By Dr. Rikki Racela, WCI Columnist
Say whhhaaattt? Yes, you read that headline right—my financial plan involves being hung by my fingernails. Now, I know that's hard to believe. What might even be harder to believe is that this financial plan was a result of taking WCI’s Fire Your Financial Advisor course. Now, Dr. Jim Dahle doesn’t advocate for physical torture. That was thrown in there by me for a reason—a very salient reason I will explain later.
But what I hope to do in this column is go over the financial plan that my anesthesiologist wife, Meredith, and I developed through Fire Your Financial Advisor and, with our plan as an example, illustrate how it can enable you to reach your financial goals.
So here it is: Rikki and Meredith’s Written Financial Plan (and how to keep your fingernails intact).
The first part of the course involves some introductory material and a focus on written financial goals. No, the goal is not to “make the most money so that you can be the richest person in the grave.” In fact, the goals portion is the first written part of the plan, and as you go through the course, Jim focuses on them to be “SMART” goals. For those who don’t know the acronym, it stands for Specific, Measurable, Achievable, Relevant, and Time-Limited. The course gives you the knowledge to write and accomplish these written goals, and they will form the first and foundational part of your written financial plan.
Here are our goals.
- Our investments will provide an income of $100,000 per year (2020 dollars) while still growing at the rate of inflation where Meredith will be financially independent in 2030.
We will reach a net worth of $1 million by July 1, 2021.Done in November 2020
- We will have a pool/patio and landscaping fund of $200,000 done on May 1, 2022. We will abandon this if we move out of New Jersey.
- We will have $300,000 in Jackson’s (my son) 529 by Sept 1, 2033.
- We will have $300,000 in Mia’s (my daughter) 529 by Sept 1, 2035.
- We will pay off our home by December 2045.
- We will have our student loans paid off by 2042.
- Save 20% of our gross income for retirement.
- We will max out Rikki’s 403(b), solo 401k(), Meredith’s 401(k), and our Backdoor Roth IRAs each year.
Notice that we crossed through one of those goals because we accomplished it. For us, it’s nice to leave that accomplished goal in there with the strikethrough font, giving us a psychological win feeling, almost the same feeling when using the debt snowball method. Also, we did not accomplish No. 3, though we tried our hardest. We currently have $160,000 for the job held in a high yield savings account, which is OK. Yes, we fell short but would have fallen much shorter if it weren’t written down. As Morgan Housel writes in his book The Psychology of Money, “The most important part of every plan is planning on your plan not going according to plan.” And that’s the beauty of FYFA: the course teaches the plan to be flexible where it can be modified, changed, and rehashed dynamically as you achieve (or don’t achieve) your goals or as life circumstances warrant.
Notice that we did not make goals such as, “Retire with $30 million someday and live an awesome life.” Although it sounds like a cool goal, especially when I throw in the word “awesome,” you learn through the course that it is not a SMART goal. This may seem obvious with the sum of $30 million, but then what is a realistic, SMART number? Is it $20 million, $10 million, $5 million? And what is a realistic timeline? Ten years? Twenty years? Fifty years? The course hones in on a SMART goal where you have an appropriate Financially Independent (FI) number for the time you actually want to retire, as you read in No. 1 above. That $100,000 of investment income so my wife can be FI is a SMART goal. I myself plan to keep working (and hopefully still love neurology!) at age 65, but the course can even enable a couple to plan when one spouse wishes to be FI while the other keeps working.
More information here:
The next part of the course makes mincemeat of the complex topic of insurance, where the type and amounts of insurance required are taught and reviewed in a succinct and comprehensive manner and are integrated into a written plan. We ended up with the following:
- We will have a level term life insurance ladder starting in July 2019 of:
- $1.5 million for 10 years
- $1.5 million for 15 years
- $1 million for 20 years (These amounts correspond to the decreasing need for life insurance, as we accumulate more in retirement accounts, pay down debt, and fund the kids’ 529s.)
- Rikki will have disability insurance of $12,500 from Ohio National on top of his Englewood Hospital group policy. Meredith will have $5,000 from Principal on top of her group policy at Holy Name. We will stop disability when we achieve FI.
- We will maintain homeowners/car/umbrella insurance. We will keep full collision coverage for our cars until they are worth $10,000 or less.
- We will keep a $60,000 emergency fund (three months of our fixed expenses) in a high yield savings account.
Notice that we laddered the term policies. As the course reviews, this is the most optimal way to buy the insurance that you need, because as you build wealth, you will need less insurance. Laddering allows whatever insurance you no longer need to drop off. In 10 years, we hope to have $1.5 million worth of our liabilities settled (which include the mortgage, the elimination of student loans, saving for retirement, and 529 funding). Five years after that, another $1.5 million of liabilities will have been paid down, and then five years after that, we shouldn't need the last $1 million.
FYFA taught us that in 20 years, we likely won’t need life insurance at all. Also notice that the amounts in our life and disability insurance are deliberately calculated. The course goes over in detail how to crunch these numbers.
#3 Housing Plan
The next part of the course revolves around housing. Our plan is as follows:
- We will continue to pay our current 30-year mortgage at 2.9% fixed with minimal payments, and use our extra money to invest.
- We will continue to consider geographic arbitrage to Texas or Florida and not pay more than $1 million for a house. We will rent first if we move to make sure we like our new jobs and to make sure our jobs have incomes that will reinforce the monetary benefit of geographic arbitrage. Also, we will make sure we do not sell the house in New Jersey at a loss, including the round-trip cost of selling and buying a new house. We do not believe staying in the house in New Jersey is a sunk cost fallacy; instead, we would only be moving to increase our wealth and help us achieve our financial goals faster.
Notice our absolute baller of an interest rate (we refinanced in March 2021) and that we also recognize that living in New Jersey is financially toxic where there is a real danger of not meeting financial goals while living in a HCOL area. But this is personal to us. When you develop your written plan, feel free to add your own personal flavor and thoughts. That is the beauty of Fire Your Financial Advisor. You end up with a very PERSONAL financial plan. You’ve heard it many times: personal finance is personal, and Jim’s course emphasizes that.
More information here:
#4 Student Loan Plan
The next part of the plan regards student loans. If you thought our fixed-rate mortgage was phenomenal, take a look at this part of our plan:
- We will do minimum payments to our First Republic loans at the five-year fixed rate of 1.95%. We will invest the rest and make sure the money we would have used to pay down the loan is not just spent. We will pay off the loan in full by May 8, 2023—which will be about $27,000 according to the amortization schedule, given we will get a $2,000 credit for paying off the loan one year early.
- We will make minimum payments on Navient loans, given the low 30-year fixed rate of 2.6%, and invest the rest of the money.
There are two things that will dictate this part of the written plan. First is your comfort with debt; as you can tell, we are very comfortable keeping this debt around. The 2.6% fixed at 30 years helps. This also ties back to the overall goals of your financial plan. If you remember in our goals section, debt payoff was not a high priority. FYFA makes sure that each written segment of your written plan flows back to your overall financial goals.
More information here:
#5 Spending Plan
Ha! I avoided the dreaded “B” word of this part of the written financial plan. This part of the plan also has a spreadsheet template that you can use as part of the course, but written here is the overall gestalt for how our money will be spent.
- We will track our spending using Personal Capital and a spreadsheet, and we will review it once a month.
- We will use credit cards as much as we can to get the cash-back bonuses but make sure that this does not tempt us to spend more. We will make sure to pay these off each month (with the exception of a 0% promotion where we keep any extra money in a high yield savings account, and then pay it off when it's due). This is because we are trying to take advantage of inflation eating the debt in real terms and the addition of the APR of high yield savings account.
- We also have a personal loan of $15,000 at 2.125% interest to a family friend, and we will only pay $500 per month.
- We will utilize our used cars until our kids come of age, and then, they can have them. If our cars die before that time or repairs cost more than the car, we will only buy used cars that are at least three years old—either a Toyota, a Honda, or another car that is known to last forever.
- We will save 20% of our gross income for retirement.
- We will put $1,200 per month into both 529s.
- We will keep a $60,000 emergency fund (three months of our fixed expenses) in a high yield savings account.
Notice that there is no mention of “we can’t afford” or “we will not spend” in this budgeting (Ah, there's the “B” word!) part of the plan. Many people have a visceral, retching feeling deep in their gut when they hear the word budgeting. But FYFA does not frame it this way. In fact, my wife and I feel more comfortable spending more.
The spending plan/budget here is GOALS focused. It is not some number that we are trying to attain, where once we attain it, we will fall into the Arrival Fallacy trap where we mistakenly think reaching that number will suddenly make us happy. It's also not a way to force us to be as frugal as possible. The spending plan part of the course is taught in a way to achieve financial goals. If you didn’t have a financial plan, that point sometimes is lost on your way to financial independence.
#6 Investing Plan
Ahh, here it is, finally, the “hung by my fingernails” part. Much of the FYFA course focuses on the investing portion of the written financial plan. This is probably the most difficult portion to teach because there are there multiple ways to invest (aka “roads to Dublin,” as Jim says) and because much of investing is emotional. Hence the visualization of physical pain.
Here are our investment policies.
- We will minimize taxes and expenses as much as possible in our investments.
- We will primarily use low-cost stock and bond index mutual funds, as well as stock index ETFs.
- We will use passive (not actively managed) investments if possible, given the lower costs.
- We will strive to achieve a 5% yearly real return, averaged over our investment lifetime.
- We will NEVER, EVER, NEVER, may God burn us in hell and Rikki gets hung by his fingernails NEVER sell our stock index funds during a bear market except to tax-loss harvest. If anything, we should buy more stocks if possible as STOCKS ARE ON SALE!!!!
- We will rebalance yearly on July 1, first by new contributions in taxable and then in tax-deferred accounts if needed.
Of course, FYFA does not mention/encourage/endorse hanging by fingernails. Obviously, I (and my wife) added this in to battle the worst enemy you will face in investing. Economist Benjamin Graham once said, “The investor's chief problem—and even his worst enemy—is likely to be himself.” Very insightful of Mr. Graham, but this begs the next question of why. I believe part of the answer lies in one of our innate survival heuristics called “salience bias.” Our brains are hardwired to recognize stimuli that stand out from a background, given the survival advantage to our ancestors. The ability to quickly pick out a stalking orange tiger amid a green dark forest background would help a human run for cover.
Such a heuristic is now maladaptive in investing. Terrance Odean and Brad Barber conducted an experiment on whether people buy stocks that grab attention in their paper, “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors.” They concluded, “We test and confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one-day returns.” In other words, Odean and Barber found that salience bias was responsible for poor investing behavior. But who says that you can’t use salience to help us invest? Hence, the hanging by fingernails!
In fact, being hung by my fingernails involves an even more personal flavor. I once had the gall to ask my 10th-grade lit teacher if, instead of reading The Scarlet Letter, I could just watch the newly released movie version starring Demi Moore. Her response: “Absolutely not and Demi Moore should be hung by her fingernails!”
Now, I cannot think of anything else more salient than the painful possibility of me being hung by fingernails. Forget about loss aversion and the pain of losses! Being hung by my fingernails is much more painful if I were to commit the cardinal investing sin of selling in a bear market. This form of visual salience has helped keep my System 1 in check during the Coronabear and 2022’s bear markets. I never thought about selling.
When you write your financial plan or if you have one already, feel free to add some personal hilarity to it.
Investing Plan by Goal
The next part of the plan outlines how to invest for each particular goal. It's not written down in our plan, but we do keep our finances together in joint accounts. The investing plan will absolutely differ if you and your spouse are keeping finances separate.
The goal is to have $100,000 per year in income in today’s dollars within 11 years for Meredith to be financially independent at age 50. Using the 4% rule, that requires a portfolio of $2.5 million. Rikki will have to continue to work to pay off the mortgage and student debt. We currently have $550,000 in retirement accounts. This will require savings of about $100,000 per year (=(PMT(5%,11,-558000,2500000,1))= $103,000) or about $8,500 per month.
- We will save 20% of our gross income for retirement. Currently, this is about $180,000 per year which will help us achieve our goal sooner.
- We will max out retirement accounts except for Meredith’s non-governmental 457, given that her hospital has a BBB rating and can be at risk of closure or merger. This comes out to about $70,000 among Rikki’s 403(b), solo 401(k), and Roth IRA and Meredith’s 401(k) and Roth IRA.
- We will invest the rest for retirement in taxable, about $10,000 per month.
- We will keep our asset allocation 100% equities, knowing that during the bear market of 2020 we had the mindset that “stocks are on sale” and found that we have a high-risk tolerance. It will comprise 65% total US stock, 25% total International stock, and 10% small cap value. Our small cap value tilt in our portfolio will be with FISVX in our Roth IRAs, and the rest will be in tax-deferred accounts. This is to minimize taxes on an asset class that should have the highest return. We will change this asset allocation to more bonds about 10 years prior to Rikki’s retirement, at age 65, and try to keep these bond funds in tax-deferred accounts. Our asset allocation at Rikki’s retirement will be 60/40 stocks/bonds.
- Because of the way our automatic contributions are set up in retirement accounts, our monthly contributions to taxable will be 2/3 total US and 1/3 total International.
We will cash out Rikki’s low-cost Fidelity variable annuity once it hits cost basis and then invest the money in taxable.Done!”
We have a lot of verbiage here, and you can make this as short or as long as you want. For my wife and I, we found it helpful to put our thinking down on paper. Also, we kept some of the goals we have accomplished in strikethrough font, just like earlier in our plan. Also, did you notice the Excel PMT function calculation? Yes, FYFA teaches you some Excel skills as well!
We want $300,000 by the time Jackson enters college in September 2033. We will use the Virginia 529 plan and put in $1,200 monthly (=PMT(5%/12, 14*12,-3500,300000,0)= $1,200). We will invest in the Vanguard Total Stock Market fund (VTSAX) but will start making 529 contributions to all bonds when Jackson starts high school. At the end of his freshman year, we will rebalance to an 80/20 asset allocation and rebalance again by adding 20% more bonds at the end of each high school year—until he has an allocation of 20/80 stocks/bonds. We will stop contributing when Jackson has finished high school. We will first sell the stock portion if not in a bear market to pay for college. If Jackson has any money left over and is not going to grad school, we will transfer the rest to Mia.
We want $300,000 by the time Mia enters college in September 2035. We will again use the Virginia 529 plan and put in $1,100 per month (=PMT(5%/12, 15*12,0,300000,0)= $1,100). Again, we will invest in VTSAX but will start making 529 contributions in all bonds when Mia starts high school. At the end of her freshman year, we will rebalance to an 80/20 asset allocation, and rebalance by adding 20% more bonds at the end of each high school year until there is an allocation of 20/80 stocks/bonds. We will stop contributing when Mia has finished high school. We will draw down stocks first to pay for college unless in a bear. If any money is left over and Mia is not going to grad school, we can give it to Jackson if he is still in grad school or let the money grow. We can then transfer the rest to our first grandchild, or take it out for our retirement if we are somehow desperate.
More information here:
#7 Estate Plan
Can’t forget about estate planning. FYFA reviews the more formal documents that you will need, but included in my written financial plan is a basic overview:
- If anything happens to both Meredith and me, her cousins will be Jackson and Mia’s guardians and trustees.
- Our backup trustee is Meredith’s best friend.
- Our backup guardian is Rikki’s best friend.
- We will meet with an estate planning attorney for a revocable trust as soon as we become millionaires.
- The beneficiaries and secondary beneficiaries are set on all of our accounts.
If you are wondering why we chose some guardians to also be trustees while our backups are separate, well, you'll just have to take the course.
#8 Asset Protection Plan
The final part of the plan. Short, yet super important.
- We will max out retirement accounts each year.
- We will pay down the mortgage as planned and know that the house is titled owners in entirety, giving protection of the house if we are sued individually.
- We will maintain our umbrella ($4 million) and malpractice policies.
The Final Part: Change Policy and Signatures
At first, I thought this part was just cute, but psychologically signing your name makes you subconsciously accountable. I wrote in a previous column how visualizing and physically writing a plan with your John Hancock on it can make you a better investor through the neurological process of encoding. And yes, those are our signatures—I guess we fit the stereotypical doctor signatures!
It's also important to point out the three-month waiting period before making any changes to the plan. This really limits the potential for action bias to torpedo your plan. By having to wait and keep your System 1 at bay, this part of the plan will help you ride out short-term market volatility and life events to make sure you are making an informed decision. Inflation over 9%? Wait three months before modifying the plan. Bear market hitting at the same time bonds are tanking? Wait three months before modifying the plan. Global pandemic? Wait three months before modifying the plan. Sudden changes in headlines might entice you to want to take action, but this three-month waiting requirement ensures you follow Jack Bogle's sage advice, “Don't just do something, stand there.”
What the Plan Helps Us Do
As I write this article and review my plan, I am again in awe at how comprehensive a plan we wrote after taking the FYFA course. As you just read, the amount of financial literacy I obtained from taking the course is astounding, and to put that on paper in a direction to help my wife and me attain our financial goals is relieving. Finally, it provides a grounding to avoid misguided and emotional investing. To quote him yet again, Morgan Housel was recently on the NewRetirement podcast hosted by Steve Chen and said, “To me, everything I’ve learned about money, whether it’s personal finance or investing or running a business, is that it’s not a math-based field. It’s a soft social sciences-based field. It’s closer to psychology and sociology and history. What’s going to separate the good from the bad, from people who do really well and people who do really bad, is not your intelligence. It’s not your education. It’s not your IQ. It’s whether you keep control over your emotions.”
This plan helps me keep control of my emotions while investing. And it’s not just because I get hung by my fingernails for selling low in a bear market. That utterly ridiculous/comedic yet pertinently salient thought only prevents us from selling low. It is this and other thoughts integrated into a complete written plan that focuses our financial energy into what we want to accomplish in our lives. Again, to quote Housel in a recent blog post he wrote called Lifestyles, “I have no idea how to find the perfect balance between internal and external benchmarks. But I know there’s a strong social pull toward external measures—chasing a path someone else set, whether you enjoy it or not. Social media makes it 10 times more powerful. But I also know there’s a strong natural desire for internal measures—being independent, following your quirky habits, and doing what you want, when you want, with whom you want. That’s what people actually want.”
Whether it be living it up when we are old and retired, preventing mountains of student loan debt from forming when our kids graduate college, or the legacy we wish to leave when we pass, FYFA makes these financial goals attainable. And FYFA makes your written financial plan THE benchmark. Not the S&P, not the Joneses, but your goals are the internal benchmark that Housel refers to. The goals for your spouse, for your kids, for yourself. If that is not enough emotion to get you to write your own written financial plan, then I don’t know what is. You don’t have to necessarily buy FYFA to write a plan, but gosh, it did make it super easy.
What do you think? Do you have a written financial plan? Did you purchase FYFA to write one, or did you write it alone? Do you add any salient funny additions to stop you from selling low in a bear? What behavioral biases does your written financial plan help fight? Comment below!