Katie and I have been very fortunate the last few years, mostly due to the financial success of The White Coat Investor, LLC. This has put us in a financial situation we never expected to be in. Now don't get me wrong. We always expected to be financially successful. We always expected to eventually be multi-millionaires. I went to medical school and expected to have a decent income as a result. I started learning about personal finance and investing in residency and realized that becoming wealthy on that decent income wasn't really particularly difficult. Sure, we became wealthy a little faster than we expected to for various reasons. But honestly, back in 2010 when we were deciding whether to get out of the military or stay in, we ran our projections with an income of $225,000 per year, which was the average emergency physician income at the time and I assumed I would never make any more money than that. We certainly NEVER expected to have a seven-figure income.
As a relatively new seven-figure-earner, I'd like to give those who have not yet had a seven-figure income a look behind the scenes at what it is really like. I thought for a long time about whether or not to run this post after writing it, as I'm sure the subject will attract a certain amount of hate. I hope it doesn't come across as a humblebrag, but since blog readers already know what WCI, LLC makes due to our transparency efforts, and since that figure dwarfs an emergency physician salary, our income shouldn't be surprising to anyone. This entire website is dedicated to solving “first world problems” already. If you don't like reading about first world problems, you're in the wrong place. I hope you find the post interesting and perhaps even useful. We've made a habit over the years of writing about the financial issues we personally face and figured why stop now even if this issue is admittedly fairly rare for our target audience.
Survey of the Land
There aren't very many Americans with a seven-figure income, even as the number of millionaires increases each year (remember a millionaire has a seven-figure net worth- what she owns minus what she owes.) In fact, the 1% starts at something around $350-400,000/year. Half of the 1% makes less than $500,000 a year and more than 3/4 of the 1% make less than $1 Million a year. It's important to realize that when you look at the 1% all together that you're lumping doctors and billionaires together, and there is a dramatic difference between a $1 Million income and a $100 Million income. One has a $50,000 ski boat on a trailer in the driveway and the other has a $10 Million yacht.
Inflation is Part of the Story
The truth of the matter is that eventually, at some point in the future, most Americans are going to have a seven-figure income. Just like most good savers who invest wisely can retire as millionaires these days even with average earnings, inflation changes things over decades. The image of a millionaire in our public consciousness comes from the gilded age of the 1920s (like the guy on the Monopoly game box.) Well, a millionaire in 1920 is the equivalent of a decamillionaire now. At 3%/year inflation, 100 years from now, even with no increase in our productivity or standard of living, the average American household income of $55,000 will actually be $1 Million. So if your idea of a seven-figure income is rooted somewhere in the past, well, it's not quite the same thing. It's still a ton of money, of course, but maybe not as much as you think.
We Weren't Here For Our Entire Careers
Most of us seven-figure earners are first-generation rich. We weren't here for our entire careers, much less our entire lives. Many of us aren't even wealthy yet. Remember that wealth is a net worth, not an income. We're often HENRYs- High Earner, Not Rich Yet. Thanks to a heavy and increasing student loan burden for professional school, sometimes we even have a negative net worth and often we have a net worth less than our income! Much of the time, we're not even financially independent, meaning that if we stopped working we couldn't maintain our standard of living for long.
In my family's case, we've been in every single tax bracket at one time or another. We know what it is like to live on $20K because we've done it. For years. Same for $50K and $100K. We didn't grow up with a silver spoon in our mouths. Going to McDonalds was a treat, and it didn't happen often. Even once we started working, we weren't making a million a year. In my experience, that's pretty typical of most seven-figure earners.
What Do We Do For a Living?
The typical seven-figure earner is a business owner, although if they are an employee they likely work in finance, in real estate, in the C-suite (CEO, COO, CFO), or as a particularly successful specialist physician, dental subspecialist, or attorney (probably a dual professional couple). We generally work far more than a forty hour work week and are no strangers to working evenings and weekends.
We Don't Expect To Be Here Forever
Just as we haven't been making this much money our entire careers, most of us don't expect to be here forever. It's a little bit like a professional athlete or artist. Yes, the income is high, but the career can be very short. The average career in the NFL is three years. Three years of the minimum player income of $600,000 doesn't last very long, especially after-tax. Even a professional cyclist or other endurance athlete is washed up by forty. Other seven-figure earners may only be making “the big money” for 5 or 10 years. You get burned out. You're hitting retirement age. The business climate changes and the business becomes less profitable, fails, or is purchased. Something happens, and that high income goes away. So for many of us, there is very much a sense of “make hay while the sun shines” and trying to build real wealth as quickly as possible for when the income goes away.
We Pay a Lot of Taxes
We pay a lot of taxes. Our government pays for itself primarily with income taxes because we tax income, not wealth (except at death with the estate tax, which applies to even fewer people after the recent tax law change). Spending is somewhat taxed in most states, but for a high earner, that is relatively minor compared to the income tax. We understand and are okay with the fact that our tax system is progressive, meaning the more income you have, not only the more absolute money you pay, but the higher percentage of your income you pay. We get frustrated that many Americans don't understand how the tax system really works. Far too many people think they pay a lot in taxes because they see the difference between their gross pay and what actually hits their paycheck. They ignore that many (sometimes most) of those deductions are for retirement plans, health insurance, other benefits, and payroll taxes (which pay for their retirement and healthcare as well.) Plus most people have more withheld than they owe, that's why they get a tax refund.
Mitt Romney famously pointed out that 47% of Americans don't actually pay federal income taxes, and seven-figure earners are acutely aware of that fact and often resent it a bit. It isn't that we think low earners need to pay the same percentage of their income that we pay. We're perfectly fine with a progressive income tax code. It's just that we think everyone ought to pay SOMETHING toward the government functions that the income tax pays for- defense, national parks, roads etc.
There is this idea out there that high earners aren't paying their fair share because they know (or can afford to hire someone who knows) all the tax loopholes. The truth of the matter is that we're phased out of most of the loopholes. In fact, taxes get pretty simple at this level of income. If there is a phaseout of a deduction or a credit, we're phased out. There's no fussing around trying to stay out of the next bracket, because we're in the top bracket, and well into it. In Utah, our itemized deductions are completely phased out. That's right, our charitable contributions, state income tax bill, mortgage interest, and property taxes don't reduce our state tax bill at all. Now, are there some other “loopholes” that some of us can take advantage of? Sure. Things like carried interest and some of the real estate related tax breaks. But most of us aren't using those. And many lower earner (particularly business owners) can get the same advantages. The rules are what they are, and learning to use them to your best, legal advantage is a good thing. As Judge Learned Hand famously said,
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes.”
If Congress doesn't want high earners to do the carried interest thing or use a Backdoor Roth IRA or be able to do 1031 exchanges, it has the power to change those laws. But you can't fault those who take advantage of the law as written.
In our case, we paid 32% of our gross income in federal income, payroll, and state income taxes for 2016. About 1/3. That is dramatically more (by both percentage and absolute amount) than we paid when we had a five-figure income. In fact, there was one year as an attending physician when that figure was as low as 4%. (Join the military and get deployed if you're interested in getting your effective tax rate that low.) But it was routinely in the 15% range. It is now more than double that.
Our marginal tax rate is 46% (should go down by 3-4% starting in 2018). If we earn one more dollar, 46% of it goes to taxes. Some reasonable questions to ask yourself when presented with that sort of data is, “How much is enough?” How much of the money I make by working should go to pay for functions that we all use? What is the highest an effective tax rate should be? What is the highest a marginal tax rate should be? Is 1/3 enough? Is 1/2 enough? What is the lowest an effective tax rate should be? What is the lowest a marginal tax rate should be? These are political questions (meaning ones that reasonable people can disagree on) not mathematical ones, but they are questions that seven-figure earners wish lower earners would at least consider a little more often because it really does have an effect on how much work we do, what kind of work we do, and as business owners, how many jobs we can and do create.
We recognize that we pay a huge percentage of the overall tax burden for the country. We're not necessarily looking for a tax cut, but an occasional “Thank You” for what we're paying (and the jobs and valuable products and services created by our businesses) and a little less vilification would go a long way. We recognize that our tax burden is a first world problem, and one that we're glad to have. We know that the only thing worse than paying taxes is not having to pay taxes.
We Could Spend a Lot, But Often Don't
You might assume that someone that makes a million bucks a year spends a majority of that. That's probably not true. A large chunk of it goes to taxes (32% in our case.) Another large chunk is saved if we're wise, since we're probably HENRYs trying to make hay while the sun shines. Typically someone making a million a year is going to be spending less than half of that. In our case, we spend about $150K a year, and that includes the years we buy a car, boat, or major home remodel. Surprised? You shouldn't be. It's more common than you realize. Don't get me wrong, $150K is a ton of money. It's nearly twice what WCI Network partner Physician on FIRE spends and 5 times as much as Mr. Money Mustache spends. Given that we don't have any debt payments, it really goes a long way. But it's an amount that could be spent by someone earning the average physician income. We live like doctors, not movie stars.
We Still Have Financial Concerns
We don't worry about many of the things that low earners worry about. Going to the hospital isn't going to bankrupt us. We're not worried about putting food on the table or clothes on the backs of our kids. But we do have plenty of financial worries. Many of those worries are the same ones lower earners have and the same ones we had before we had a seven-figure income.
College
Believe it or not, we worry about paying for college for our children. We know that the income tax code is not the only progressive aspect of our society. College is also quite progressive. Our children won't qualify for need-based loans, much less grants or need-based scholarships. Some of the best schools in the country are free to the children of lower earners, but we'll be expected to pay full freight. And that cost may be as much as 2 years of our net income if we have multiple children. College is all on us and our children. We either need to save the cost up in advance, or keep working to cash flow it until they're done.
Income Loss
We worry about income loss. We know that seven figure incomes are pretty precarious. If you lose a job that pays $30,000 a year, you can probably go out tomorrow and get a new one. But how many jobs are out there paying seven figures? Not very many. And how many more great business ideas do we have? Maybe none, much less the time to start over and grow them to seven figures. We know that sheer luck and privilege likely played some part (again reasonable people can disagree on the percentage) in growing our income this high. The business cycle is precarious, and even businesses that were once thought to be unassailable go bankrupt all the time. This is particularly an issue if we're a HENRY due to just recently acquiring this income or if we overspend and haven't built much wealth yet.
Our Children
Now, THIS is seven-figure entertainment.
We worry about spoiling our children. We didn't grow up with these kinds of resources available to us. Remember most millionaires are first-generation rich. We want to give them the opportunities that our parents couldn't give us, but it makes us sad (and mad) when they may not seem to appreciate it. We worry about what they are going to do with their lives, knowing the likelihood that their income will be anything like ours is fairly low. We worry about the consequences of leaving them a small (or no) inheritance. We worry about the consequences of leaving them a large one. We worry about whether we should have them in a private school. It wasn't even an option when we made less, but what if they're missing out on some advantage because of it? We want them to be in a safe neighborhood with good schools, but we also want them exposed to a broad, diverse portion of society. We struggle to find that balance.
Cash Flow
We worry about cash flow. Screwing up your monthly budget when you're making and spending $5K a month is relatively hard to do, and the consequences are relatively minor. But if we do a poor estimate of how much we're going to owe in taxes this year, we may be hit by an unexpected $200,000 bill next April, including tens of thousands in penalties and interest. Making sure the money is in the right place when it needs to be there is more than a trivial concern, and one we rarely had with a lower income. As a result, we tend to carry more of our money in cash. That might be just sitting in our checking account, savings account, or brokerage sweep account earning little and causing a drag on our investment returns. Managing money is work, and just like at most jobs your reward for doing it well is even more work. Investing gets a lot more complicated than just putting your 401(k) on auto-pilot. Budgeting on a highly variable income (as seven-figure incomes usually are) is tricky. Is it a great problem to have? Sure, and we're thankful to have it. But to pretend it doesn't create challenges is ignoring reality.
Giving Well
We worry about giving money. Just like not all lower earners are charitable, not all higher earners are charitable. But many are. The same qualities that led them to be successful in business, their profession, and their career lead them to want to help others. When you're only giving a few hundred bucks a year to charity, the consequences of doing a poor job aren't that big of a deal. When you are giving a few hundred thousand a year, they become much more acute. If you give in the wrong way, people can lose jobs or be incentivized to do things they shouldn't do. Picking the right causes to support and doing it in the right way really does matter. It turns out that just like earning, saving, and spending money is work, so is giving well. We're proud that 2017 was the first year we gave away more money than we spent and hope that trend will continue for many years to come. But we certainly want that money to do more good than harm!
Legacy
We worry about our legacy. If we are financially independent, what will we do with the rest of our lives that matters? Can we still muster the motivation to turn off Netflix, get off the couch, and go to work? What will happen to our business or farm or property when we go? Will the wealth we leave for heirs be squandered in one generation or three? Sure, it's not the same as worrying about how to pay for our prescriptions or our kids' piano lessons, but it is a worry nonetheless.
Liability
Mo' Money, Mo' Problems. This actually wasn't a big change for me. As a physician, everyone already assumed we had deep pockets long before we ever did. But the wealthy do have more to lose, especially since they're much more likely to have a significant portion of their assets in non-asset protected investment accounts.
What do you think? Did you find any of this surprising? Why do you think that is? Does your household have a seven-figure income? What do you do for a living? What does your lifestyle look like? What are your financial concerns? Comment below!
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Excellent post Whitecoat! As a long time reader let me 1st congratulate you on all your success. You deserve every last penny of the 7 figure income! You have worked extremely hard for it. My second point is I concur with the same worries about my children. My children will grow up in more wealth than my wife and I had. We have conversations often about how blessed they are because of that but also how the potential is for spoiling them. There is definitely a balance for sure! As my children grow older my friends and I always say, “bigger kids bigger problems.” I can relate that to your income as well. bigger income bigger problems. Because you have so many more choices and options than you had when you just made your military salary. Congratulations on all your financial success!
Totally agree here. Even with our “normal” doctor salary we worry about the silver spoon issue. Hope to raise kids that still have real life perspective. Ones that can still Golf at a municipal course and not do it with a frown cause the greens aren’t as nice as “the clubs”
I was thinking about this issue, too, a few weeks ago during a staycation spa day at The Peninsula hotel here. I walked by the pool to sounds of children playing. They weren’t our kids, but we could afford to stay in a hotel that nice with our kids. And I thought of yelling at them: “You don’t know how good you’ve got it! When I was a kid, I was thrilled when the motel room we stayed at had a door that opened to a hallway, not the parking lot!”
Great post, huge congrats on your success. You’ve obviously worked hard and earned it. Actually, it boggles my mind how you have time to be a full time Doc, write a blog , do a podcast, and do the outdoor activities you do. Do you sleep?
The definitive answer to “Do you sleep?” (from Thank You for Smoking):
Nick tucks his son into bed in the late evening in Washington. The phone rings.
Nick Naylor: Hello.
Jeff Megall: Thought I’d give you a little update.
Nick Naylor: Still at the office?
Jeff Megall: Do you know what time it is in Tokyo, Nick?
Nick Naylor: No.
Jeff Megall: 4 pm tomorrow. It’s the future, Nick. Anyway for Pitt to smoke it’s 10 million, for the pair it’s 25.
Nick Naylor: 25?! Usually when I buy 2 of something I get a discount. What’s the extra 5 for?
Jeff Megall: Synergy. These are not stupid people, they got it right away. Pitt and Zeta-Jones lighting up after some cosmic fucking in the bubble suite’s gonna sell a lot of cigarettes.
Nick Naylor: Well for that kind of money, my people will expect some very serious smoking. Can Brad blow smoke rings?
Jeff Megall: I don’t have that information.
Nick Naylor: Well for 25 million, we’d want smoke rings.
Jeff Megall: Oh, one other thing. You’ll be co-financing this picture with the Sultan of Glutan.
Nick Naylor: The Sultan of Glutan, the one that massacred and enslaved his own people? Aren’t they calling him the Hitler of the South Pacific?
Jeff Megall: I can’t speak to that. In all my dealings with him he’s been a very reasonable and sensitive guy, he’s fun, you’ll like him. [his phone beeps] Oh, thats London calling, it’s 7 am in the old empire.
Nick Naylor: Jeff, when do you sleep?
Jeff Megall: Sunday.
Well, I’m down to 3/4 time for the last 20 months and going to 1/2 time this summer, so that’s part of it. My goal this year is to cut back to full time work! That means cutting back on both clinical work and figuring out better ways to outsource WCI work.
Congrats on that strategy! The success of this site, while maintaining a successful professional career has been inspiring. Hoping you write a time-management post one of these days…maybe you have and I missed it. Have fun!
Here you go: https://www.whitecoatinvestor.com/top-ten-wci-efficiency-secrets/
That is great. We have a doctor in Memphis who is always running for congress. I think that helping people as a doctor is far more important and valuable than being a congressperson. I hope you will continue to practice, and continue to support our future medical professionals. We need more such who both want a great life and serve people in their profession.
The bottom of this post is what I can really relate to. I worry a lot about my kids and how they’ll turn out. I want them to be appreciative and respectful. I want them to work hard and be dedicated. The amount of money we make and what that will do to them worries me. So, we raise them very very intentionally. We talk A LOT about what others experience in life and how that may not be like ours.
We also struggle with educating our kids and how we hate that, in the part of the country we live in, choosing a good school often means less exposure to diversity. We really hate that. It’s a tough spot to be in.
I also relate to the giving portion. Taxes are zero fun. Yet we still feel it is our responsibility to give money to those in need. As high income earners we feel it is a responsibility of ours to help people come behind us that need help and to help those that cannot help themselves.
I am really glad you brought up those topics at the end of this post.
Good points, and it is not only in schools but in church and other activities. One way to address it is have your children participate in various activities including some charities. There are many that could give your children exposure, and help those less fortunate than them.
Fantastic post. Every email I get from the site, I think before opening, “this can’t possibly be as good as the last one,” yet the quality is unwavering. Thank you for being so giving with your thoughts and time. 7 figure earners may be pretty rare, but I can only think of one who publishes his email address and encourages people to contact him so that he can help them succeed as well. Thank you!
Great insights Jim. More power and God’s grace to you.
I loved this post. You are my entrepreneurial physician hero dude. Thanks for having the gumption to write it.
My brother is a mechanic. Once, he asked me what it was like to be rich. That was 15 years ago when my salary was about $220,000, I had just built a large home, and had a negative net worth of about – $350,000. Our combined student loans of $120,000 had been paid off, and my retirement account balance was about $150,000.
I told him that I could buy any kind of beer I wanted, eat at McDonald’s whenever I wanted, had a lot more insurance and took nicer vacations.
When I told him my total tax bill for 2016 (all taxes including property), he said: “I think that would kill me”.
1. Does this change your IPS? Do you go more conservative since you’ve won the game? Do you go more aggressive because you have a chance to leave a larger legacy behind?
2. Does this change any of the rules? E.g. “don’t borrow more than 2x gross for a mortgage” Are 7 figure earners being reasonable when looking at homes $3M+ or should the rules be adjusted because it would be too optimistic to expect that kind of earning power over the course of a 15 year mortgage?
Thanks and congratulations on all your continued success!
This was a very sobering post. My wife and I are fairly new attendings tackling the debt problem. I guess I had the belief that once we had a positive net worth in a few years, the rest of this finance stuff would be easy. It looks like the pot of gold at the end of the rainbow is still a little bit further away.
1. So far the only change we’ve made to our IPS was to go from 67.5/25/7.5 (stock/bond/real estate) to 60/20/20 a couple of years ago. Given the amount of business risk I face, the equity risk seems to pale in comparison. We did deleverage by eliminating all our debt though. I’m not sure what the right answer is to your question; I suppose it is different for different individuals. I think if I were 60 and barely had “enough” that I would dial it back. But if you have twice “enough” at 40? Maybe you can be a bit more like Warren Buffett. Even if he lost 90% of his equity value, he’d still be fine.
2. I think you can change the rules a bit if you want simply because you have more disposable income. It’s probably easier to stretch with a higher income (although your taxes also probably get hgher). However, you should have less need to do so! Plus there is the precariousness of the income that should be taken into account. It would kind of suck to have to move if you had a bad business year or two. So overall, I think sticking to the 2X guideline is still probably a good idea.
‘There is this idea out there that high earners aren’t paying their fair share because they know (or can afford to hire someone who knows) all the tax loopholes. ‘
I believe this idea has merit, but NOT when it comes to people like you. You do pay a lot of money in taxes, but what you make is really just chump change compared to multi-billion, multi national corporations – the top 1/10th of the top 1%. THEY are the problem, and they are NOT paying their fair share.
Do you know how much amazon paid in taxes last year? -117 million. Yes, you read that right. We, the taxpayer, OWED Amazon money! Jeff Bezos is sitting on 100 Billion dollars and we are paying him. Verizon, AT&T have all had money OWED to them by the taxpayer, thanks to these loopholes. So, the loopholes are phased out for YOU, but clearly not for these corporations.
I’m going to push back a little bit on this one just to give you a different perspective.
Corporations don’t pay any taxes at all. That’s right. Despite the presence of a corporate income tax, these organizations aren’t paying the taxes. Their owners are, in the form of lower returns. So when we tax corporations, we’re really lowering the return on your pension, your 401(k), your Roth IRA etc. I own Amazon right along with Jeff Bezos. So do you. Does he own more of it than you do? Sure. But he also pays a lot more in taxes than you do.
So there are likely some good reforms that could be made, but taxing corporations and lowering the personal income tax isn’t some tax policy free lunch. That money has to come from somewhere, and that somewhere is the pockets of the individual owners like you, me, and Jeff Bezos.
If we think Bezos and others with incomes of $10M+ or $100M+ or whatever should pay more, then we (through our Congress) should install a new tax bracket.
I totally agree, Jim. All taxes are ultimately paid by people. Some forms of taxation are very transparent about who is paying (income taxes) and some are quite opaque (corporate taxes). Regardless, people are the ones that pay the tax. I agree that corporate taxes are largely paid by the shareholders in the form of lower returns, but some of the corporate tax is also paid by employees in the form of lower salaries, and some by customers in the form of higher prices. The proportions paid by each of those stakeholders is up for debate. I think these opaque forms of taxation, along with a complicated system of deductions, are why so many people believe the tax code is “unfair.” The easy solution, in my mind, is to raise our revenue with a transparent form of taxation.
Corporations don’t pay taxes, their owners actually pay them indirectly or their customers. Amazon’s wealth is almost all stock, not cash. I do wonder what corporate “loopholes” you are referring to? How about our federal government stick to less spending and allow states to decide which benefits they want to and can afford to provide?
Great post as always. I look at taxes as a charity for people who can’t afford to contribute significantly. I believe that everyone should pay something but feel that it’s fair for the rich to pay a lot more (even though this is increasingly including my family). The poor pay proportionately more sales tax for necessities. The reality is that even if the lowest earners paid something, it would not significantly affect the tax bills of the highest earners. I believe that you’re success is well-earned and you are providing a lot of value both in EM and WCI and think a high tax bill is part of that success. My family’s tax bill is high as well though not quite as high as yours and I don’t begrudge it bc we have enough and can afford it.
FWIW I really appreciate how transparent you are about the financial implications of WCI. Too many successful bloggers pretend that they are getting rich with just their day job and it makes it hard to take them seriously.
I agree that taxing lower earners more wouldn’t make a big change in the size of the pot. What it would do, however, is give them some skin in the game. More of a principle thing than a fiscal thing. Likewise, I’d like to see the welfare system separated from the tax code rather than embedded in it with things like the Earned Income Credit. But those are minor tax policy quibbles. I think very few people think the tax code should be completely flat. Most are in favor of a progressive tax code. But EVERYONE has an opinion on how progressive it should be, and for about half of Americans it should be more progressive and for half it should be less progressive! That’s why it is where it is!
It’s a little bit like Medicaid ED co-pays. In the ED, I see lots of Medicaid patients with trivial complaints. I’m convinced a big part of that is the $3 co-pay in my state. I’m not sure that’s fair for a middle class dude to have a $500 co-pay, a $3000 deductible, and 20% co-insurance while Medicaid Mike has a $3 co-pay and no deductible or co-insurance. It’s not that I think Mike needs a $500 co-pay. Maybe it should be $30. But enough that he thinks “I’d rather have the $30, I’m going to wait and see my PCP tomorrow for a $10 co-pay rather than go to the ED for my URI right now.” It’s just a little too progressive to the point where it is incentivizing people to do the wrong thing.
You’re correct that sales tax is a flat tax (not regressive, but flat.) Social Security, however, is in at least one way a regressive tax (although progressive in its payouts and the taxation of its payouts), but that was by design so it was more like a retirement plan than a tax so it would pass.
As far as the “taxes are my charity” argument, I guess I disagree a little. While taxes can do some social good just like charity, the fact that they are mandatory is an important distinguishing characteristic. I don’t think it does anything for my soul to pay taxes, whereas I think giving voluntarily to charity actually helps me become a better, less selfish person.
My flatus would be rainbows if our medicaid pts had a co-pay. They pay NOTHING here. The mom who brings in little Johnny for a fever and says “Oh, can you check out Sally, Billy, Ricky and Jenny, while you’re at it?”…generates an extra hour 40 minutes of work for me, costs the system several hundred dollars, and Mom doesn’t care because there is literally no downside to her.
This I think we all agree on. Even a $10 medicaid co-pay in the ED would do wonders.
In the army ER we sure wished there was some co-pay. If the general thought the ER wait was too long he’d make us increase staffing, and just like commuting when they build faster highways more people come in until the wait is the same as before. I do think, though, that there should be no co-pay for a sick child because I am sure some of the folks we saw in army ERs would Buy a pack of cigarettes before they would pay for their kid to be seen when ill.
Don’t be so quick to dismiss the earned income tax credit. I do a lot of low income tax prep volunteer work. Lots of Walmart moms (people who work entry level jobs making perhaps a bit more than min wage) rely on eitc to get them by. They simply could not make it without it.
While the sentiment that “everyone pays something” sounds right, when it comes to the working poor, i dont know that there is a solution. Also the eitc is credited with getting people off welfare and into the workforce so it has other benefits.
GREAT post. You really put it out there for your readers to see!
I’m not against the program. I’m against the program being part of the tax code. I think our welfare/redistribution programs and our tax programs should be separate. Totally minor quibble though.
Not sure why just the one program should be separated out. If we’re separating it then shouldn’t we also have a separate program for just housing subsidies combining rental supports and the mortgage interest deduction? And whatever X other programs that would stand alone. Likewise the way payroll taxes are hived off from federal taxes also gives a false impression of how much us being contributed at each income band. Total tax burden makes much more sense to look at when considering your questions about what we want our society to look like.
Great points about the relationship between corporate and individual taxation. People have a hard time getting their head around the idea that a corporation is just a group of people choosing to do stuff in the world and not something that exists in the absence of those people.
I think it would be more obvious what was going on if everything was separated out, yes. But I also think EVERYONE should pay quarterly estimated taxes so they really knew what they were paying in taxes. The employer withholding, while it probably raises more money as there is less cheating, is also out of sight out of mind.
Medicaid Mike pays a $0 copay to see PCP, I think, in Utah. But 30 to see his cardiologist. So he sees me and the ER frequently without seeing those special ists. Difficult balance of course.
I’m not sure that’s a bad thing. Maybe $0 for PCP, $15 for specialist, and $30 for ER, I don’t know. Ideally enough for them to think twice about whether they can wait a couple of days.
I worry about what kind of inheritance to leave my children as well. This may sound weird, but I am in a much better position today as a result of my wife’s 300k student loan debt. It caused me to “wake up” and take on personal finance as my second job. 2 years later the debt is gone, we are focused and living with intention. If I didn’t have that wake up call I probably would of just coasted through, made dumb doctor mistakes etc. I was not burdened with student loans thanks to my parents (and that undergrad was tuition free and went to low cost state school for medicine). I want my children to have to come to the same conclusions, but I worry a big inheritance will interfere with that.
So don’t leave them a large inheritance, there are plenty of worthy charities to consider or make a foundation to continue projects you desire to support in the long term. I used to believe that since I inherited some wealth I should pass it on to my children, now I know that they really don’t need it and I would be better to help some other more needy people with my wealth.
I’ve wondered many times how my decision to do the HPSP scholarship for medical school affected how I thought about money. In two important ways my financial life was different from a typical doc- we actually had an income to budget with during medical school and we had many small income increases instead of one large one like most docs.
A trust with distribution limits and incentives will eliminate the problem of children feeling entitled and having no self motivation to achieve their own success in life.
Thanks for the continued commitment to publishing original and authentic content, Jim. It continues to help others, whether they’re at the beginning of their careers or are fortunate enough to also be wealthy/FI enough that their concerns more closely mirror your own above.
I would also be interested in the same type of insights that Janette was asking about above- how do all of the considerations/concerns you list actually change your plan of action? That would be instructive for readers to understand…
I certainly don’t sweat the details as much as I used to. For instance, as mentioned in the post, we’ve got a lot more money sitting in cash right now than anyone would recommend simply because of cash flow issues and because I haven’t yet gotten around to doing April’s investing yet.
I think a common thread is concern over impact on our children. I am definitely one of those first gen wealthy; my grandfathers were laborers. I was concerned enough back in the 90s to instruct my lawyer to design a trust that would seek to prevent dependence on unearned wealth. Among other clauses was gaining control of 1/3 at age 35; 1/2 of remaining at 40; and all remaining at 45 with a “performance bonus” of an early 20% at age 30 provided college graduation and working a year and a day prior or satisfactory progress toward completing a professional degree .
Now I’m thinking about those yet-to-be-born grandchildren.
I’m with you on the college tuition. I graduated from high school in a state that waived tuition to state universities for top 10% graduates. My oldest was a valedictorian and got nothing for attending public ivy. I likened it to parking a car at the campus every year, leaving the keys on the dash over and over. First world problems are better than third world problems but still…
Congrats on your success!
My grandfathers were a miner and a farmer, both WWII vets. My father was the first in my line to get a bachelor’s degree. I was the first to get a graduate degree of any kind. My siblings have the following degrees: a masters, doctorate, doctorate, master’s, working on a master’s, and a bachelor’s. All are living a middle class or upper middle class life. Now people on average are wealthier and better educated than they were two generations ago, but in many ways we are just standing on the shoulders of giants.
Too right and amen to standing on the shoulders of giants.
Similar story: My father-in-law and all of his brothers were drafted in April 1942 out of a small coal-mining town. All came home and GI- Billed to something and somewhere else.
My eldest received a HPSP and is a year out from graduation.
Lies! Pretty sure I was the first to get a graduate degree… ????
Okay, maybe so. But I beat you to the doctorate.
My eldest chose two tuition free scholarship years to a Community College, finished their honors program with a 3.93 GPA and got a merit based scholarship to the next two years (just as I did). Her next two years at the private school cost $60,000 with her scholarship and she worked on campus 15 hours a week to pay $4000 toward her food plan. She is out and making about $40,000 a year.
The next eldest just chose the less expensive of her top two choices and her four years on campus will cost about $65,000. She was told we had $65,000 for her and if she went to a more expensive school, she would have to borrow the rest. She wants to become a physical therapist, so she will be on the hook for graduate school tuition of $11,000 a year (and live off campus).
The next two will get the same options. None of my kids will qualify for anything unless it’s based on grades. That is much different than my early years when I went to Community college on Pell grants. I’m glad to be of help to my children. I’m trying to help them, but not “spoil” them.
In some states tuition is free for everyone who qualifies, if it is an issue doctors could just move to one of those states.
It’s a tricky line, isn’t it, and you don’t need an income of anywhere near 7 figures before you start worrying about that. I know a rheumatologist who spent a million dollars on the educations of his four children, otherwise living a fairly middle class life. That was simply his priority.
Ivy vs State: My BFF and her husband (VP big company) with 5 now kids promised them the equivalent of State for 4 years, any extra (from work, scholarships) they get to use toward further ed or a house etc. I went Ivy nearly free given my parents’ low income and wealth. I don’t think it’s fair my kid would need big loans to go Ivy if she got in just because her parents are wealthier. So it’s always been my policy that I’ll go back to work to put them through Ivy/ other top tier if it’s an option. I refuse to fund private ed at a non top tier place, though, since I’m not convinced it’s better than State for the price. Just another progressive tax which I’m willing to pay. I think my friends should also be willing should their kids get in somewhere top tier, but they disagree (and if I had 5 kids I might change my opinion also).
“If we earn one more dollar, 46% of it goes to taxes.”
This really resonates with me. I often think about that when deciding if I should work more / harder. I’m in a similar if not higher incremental tax bracket. The squeeze isn’t worth the juice. Progressive tax rates like this start disincentivizing hard work. Could you imagine if a Bernie Sanders type gets elected next cycle and they institute much higher rates, like the often touted 90% rate. Who in the world would continue to work beyond the point where the 90% rate kicks in?
There would be a mass Ayn Rand opt out…
Top rate was in the 90% range during WWII and after. Down into the 70%s after the Kennedy tax cuts, and only got down to below 40% in the Reagan years (http://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates). People used to do it, although people were a lot more trusting of the appropriateness of government spending back when the government was a lot smaller and not trying to micromanage all our lives.
I’m sure that if there was a 90% rate instituted our friends in Congress would make sure there were lots of loopholes inserted to help their buddies and contributors.
Yes but as WCI pointed out many of these fancy loopholes don’t apply to us schlubs who are out there actually working and earning a W2 income.
There were a few things that Kiyosaki was right about in his Rich Dad, Poor Dad, and one of those was just how little tax creativity/control there is available to an employee. If your employer treats you well with health insurance, HSA, good retirement plans etc then it’s usually fine, but when you get a crummy set of benefits and can’t really go out and choose your own, it can really hurt.
I’m pretty sure 90% is on the far end of the Laffer curve and suspect 70% is as well. I’m not sure the 40-60% range is though. There were lots of Californians with a 50%+ marginal tax rate, at least up until last New Year’s Day.
Fantastic post (again). Thank you !!
Just a minor point: You are giving credibility to term “Laffer curve “. Many people are already under the impression that it is a real curve. Nothing could be further from truth. It is a off-hand curve ; drawn on a paper napkin to illustrate a point during a meeting. It is not based on any data.
According to Wikipedia, the Laffer curve was popularized in the United States with policymakers following an afternoon meeting with Ford Administration officials Dick Cheney and Donald Rumsfeld …
Via email:
regarding the Laffer curve , I will like to add the following.
If it was real, Buffet will not be tap dancing (his own words) to work
everyday.
And at $5m net worth (on single income) and a 47.5% bracket, I am yet
to feel it at age 47.
Granted these are just 2 data points, but I strongly believe that
after a certain point, you keep working for self-actualization rather
than money.
Furthermore, I scanned the scholarly paper Larry posted a link to as
“plenty of evidence” for Laffer curve. Here is what the abstract of
the paper says.
“We show that the US and the EU-15 area are located on the left side
of their labor and capital tax Laffer curves”
“US can increase tax revenues by 30% by raising labor taxes and 6%
with capital taxes”
So even the “evidence” seems to point that increasing taxes won’t be
as detrimental as professed.
Please note that I could barely understand the abstract. The actual
paper was all Latin and Greek to me.
Thanks. You are awesome. I wish I had run into you a decade earlier.
And I hope my son learns from you.
I agree it is a paper napkin concept and not something that has ever been rigorously defined by some sort of sociological study.
Are you suggesting the concept isn’t real? That there is no marginal tax rate at which people work less, produce less, and pay less in taxes? That seems unlikely to me. I think the concept is real, just that nobody has ever really defined where the Laffer curve is. European experience would suggest it sits higher than most in the US who like to talk about the Laffer curve would like to admit.
Part of why I cut back to part-time was my high marginal tax rate. As PoF pointed out the hours you drop are the ones where you are paid the least. So I agree high tax rates can decrease the desire to work/earn.
I agree it’s real. It’s a huge reason (in our two physician household) that my wife works part time/three days a week. If she worked two more, we’d keep her pay from Thursday, and basically give all of Friday’s pay to the federal and state government. Seemed likes a no brainer with kids at home.
Each “age” of America has had a fabulously wealthy Rockefeller-type at every level of tax rate. Taxes don’t disincentivize work. They just incentivize different work. Perhaps that work is better ways to not pay the tax, but the drive to be wealthy doesn’t magically vanish.
Tax credits that drop $2 for every extra $1 you earn DO disincentivize work, but marginal work, assuming your income has to rise THROUGH the bracket. The same people that wouldn’t do more for $20K->$25K, DO take the chance to jump to $40K even if it’s “more” work.
That’s my 2c. I will say this is the first time I’ve really felt like your post just didn’t speak to me in ANY meaningful way. It really did seem to parrot the views of every million-plus earner, whether they bootstrapped it or not. I’m curious if you ever wrote about your “relationship” with taxes WHILE you were earning in lower brackets? Do you see your perception as having changed?
I don’t think so but you tell me. I’ve been writing about taxes for years. I think I was in the 28% bracket when I wrote these two.
https://www.whitecoatinvestor.com/doctors-dont-pay-50-of-their-income-in-taxes/
https://www.whitecoatinvestor.com/10-reasons-why-i-pay-less-tax-than-mitt-romney/
Plenty of evidence based work on the Laffer Curve. Here is one: https://www.sciencedirect.com/science/article/pii/S030439321100064X
Interesting, but it does support my assertion that our tax rates are still on the downhill side, not that I think the Laffer curve ought to be the main method used to determine them.
Oh, sure. I was not disagreeing. I just like the discussions to be empirical when possible and was reacting to your agreement with the assertion that the curve was a paper napkin concept.
In California 2018 taxes I suspect will be higher than before in 2017 without limitation on state write-offs.
The problem with this is it doesn’t show what incomes these rates apply to. If you look at that data and adjust for inflation, these high rates didn’t kick in until $2,000,000 in income (often much higher). I think the Bernies of the world want to institute a high rate at a much lower level of income. It looks like the absolute worst time in history to be a high income earner from a tax point of view would have been 1981, where income above $215,000 was taxed at 69.125%. If that happens, count me out!
Before dropping to part-time in my job as an anesthesiologist, I calculated how much I was being paid for the 40% of the clinical work I ultimately gave up. The results were remarkable. An excerpt from the post https://www.physicianonfire.com/solong/ (which was calculated early 2017, so the math will look a bit different now). I also continue to have full benefits, profit sharing and employee match, which makes this part time job even more enticing.
“The 40% I’m giving up? That’s the 40% of my salary that gets taxed the heaviest at both the state and federal level. On an after-tax basis, those are the hours for which I am reimbursed the least.
Based on a $400,000 salary, which is not my exact salary but will suffice for today’s exercise, my salary drops by $160,000, but my take-home pay drops by $92,000. I’m dropping the portion of my pay that is taxed at approximately 42.5%.
The $240,000 part-time salary results in $56,000 in income taxes after all deductions and exemptions, for a new effective tax rate of 23.3%. This was calculated using Taxcaster for a one-income family of four, married filing jointly, in a high-tax state with $43,000 in tax-deferred investments in a 401(k), 457(b), and HSA.
Working full time, post-tax compensation (after-tax income + match / profit sharing is $298,000 per year, or $24,833 per month. Working an average of 16.5 units per month, I am compensated an average of $1,505 per unit ( ~ 12 hour shift) after taxes are paid.
Working part time, post-tax compensation is $204,000, or $17,000 per month, which works out to $1,700 per unit. In other words, I’ll be keeping an extra $200 per surgery center shift, or $400 per 24-hour hospital shift by working part time.
When extrapolated over the course of a year, the 6.5 additional units worked per month as a full time employee result in an extra $7,833 in after-tax compensation, or $1,205 per unit. Compared to the first ten units worked in a month, the final 6.5 units are compensated at nearly $500 less after tax. That’s $500 lower after-tax compensation per surgery center shift, or $1,000 less per hospital shift for those shifts that bridge the gap from 0.6 FTE to 1.0 FTE.
Of course, the tax system is more gradually progressive, but I’m simply comparing two salaries. The math for the year would work out the same for someone working only the first 60% or last 60% of the year, or taking 4.8 months off in the middle.
I have been well aware of the progressive nature of our tax code, but running the numbers and applying them to this decision-making process has made the right choice clear. Going part-time allows me to drop the shifts that are effectively compensated at a 34% lower rate.
Why wouldn’t I want to do that? Can you say “disincentive to work more“? I can.”
Interesting way to think about it. But I would argue that what allows you to do this/incentivizes you to do this has more to do with the fact that you spend $80K than that you were being taxed so heavily on the additional earnings. If that additional money was actually improving your life, you’d probably be willing to work more/pay more tax in order to get it.
PoF, I’m in the same spot. “Who is John Galt?” Jim, you’ve done a nice job not going all Ayn Rand. I would not be so gracious.
My biggest worries are children (how to raise them to be happy and successful in a home of relative abundance) and liability (now that I finally have something to lose).
It helps that I read both Fox News and the New York Times. I do lean a little right politically, but not very far. In Utah it feels like I lean a little left! I was a state delegate to the state Republican convention once and boy did I feel out of place as a moderate.
I’ve read Rand, but I’ve also read Marx and found useful pearls in both of them. Take what’s useful, leave the rest, like everything else in life. I wish more Americans would learn how to disagree without being disagreeable.
To be fair, there’s a pretty big range between 46% and 90% and the studies show you can get a fair bit higher than 46% before most people start opting out of work.
However, there are two effects here and you’re only mentioning one. Not only do you pay more in taxes on additional earnings, but those additional earnings also have lower marginal utility. What am I going to do with an extra $100K at this point? 99% of it is going to go to taxes, savings, and charity. I might not spend a bit of it. THAT is more disincentivizing to me than the fact that 46% of it goes to taxes. It’s harder to get excited to work more in order to grow your nest egg and give more to charity than it is to work harder in order to improve your lifestyle.
This was a great post and not really unexpected in the details. I might choose to replace “worry” with concerned, and eliminate the idea that “privilege” had anything to do with the success. Sure luck, but I bet a lot of hard work goes into the creation and maintenance of this web site. I also bet you did not expect such success but rather hard work and that luck has resulted in it. Thanks for the insight.
Yes, privilege is a bit of a politically loaded word these days. I tried to use “luck and privilege” to appeal to those on both ends of the political spectrum, hopefully with some level of success to depoliticize the post as much as is possible when discussing a topic like this.
My wife and I have learned a lot from your writing and we are on track to have financial security for ourselves and our children. I appreciate your candor, and recall throughout the last few years of reading your work that you’ve always mentioned your intent was to make a profit. Seems you’ve earned your high income and it’s a mixed blessing-I would be glad to make 7 figures but I’m not sad that I don’t. My only regrets are going to the “5 star” undergrad instead of a perfectly good state school (we all use the same textbooks), and not choosing a specialty (though I wouldn’t talk anyone out of primary care, since a few seem to like it.)
Good luck to you and thanks.
I don’t blame you. I’m 100% sure I was just as happy on 1/2 my current income, maybe more happy. My taxes and business have certainly become more complicated and required more time because of it, none of which is particularly pleasurable.
Great post. I think one of the underappreciated positive aspects of your work has been financial transparency-that it’s ok to discuss finances without automatically being considered gauche for doing so.
I worry tremendously about my kids being spoiled or envious. I have the ability to provide for my kids in ways my parents never could for me, but there’s doubt whether that’s a good thing or not.
I too worry about my kids, and I’m not in your income level. The easier it is for us the harder it is for our kids.
Some other 1st world problems..
– most hospitals don’t want to be cutting you anywhere near a 7 figure check (even if they benefit immensely from it) so if employed or contracted you’ll have institutional forces coming at you all the time
– also once other partners or docs catch word or that income you’ll get their collective wrath as well. The “rising tide” concept doesn’t apply when egos are involved
– also as mentioned, very few free lunches in medicine (without the side hustle) and when it comes down to it the actually hourly dollar amount might not be all that different.. so as mentioned you’ll work for it
Having assets in non-asset protected accounts is certainly on my mind as time goes on. That being said, doing the right thing, having the appropriate insurance in place, and being smart can help mitigate that worry.
Great post – maybe someday I can experience an income of 1,000,000! 🙂
Depending on your age, there is a VERY good chance of it. 30 years from now, many doctors will have a 7 figure income just thanks to inflation!
Raising children to not be spoiled is probably my biggest concern out of all of this discussion. Taxes are just what taxes. We can’t change’em, just do the best we can. Manage cash flow the best you can.
I find it very hard to hold back on small luxuries when we have more than ample means to purchase most things we want. Our oldest is only 4 and I found myself having a discussion with her about not bragging. We probably buy her too much stuff.
I don’t know how I’m going to give her life experiences such as living in a single wide with 5 people. Her life just won’t be what mine was. We’ll just try to keep her mind open and educated.
I’m not sure that taking your kids along with you on a mission trip to Guatemala does the same thing as raising them in a doublewide. But I don’t know what to do about it. There are a few good books out there with some great suggestions though. Here’s one I reviewed:
https://www.whitecoatinvestor.com/silver-spoon-kids-a-review/
Congratulations on the seven figure income and thanks for all you do. I too struggle when it comes to kids. We chose to send our kids to private school. And we live in a HCOL area. This puts a serious dent in my savings rate. But I am on the path to a comfortable retirement when the time comes and my goal is not to be FIRE necessarily. If they went to public school, I could have a lot more and end up giving it to my children when I pass, but they won’t need it then. I’d rather spend some of it now as an “investment” in our kids. Whether private school is a better value or not is quite subjective and open to debate. In any case, I adopt the mentality as if I can’t pass any money to future generations. Instead, I concentrate on what values and education can I instill in them now so they can make their own hay when they grow up.
The big issue I’ve got with private school is the opportunity cost. The local private school is $24K a year. Imagine $24K a year x 13 years that you just let sit until age 40 at 5% real? You’re basically now choosing between public school plus enough money to retire at 40 versus private school instead of a more simple public vs private debate. In fact, I think I’m going to write a post about this.
Yeah, I know. It makes my stomach turn when I think about it. The Financial Samurai recently wrote a post about opportunity cost on sending 1 kid to private school from K through college. The cost? At 5.4% annual return is $1,129,781. Gulp. Looking forward to reading your post.
I got higher figures than that. Suffice to say it’s either public school + early retirement or private school. Your choice.
My issue as a progressive, and self servingly figuring ill educated neighbors are more likely to rob from me or just be crappy at jobs they do that affect my family, is that the public schools need fixing if they’re no good. I followed my parents’ rule (enforced by their income) of “don’t flee the public schools, fix them” but got two outs. For myself in the 1970s our integrated de jure high school was segregated de facto into honors track (mostly white) and non, mostly black. This century my kids went to an exurban public school with mostly white contractors’ kids, crappier than the city schools but less fighting amongst students. And they both had a few years at an officially public, but actually available to only a few elite, boarding high school. I also didn’t want to drive them to the private school (local religious barely teach actual science down here) for an hour daily aside from the money. Had I lived in walking distance and spent the money I’d have inadvertently had them attending the Jim Crow academy HRC visited to verify its racism back in the day.
Philosophically I’m a fan of public schools as well. There is public benefit in raising the general level of education.
Please do, that would be a great post! I never expected all these “worries” now that we’re such high earners. You think money will give you peace of mind but you find yourself worrying instead about giving your kids opportunities but trying to figure out how much is too much. And when is losing time with them to work more to pay for these opportunities worth it? I think we’d all pay whatever it took if it guaranteed their happiness, but there’s no way in real life to know if we’re helping or hurting. Is private school going to train them to think more creatively and network and open up doors to opportunity? Or will it instead expose them to more wealthy kids and set up their expectations that happiness requires designer clothes and cars? I loved my lower income diverse high school, hit millionaire status by 33, I’m incredibly happy and remain close with my high school friends. But did I just get lucky? It’s so hard to know.
Great article, thanks!
For such a high earner you are very frugal. I admire the fact that you don’t live an incredibly showy lifestyle given your income.
It helps that you had your HSP scholarship which actually gave you low income for an EM attending; this helped you continue with your frugal behavior. I’m much more in line with POF’s spending but most people aren’t living on 75k a year while making 400k gross a yr.
Stay true to your frugal nature! It seems like your children will be hard workers. I know doctors who earned 500k a year or more and sent their children to boarding schools. It didn’t turn out well as many of them are 30 and not financially self-sufficient. They were given too much and were lazy. Good luck and thanks for spreading the message of responsible personal finance to doctors and other professionals.
Appreciate the honesty, and yes, I do thank you (for the paying of the taxes). It is interesting to see what it’s like on your perch 🙂 I know from reading Bogleheads et al, is that when it comes to money, one should be quiet about finances around family and friends, so again, enjoy that you shared.
Normally, I’m at a 3% WD rate, after reading this post, I splurged and bumped it up to a little over 3.5. So I’m adding an extra $200/month deposit to my checking.
Excellent open and honest post. I modestly disagree with your philosophy on income taxes, but to each his own.