks like it is mentally, socially and financially rewarding but you pay upfront in 2-3 years of hard work in posts – what is your opinion/additional thoughts?
4. Worth attending classes to learn all of this or just…go?
Thanks! And happy holidays
1. Self taught
2. Self published
3. Yup. Made nothing the first year and less than $5K the second year.
4. There are classes? I attended a panel discussion once on self-publishing if that counts.
You are the best Jim. Thanks. Will follow your adventures for inspiration.
I’m just giving you a hard time. Here are the lessons that were given to me:
http://www.smartpassiveincome.com/
http://www.problogger.net/
Those two sites have been worth hundreds of thousands to me. A lot of pearls there.
Thanks for the links Jim,
Wow. Purely financially speaking, that Patt flyn guy is generating some serious monthly income (top right on his blog). Will check out his journey – let me guess he quit his work for this
Jim, do you see yourself dedicating yourself 100% to your blog endeavor and leave medicine? As a physician, while I have talents and am excited about outside ventures, I still enjoy medicine but am thinking hard about following my heart.
Also I think engagement with users is what drives interest: example – you replying to me comment in earnest. This pays dividends in loyalty.
Keep up the good work. Eagerly awaiting “State of the blog” post – won’t be surprised you blew the doors off this year.
Take care.
I agree. I have a loyal following because I’ve saved thousands (tens of thousands? hundreds of thousands?) of readers thousands (hundreds of thousands? millions?) of dollars, not only from them just reading something I wrote, but also from direct engagement via email or comment. Assume that’s 10 people a day, 365 days a year, for 5 years. That’s 20,000 ambassadors for my website out there. You can’t buy that kind of marketing, you can only earn it.
I doubt I’ll leave medicine completely at any point in the next decade. I still enjoy seeing patients. The less I have to do it, the more I like it. While I don’t make as much as Pat Flynn, I’m also not doing it full time. I do make enough that I don’t have to practice medicine any more if I don’t want to though. Part of that, of course, is that we’ve held the line pretty well on our spending and, with the help of future compound interest, have mostly already met all our savings goals.
You’re actually the first doctor who has told me their income is going UP instead of down due to Obamacare and more difficulty getting reimbursements from insurance companies.
Besides emergency fields, what other field is seeing pay go up?
Thanks,
Sam
My income is mostly going up due to my side business, but we had a decent year, at least until December, in the partnership as well.
If WCI decides to bring out the inner entrepreneur in readers, I just hope it’s aimed at a different group of readers. More than most people, he knows that launching a blog in 2016 is hardly a guaranteed get-rich-quick scheme. It just doesn’t seem likely that a group of highly educated professionals who have already committed decades of their life to medicine would be suddenly interested in another difficult and frustrating 5-10 year learning curve to make a few more dollars on the side. That’s particularly true when they already have a rock-solid plan (per WCI) for retiring both early and quite wealthy.
I’ve started several successful businesses and spent quite a bit of time on Pat Flynn’s site and interacting in the forums. Pat is extremely personable and highly business savvy with plenty of excellent advice, but I’m very skeptical that his blogging success could be replicated by more than a handful of people. Real-world revenues from his audience are pretty dismal. Most can’t even monetize enough to cover monthly website hosting and email service fees.
I just recently was referred to your brand. Thank you so much for the sane advice!
My husband and I are internists and entered the field of full time hospitalist medicine in 2011 after spending a decade working for a small hospital in traditional (read: combined inpatient and outpatient) practice. We have seen a continuous windfall of cash that still doesn’t seem to be ending. Thank goodness, because we lost all our retirement and kids’ college fund in a failed business venture due to the 2008 crash but thankfully were able to hang on to our house and vehicles. We are well on track to retire on time due to the busy hospital we work at with an excellent contract and living well below our means despite traveling often.