By Dr. Jim Dahle, WCI Founder
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!
[Note: Given the sensitivity of this topic, for this particular post, we're going to have a stricter comment moderation policy than usual. Be extremely careful how you write your comment lest you find it has disappeared and your time and effort was wasted. Personal attacks and inflammatory comments won't be tolerated. If you don't have anything constructive to say, don't say anything at all.]
I agree with all of your comments. The tax issues you raise have always bothered me. I cannot understand how some politicians and low earners say that the high earners are not paying their fare share of taxes. They never say what “fair” is. Even though, as you state, the absolute dollar figure as well as the percentage of income high earners pay is more than low earners pay they still are not happy. Entitlement is not a good thing no matter how it occurs. Both non-working welfare collectors and spoiled heirs complain about their terrible existence. Everyone should do some work that is contributing to society. I also worry about leaving a large inheritance and the consequences it could have.
Great article. I could totally relate to the worries. We are immigrants: my parents, my sister and I moved to the US when I was 19 years old and we all worked pretty hard to get ahead of the game. We were able to buy our first home within the first year of living in the US, even thought we arrived penniless. That tells you how much we worked that first year. I went to mes school and we are currently in a situation very close to your. My 2 greatest worries are losing income because my parents are now older and even thought they are in their early 60s and still able to help me manage my medical office and rental properties, eventually they will b older and needing my help. That’s the reason I’ve been working towards building a steady source of passive income. My other worry is my daughter. She is first generation in this country and she was born when I was in residency. Even thought she has witness my hard work to get my financial life to where it is right now, she has never experienced a lack of anything. I’m afraid she won’t develop that hunger for success that my family had when we came to this country. She is a great student and pushes herself a lot to be the top student in her class but other than that she has no other obligations.
Thanks again for everything you do. I got your book when I was a resident. Maybe 2012 and followed you since then. It was finally nice to meet you at the park city conference
It was great meeting you too! What an inspirational story! When are we getting a guest post on it?
I’ll be very happy to share my story in a guest post. Just let me know. Thanks
Here’s the instructions: https://www.whitecoatinvestor.com/contact/guest-post-policy/
Hi WCI:
Congratulations on your HUGE success. I remember you and I talking back in 2010 and 2011 when you were just getting his site started and man how it took off! I also agree with your comment regarding holding MORE money in cash. Last year, we changed accountants and were hit with a fairly LARGE tax bill. If we hadn’t prepared with extra cash saved in our Vanguard Money Market account, we would have been toast.
Thanks for your kind words.
By the way, are you sure you want to use that blog name/handle? It brings up a lot of bad memories for a lot of people in this space. You might want to reconsider it.
https://www.whitecoatinvestor.com/forums/topic/r-i-p-amanda-liu-aka-debt-free-doc-aka-dr-wise-money/
Thanks for sharing this. You are courageous to do so, but we all benefit from your sharing. You deserve every penny of the success you are enjoying.
It has been interesting for me to watch your comments on taxes evolve. In the early days it was more like “what are you doctors complaining about…. just have kids, get a mortgage, donate to charity…etc. Why are you guys paying such a high percent…..” And now you are facing what many of us high earners have been dealing with. Granted, it is a nice problem to be able to face. Wouldn’t a flat tax be great? It could probably be 25%. I’m not sure there is the political will to make that happen though.
Keep up the great work. I hope you enjoy many more than three years of making hay while the sun shines. I’m exhausted just reading about all of the projects you work on.
Now off I go to write an enormous income tax check to the state and the federal government. The amount I’m paying is more than I ever dreamed of making in one year!
Interesting piece. We haven’t gotten up to 7 figures, but we were close last year. We are definitely in the HENRY category. Mostly I would like to earn less money so I can work less but I found myself nodding with many of the concerns you articulated.
I agree with many of your points. It’s surprising to me how many high income earners also don’t understand the idea of marginal tax rates much less more complicated aspects of the tax code.
I don’t totally agree with your assessments of tax “loopholes” and payroll taxes. While I agree that you should take advantage of tax breaks that are available, these tax breaks don’t show up in the tax code by magic. They appear in there because someone who stands to benefit from it lobbies for it since as you say most people don’t even have a rudimentary knowledge of how taxes work. I never personally wrote to Congress asking for a back door Roth IRA as a high earner and I would annoyed if it went away, but I’m sure at some point in the past other high income earners complained that they didn’t have access to a Roth and this lead to the current state where high income earners can use a Roth by jumping through a few hoops. So I’m happy to take advantage of the backdoor Roth and I guess I would complain it went away since it’s such a cool account and I’ve only been doing it for a couple of years. I think this makes me somewhat responsible for whatever policy and budget implications these account have on the federal budget (in reference to your statement “you can’t fault those who take advantage of the law as written”).
As for payroll taxes and your comment that “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.” Like you we’ve been in those lower tax brackets before and during medical school and during residency. I think we even had several years of zero or maybe even negative effective federal income tax (got some child tax credits) when I was in residency. While I realize there is some mental accounting by the federal government for funding medicare and social security by having trust funds for these programs, the money from these payroll taxes goes into the federal treasury just like other tax dollars. If we (the USA) spend more money on SNAP, NIH grants, military, etc then the extra money to fund these expenditures adds the federal budget and therefore the deficit just the same as higher spending for medicare and social security. I don’t think it’s fair to imply that lower earners aren’t paying taxes just because some lower earners aren’t paying much or any income taxes. What amount lower earners (or higher earners) should pay is obviously up for debate, but payroll taxes are a high percentage of your income if you make $40 or $50k. However, one big reason for lower income taxes for lower earners with tax cuts over the last 20 years is to deflect the argument that tax cuts are geared too heavily towards high earners (at for Bush and Trump, not so with Obama I guess since he felt taxes should be higher on those with an income > $250k). Therefore, well-to-do people advocating for a tax cut have also led to tax cuts for lower earners thereby setting up a situation where many high earners feel that complaining by lower earners that the rich don’t pay their fair share of tax is unjustified because lower earners don’t pay much or any income tax to begin with. IMO high earners have contributed to this dynamic by asking Congress for tax cuts so high earners can’t exactly get on a high horse about the low income tax burden of lower earners.
The low earners, in fact, about 50% of the population does not pay federal income taxes. The money that they pay into SS and Medicare does go into the general treasury, however, they are going to be costing the country far more than they put into SS and Medicare when they start collecting it. Therefore, your assertion that they are in essence contributing to the cost of running the nation is not accurate. I too believe that EVERYONE needs to contribute to the cost of being in this country. If there is no skin in the game there is no interest in fiscal responsibility. An alternative, which I would endorse, is that if you are able bodied and of working age and don’t pay any federal income/investment taxes then you don’t get to vote. Why should you get a say in how much we get taxed and what it goes for if all your doing is riding in the cart?
I made no assertion that low earners are contributing an equal amount or even paying more than what they put it, just these lower earners are paying taxes by virtue of payroll taxes. As Jim said we have a progressive tax code. There’s no way to have a progressive tax system and have low earners pay for the cost of their benefits unless all social welfare programs are drastically cut and/or everyone pays a lot more in taxes. You can obviously advocate for that, but that’s just not how it is right now.
Is the only way to contribute to the country by paying federal income taxes? What about state and local taxes that some of these folks pay depending on where they live? What about people who have community service jobs (churches, charities, etc) that don’t pay that much? What about service members who are deployed and don’t pay income taxes on combat pay? I think everyone feels like they are serving through military service.
As for your comments about voting, that obviously won’t happen given past court cases and laws regarding suffrage, but I guess you could lobby Congress to pass a constitutional amendment that we readopt a poll tax or only let land owners have the vote.
Yea, that’s a pretty slippery slope isn’t it? If you have to pay taxes to vote, pretty soon it’ll be you get as many votes as dollars you pay. Lots of reasons that isn’t a good idea. Was it Starship Troopers where only Veterans got to vote? Similar issues.
I don’t believe that the poor should pay an equal amount in taxes, but I do believe that everyone should pay something. I don’t think payroll taxes equate to federal or state income taxes. Payroll taxes are basically a poor retirement and insurance plan from which they will benefit from in the future. State and Federal income taxes go toward the cost incurred in the running of this country, poorly managed albeit. I believe everyone has a responsibility to contribute to this cost. Its unhealthy for the lower earners to have no skin the in the game and it contributes to people voting for things that cost more money for which they will have no responsibility for.
I’m sure you know, but it’s unclear from your comment, but when anyone pays payroll taxes you aren’t contributing to your own future social security or Medicare benefits. You are just paying money into the treasury that gets used to pay for all the things the federal government currently finances including social security and Medicare for current retirees with the expectation that you will get some sort of benefit like that in the future when you are older. Obviously demographic trends will make maintaining the current level of benefits more difficult in the future.
It’s all fungible isn’t it? But nevertheless, your SS benefit has a very real relationship with what you paid into the system. Medicare obviously much less so.
Fair enough on the expected social security benefit.
Yes, I am aware of how the system works. Even though payroll taxes are used for other budgetary needs right now, its not the intended use and its not the reason we pay them.
Yes, but the poor will receive fewer years of benefits for the same amount of payments, since their life expectancy is several years less. Should they get a credit for that, or is it fair to ask them to subsidize the benefits of the wealthier?
That’s an interesting argument I haven’t heard before. Maybe overweight, sedentary, hypertensive people should qualify for higher social security payments too. 🙂
I’ve discovered that “fair” is in the eye of the beholder with political topics like these. I’ve also learned by sad experience that discussion of them frequently generates more heat than light.
Woohoo! Score for me. 😉
Yeah I came across it when I was digging down into the tax contributions at various levels since I do feel everyone should be contributing something. That’s what led me to the conclusion that total tax burden is what we should be looking at due to our all too human tendency to hog credit for the ways we personally contribute and discount the ways we aren’t contributing.
It’s a nice idea in theory, but extraordinarily difficult to do in reality. You see, do we really want to “reward” someone who spends a lot even if that increases their total tax burden (higher property, gas, and sales taxes)? Perhaps not. Eliminating them all and instituting a VAT would certainly simplify things. But whether that would be more fair or not is in the eye of the beholder.
To me that comes into how we shape how the taxes are applied to achieve social aims rather than whether the individual is contributing their theoretical fair share.
My definition of a “political” topic is one where reasonable people can disagree on the right answer. How we are taxed and how that tax money is spent are the most political of all questions. I take great faith in the wisdom of crowds on this topic. As Americans, we’ll muddle around a lot, but I think we’ll end up in more or less the right place because half the country will be pulling one way and half will be pulling the other. We’ll all be unhappy and it’ll be about as good as it could be.
Our government made it along just fine without ANYONE paying income income taxes until the early 20th century.
Maybe candidates running for office can’t be elected until they pass a Personal Finance 101 workshop instead. Or have to became independently wealthy first. Considering about 535 people unilaterally voted to spend another trillion dollars on behalf of a couple hundred million voters, that would have a bigger impact than insisting that someone pay a few bucks in taxes. We’ll just ignore the inconvenient fact that everyone in that “non-federal income tax paying” bucket is certainly paying plenty of other taxes along the way.
I agree with you 100%, but, even though the low earners contribution toward the federal budget won’t amount to much it will have a healthy effect on their self esteem and their voting interests. See my comment above.
“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.”
The news and politics tells you that you are vilified, but IMO that is just politics. The real vilification is for the people who have an effective tax rate lower than the middle class (e.g. ~15% or less). Often these people make multi-millions a year. I believe it is these people who are funding the political ads saying lower income people are vilifying people like you. It’s them trying to get you to fight their battles for them.
That’s an interesting assertion. Who are these people making multi-millions a year with an effective tax rate under 15%? Care to name a few and how they do it? I mean, technically you could make $100 Million a year and have it be totally tax-free if you were making it with muni bonds.
Or are you arguing that capital gains and qualified dividends rates should not be lower than ordinary income rates? There are good reasons for that in the tax code as well.
If you’re talking about getting rid of carried interest, I’m with you and supposedly so are all the politicians but for some reason it never changes.
Mitt Romney being a prominent example, was widely reported as paying about 13-15% in effective income tax. Apparently, this was through the carried interest deduction. I don’t fault the vast majority of people who get the most from our tax system legally. However, being that Romney was in congress he did nothing to fix the loopholes that he took advantage of.
I would assert that capital gains and dividends should be taxed as ordinary income and that discussion\argument can be had, but I specifically took issue with the assertion that lower income people vilify upper income people who pay into progressive system. Yes, I am sure you can find examples of people who support that position. But if you follow the progressive movements that actually get *some* traction you get things like the ‘Buffet Rule’, saying that people making millions a year should at least pay a rate equal to the middle class.
I know WCI did not want this to get political, but I am curious why you are fixated on rate and not amount. Top 1%, which will include many docs, already pays 40% of all income taxes. Top 10% pays 70%. How much more do you think is fair?
By the way, IMHO, Mr. Buffett is a great business man and investor but a hypocrite on taxes. He plans to leave his money to charity and not his family, except for several hundred million in family foundations run by his kids. Don’t get me wrong…it is a clever thing to do to avoid taxes, but why run around saying the rich should pay more?
presumably Buffett would okay paying higher taxes now since that is what he advocates. obviously higher income taxes for him now would leave less for his foundation, but there would still be a lot of money. Buffett probably has many reasons for this plan at his death including tax minimization. I don’t know that his stance makes him a hypocrite. He is simply engaging in what Jim advocates by not paying more taxes than you are required to do.
What years was Romney in Congress again? I mean, besides 2019.
The argument for lower LTCG/dividend rates is three-fold:
# 1 The money has already been taxed when earned
# 2 A good chunk of LTCGs is just inflation
# 3 Encourages investment/risk-taking
I think that’s a good enough argument for a lower rate, but reasonable people could disagree. This is a capitalistic system- the goal is to become a capitalist and get your capital working for you so you don’t have to work as much.
If you don’t think upper income people get vilified, you should check out my Twitter feed from last night after publishing this post. You’d think WCI employees were being paid 30 cents an hour to work in a sweatshop and that WCI’s chief source of revenue was killing kittens and stealing candy from impoverished Bolivian villagers.
There was a Buffett rule put in place. It’s called the Alternative Minimum Tax. Major policy failure, although it would probably be a better system if we all paid under the AMT instead of the regular tax code.
Hi WCI. Congratulations on reaching 7figure per year income! You guys deserve all the income you make!
I discovered your site as a 1st year EM resident with >300k in debt. I had the significant fortune of having a spouse who had no debt and was able to make a livable wage as a computer programmer and who honestly is content with the simplest things in life and has no real need for money. Your site inspired me to actually work on our financial health, and I went from being frustrated on a daily basis that I didn’t understand literally every other word on your site to slowly becoming at least more financially competent. From you I learned about refinancing my loans, about putting money in Roth IRA’s, about maxing out my 401k, and now about backdoor Roth IRA’s. I also learned about index investing, asset allocation, and now am slowly working my way through learning bout tax loss harvesting. All of these things, I literally new nothing about when I initially stumbled on your site years ago.You gave me the start to take controlling our finances into our own hands and the confidence to do it without a financial advisor. The amount of great financial advice I received on this site and through your book is amazing!
Now, 10 months out of residency, despite our choices to live in one of the most expensive cost of living areas, and continuing to travel internationally every few months, because that is what makes us most happy…I am happy to say we are completely debt free!
I know you here this regularly, but figure it never hurts to tell you again. You make a huge difference in the lives of innumerable young physicians. You are the number one reason that financially we are where we are today.
Thank you for running this site!
10 months, very impressive! You beat me by 38 months.
I’m readin a book “The opposite of spoiled” about how to raise grounded kids growing up with money. I recommend it.
You’re not the first to recommend that one. I’ll have to check it out soon.
As with most of your posts these days, I learn as much or more from the comments. Guess that’s a perk of being a journeyman DIY Investor, I won’t claim master craftsman status like you prob can.
I’ve worked my tail off since training and am one of the successful sub-specialists you mention. I’m giving it all up to move closer to family and also becuase I’m burnt out, another reason you mention that really high earnings don’t last.
I found several of your quotes interesting, but put 2 here.
“ 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.”
I completely agree with the demotivating nature of margin utility after FI. I can vouch. We don’t need all that money put into brokerage each month. I love giving to charity but won’t give up my youth (what’s left) and young kids years to do it.
This one I found most interesting:
“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.”
Maybe more happy? I think about this often, and feel at least as happy and maybe less happy now compared with training. Not self promoting, but I try to enlighten myself by blogging on the subject.
It’s a complex issue of money and happiness and not the post topic, but doesn’t it feel like the elephant in the 7-figure room?
I love the USA! This country has its flaws, but it’s wonderful to live in a place where capitalism and (mostly) free markets allow a person like WCI to achieve this kind of success.
As I read through the comments, a couple of people brought up topics involving taxes that drive me nuts. First, essentially nobody paid the extreme marginal rates that existed until the mid 1980s. In fact, tax shelters were so effective back in the 50s and 60s that it caused backlash and we ended up with the AMT. Subsequently, when marginal rates were reduced tax loopholes were also closed. So even though the top rate came down significantly on paper, in practice the top income earners still paid a similar effective tax rate as they did before. In the 1950s (the decade that brought us the 92% tax bracket) the top 1% of earners paid an effective tax of about 42%. In 2014 the top 1% of earners paid an overall effective rate of about 36%. Not a huge difference. Also, the top bracket back in the 1950s–as someone pointed out–started at around the equivalent of 2M in todays dollars.
The second peeve I have when it comes to talking about taxes is conflating taxes on earned income vs capital gains or other types of income. The so-called Buffet rule is based on a comparison of Buffet who derives the bulk of his income from capital gains and his secretary with her earned income (which if he pays her well ought to be six figures as a corporate secretary to the head of one of the largest companies in the world). It’s apples and oranges.
Having said that, I do think it’s time for a new, higher tax bracket. I think the top bracket should begin at around 2M dollars. I also think the government shouldn’t need to take more than about 25% from those earning less than 2M and the top bracket ought to be no higher than 33%. Hey, everyone has an opinion!
I disagree. I think 6% across the board IS a big difference. That’s interesting. The other points valid though.
When I said it’s not a huge difference, what I meant is that it’s not nearly as large of a difference as people expect when they talk about the difference between a top rate of 92% vs 39.6%. The difference between these two rates is over 50%, but the difference between tax rates actually paid is only about 6% for the top 1% of earners. 6% is still a significant difference, but it’s nothing like 50%.
When people talk about tax policy things go way off the rails when they say things like “In the 1950s we had a top rate of over 90%. Today it’s less than half that.” And imply that the wealthy are paying something on the order of 1/2 of what they did at times in the past, like the 1950s. That’s simply false.
I’ll join the chorus that’s singing your praises. You definitely deserve the success you’ve achieved. I have no doubt you will do great things with the financial resources you have accumulated–especially with the charitable giving you do.
We make mid-6 figures and even when we made low 6 figures had the same “worries” that you have about spoiling our kids, private vs. public etc. I don’t think any of these issues are unique to making 7 figures, though, perhaps when you near mid-7 or 8 figures it might get more ridiculous and difficult to continue to maintain those values. I will just echo what all the others have said: that you deserve those 7 figures, indeed, what you have created here is truly a community service to all physicians and high earners, more than just a business. For that you should be proud. It has also inspired many (and many of us who are digging deep into our own minds) to try to emulate what you’ve created and apply that entrepreneurship to other endeavors.
Congrats on your success. It is well-earned, especially knowing that every dollar you earn probably reflects a $100 (or more) benefit to your colleagues. Cheers!
Your website is refreshing. I laugh everytime you use the word “dumb” things doctors do with their money. I suggested financial planning as a topic to my female only sub sub specialty club and was met with awkward silence. Enjoy the 7 figures. I made high 6 figures (and hated the tax burden as a W-2 employee) but only for about 10 years from age 45-55. I was a late bloomer and had many years in the 20k range before medicine. I don’t remember being part of Romney’s 47 percent (I have always paid income tax) but perhaps times have changed. I grew up around “old money” on the East Coast at private schools and you do not have to spoil your kids. I did give both my kids a debt free college education. That was their “inheritance” and they don’t expect anything more. My financial planner fired me because I don’t have a net worth of at least $20 million so it’s all relative. Because of your website I (finally) discovered the difference between high income and net worth and plan to retire at 65 in 3 years with “enough”.
The 47% used to be smaller as I understand it. I think the EIC is a major reason for it and that started in 1975. According to this, the percentage of those not paying federal income taxes bottomed out at 12% in about 1968 and has been steadily rising since the late 80s.
https://www.dailysignal.com/2012/02/19/chart-of-the-week-nearly-half-of-all-americans-dont-pay-income-taxes/
1) FIRE blogs, including yours, are like grad school for real life personal investing. I’m so grateful for the learning platform. Especially when I’m reading about perspectives from far ahead on the path to FIRE.
2) As a graduate of an ASN program at a community college, I’m DEEPLY grateful for heavily subsidized tuition, enabling me to graduate without student loans. Thank you, THANK YOU to all the high earners paying marginal income tax rates that fund infrastructure including institutions of higher education. THANK YOU for your willingness to shoulder the extra burden. THANK YOU for framing it as a civic duty rather than unfair gouging. We up-&-comers realize we’re riding on your coat tails. 🙂
3) Curious … has breaking thru the
7-figure threshold changed your attitude toward “playing down” your income or net worth to people outside the FIRE circle? We all downplay a bit to minimize resentment & lubricate social occasions. Has that increased on your path? Have there been unexpected hurdles to social “integration”?
4) Got any words of wisdom for RN’s interested in building a legacy of wellness with the leverage of ecommerce? Seems like there are already multiple blogs on wellness; I’m squinting to discern where I’d fill a niche.
5) I fully intend on becoming a meaningful contributor in this & other FIRE circles, paying it forward as I pick up the basics to implement. Appreciate the fellowship!
2. You’re welcome.
3. We decided to be transparent with the blog income, so it’s pretty hard to play it down much. Want to see resentment? Check out my Twitter feed from last night. We integrate by basically not changing our lifestyle since I was a pre-partner.
4. There’s a pretty low barrier to entry, but the smaller the niche the less likely someone else is in it but the harder to get large enough to make a difference or make any money.
Brave post but so rich (pun intended).
For independent contractor docs who can easily change the amount they work the new pass thru deduction creates quite the blip in effective marginal tax rate:
“By taxable income (post all other deductions)
$165k to $315k: 19.2%
$315k to $400k: 47% (32% + lost deduction)
$400k to $415k: 50% (35% + lost deduction)
$415k to $600k: 35%” https://www.physicianonfire.com/tax-reform-physicians/
I also ponder the children questions. Parenting is tons harder than investing.
Regarding taxes, this discussion has lost the forest for the trees. Such matters as the “horrors” of entitlements, new tax brackets, higher taxes on capital gains, etc. are unimportant considering the big picture. What does matter is how much income equality, or inequality, there should be in the US. Read the Wikipedia piece on Income Inequality in the US; forget the politics and focus instead on the nature and scope of the issue. As Jonathan Haidt in The Righteous Mind points out, virtually all conservatives and liberals agree that proportionality is a good thing, but liberals tend to believe that there should be a greater amount of equality than do conservatives.
Politically, it is much easier to move to greater inequality, and that is happening today. There is no such thing as the right level of inequality, but it is incumbent upon all of us to consider and deal with this important overriding matter and forget the silly detail issues.
Just like “how progressive should the tax code be,” “how much inequality should be allowed” is a political question without a “correct” answer where reasonable people can have different opinions. When half the people are working to pull it in one direction and the other half are working to pull it in the other, it’s probably pretty close to the right place.
IMHO, focusing on equality of opportunity rather than equality of outcome is a good idea. If you penalize success too much, people stop striving for it.
An expected and predictable response: democracy and the voting booth determine the correct amount of inequality; but that doesn’t matter much, because what really matters is equality of opportunity. Of course, your views are shared by many people and, again, there is no “correct” answer.
Hopefully others will consider the inequality of income matter.
A book by a Nobel laureate, and NYT review (8/3/12), both worth reading:
“Joseph E. Stiglitz’s new (2012) book, “The Price of Inequality,” is the single most comprehensive counterargument to both Democratic neoliberalism and Republican laissez-faire theories. …
It is not uncontrollable technological and social change that has produced a two-tier society, Stiglitz argues, but the exercise of political power by moneyed interests over legislative and regulatory processes. “While there may be underlying economic forces at play,” he writes, “politics have shaped the market, and shaped it in ways that advantage the top at the expense of the rest.” But politics, he insists, is subject to change.”
I share some of your concerns as one of the successful sub-specialists you mention that can earn 7 figures. I have worked my tail off since training and made this much for a few years. I am burnout with the time trade it takes as a doc to make more money. Medicine and money don’t scale well. More money = more time. You mention this in other posts as a motivation to start a business. You also mention burnout at the work input necessary to make 7 figs as a reason 7 goes to 6 or less later in life. I love to work and am no slouch, but I can vouch for this point.
The point I find most interesting is your comment reply relating to money and happiness:
” 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.”
For me, this is one of the main reasons I’m taking a (much) lower paying job closer to family. Our happiest moments as a family were in training at much less income. The other reasons we’re changing jobs are or family and the marginal utility of that wealth, which you also hit on as it relates to taxes on an extra 100K earnings.
To me, happiness and money is the elephant in the room when it comes to more money.
Funny how much weight the word “millionaire” carries for most people. It evokes the Monopoly guy, Richie Rich and Scrooge McDuck for my generation. It seems like most people fantasize that all of their worldly problems will be solved as a “millionaire”. Obviously, the closer you get, the more you realize how untrue that is. It’s just different problems along with many of the same ones you had while earning minimum wage.
A seven figure income not only puts someone in the top .1% of US workers, it also puts them above almost every other person in the world for the history of mankind. Even past royalty didn’t have access to the kinds of things the average person has today. On the other hand, a millionaire in Beverly Hills is a pauper who probably whines most of the day about not having enough money. It’s all relative. That’s my preferred way of explaining wealth to our kids.
I figure being anywhere near or in the top 1% should leave anyone feeling quite comfortable with their lifestyle.
“A seven figure income … puts someone in the top .1% of US workers”
And isn’t amazing that the 0.1% person is writing/instructing us on how to achieve financial freedom.
Thank you for the perspective. And thanks to WCI for all the writing.
Yet another terrific post. Taxes are taxes. Raising children to be respectful, culturally literate, hard working, contributing members of society is one of our bi
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Have you considered using a captive insurance company to reduce taxable income while building a nest egg that at the most will have taxation at LTCG rates?
No. I’ve heard of docs using these, but not sure how it would work with WCI, which is most of our income.
Great post – thanks for sharing. My husband and I earn close to half of 7 figures, but I relate to all your points (except we don’t have kids so for now at least I can escape that category of concern).
One thing that’s shifted for me as our income has climbed over the last few years is my view on lifestyle inflation. I have embraced it on some level and no longer view frugality as a pure virtue now that we are FI at a baseline level. For example, I have plenty of time to clean my own house but choose to have a house keeper come twice a month. It gives her employment and relieves me of the displeasure chores (and arguing with my husband about whose turn it is to do what). I willingly pay for subscriptions to various podcasts and periodicals even though I could get most content for free if I employed some frugal hacks. It’s not all virtuous: I also willingly pay for nice hotels when we travel now and am actively trying to convince DH to splurge on first class airfare when we go abroad next year. If what I’m working for now is gravy, then bring on the biscuits while you’re at it! Either I’ll spend in or my heirs will – or the government, or some charity. I don’t feel bad being the one to splurge as a result of my efforts, all things considered.
I work with a lot of super wealthy people, and it’s easy to throw stones at their spending – the $20MM planes and yachts, the $250k cars, the six figure department store bills, the mansions filled with absurdly expensive art. It makes me a little sick sometimes, but then I remember it’s all relative. Much of the world population could look at my spending the same way. But a lot of jobs would disappear and companies would cease to exist if high earners all quit spending “stupidly.” Rolex, Bentley, Ferrari, Gucci sure, but also lots of wealth management companies, construction companies, restaurants, hotels, insurers. And plenty of assistants, realtors, handymen, drivers, pilots, and other service providers would be out of jobs.
A great post. Sensitively handled and fair. I commend your transparency. We need more of it and you set a great example White Coat Investor.
How this Rockefeller heir found out he was rich.
“It taught David Jr. an invaluable lesson: No matter how much money a family may have, it’s important to emphasize responsibility over wealth, and charity over spending. Parents, he says, need to set the example for their kids by showing restraint and economy even if they can live like kings.”
https://www.cnbc.com/2018/04/16/how-david-rockefeller-jr-found-out-he-was-rich.html
Congrats. After two decades on Wall Street I can honestly say you provide more thought provoking material than their research departments… and that’s before you compare the expense of each!
After building income plans for docs and other unusually successful folks I have learned one ingredient FROM them, more valuable than any I have provided to them. If it helps anybody with one more eyebrow raised, especially your younger readers, I wanted to pass it along as my small contribution to this amazing community.
The most significant piece of the financial planning puzzle will prove to be who you marry. Affects all the other pieces and more….
For sure. That’s huge. Marry right the first time!
So glad you decided to post this, Jim. I was at your talk on blog monetization at FinCon this past year and was so impressed by what you’ve accomplished and how down-to-earth you seemed. Your talk was truly informative and insightful. Opening up on posts like this is great for others (like me) to learn from.
Hope to see you at FinCon in Orlando if you’re going this year!
— Jim
I won’t be there this year. Too much fun stuff to do during September to go to a work conference! I’m trying to cut back to full time this year.