By Anonymous Physician, Guest Writer
My wife and I, both physicians in our early 40s, have been in practice for about nine years. Like many doctors, we have days that remind us why our profession can be so rewarding. Unfortunately, those days are being whittled down to moments, while the headaches are inexorably overshadowing the good stuff. We think about retirement on an almost daily basis (I spend way too much time pouring over WCI’s archives). While not the healthiest mindset to maintain, it is our reality. So what are we doing about it (besides trying to focus on the positives and living for vacations)?
Multi-Millionaire Doctors
I don’t know that there is a universally accepted definition of super-saving, but I think anything over 30% of gross income could qualify [EDITOR'S NOTE: Remember 20% is supposed to be “normal-saving” for doctors.], while over 40% is starting to get fairly aggressive. My wife and I invest approximately 50% of our gross income. Despite starting our investing lives in residency, about 15 years ago, with a tiny portfolio and a negative net worth (each with six-figure med school loans), we now have a portfolio worth $3.4 million.
It's All About Savings Rate
So, what’s the purpose of this post? It’s certainly not to portray our portfolio as a shining example of something to duplicate. We’ve been very slow, over the years, to learn about things like expense ratios and what type of account in which to hold bonds. And all of our naivety is evident in our inelegantly constructed collection of investments. We’re not nearly as financially savvy as WCI (not even in the same universe, let alone league). We’re not even as knowledgeable as the majority of the readers who post comments on this blog. The purpose of this post is to demonstrate what a high savings rate can do in a relatively short period of time, even when you spend the first 3/4 of your investment life feeling your way around in the dark. My hope is to inspire those who read this blog and think: “There is no way I can replicate what WCI and his savvy minions (that sounds a bit evil; it’s unintentional) are doing to secure their retirements.” I’m telling you yes, you can do it. Asset allocation and all the other wisdom on these blog pages is extremely important, BUT splitting hairs on the funds in which you invest is often less important than is your rate of saving.
Nine years ago, fresh out of fellowships, my wife and I earned a combined gross income in the low $400K’s. Over the years, that has climbed to a combined gross of almost $600K. I expect that we will fluctuate between the high $500K’s and low $600K’s for the rest of our careers. As I type this and look at the numbers on the screen, it sounds like a LOT of money. But, interestingly, we don’t feel “rich.” I think that comes from years of living like medical students. We didn’t actually upgrade to “living like a resident” until several years after completion of our fellowships. Currently, I would say we have loosened the purse strings quite a bit, but only in comparison to the way we used to live— not when compared to some of our friends and colleagues. We love eating out at nice restaurants, and we travel with our daughter as often as we possibly can. I lease a pretty sweet car for $400/month because I decided that the peace of mind in not having to worry about expensive/ time-consuming repairs on an older/owned car was worth it to me. It’s no Tesla, but it’s well-appointed and it fit within the budget with which we were comfortable. The point is, we’re quite happy with our standard of living, so the 50% of our income that goes into our investments is never missed.
Our Super Saving Path
Our First Asset Allocation
So, enough preamble—on to the data. In 2004, after three years of residency and in our first year of fellowship, our portfolio looked like this (including our reasons for selecting the investments):
- Cash $107,000 (Not sure why so much.)
- Taxable
- Individual Stocks $108,000 (Gift from grandfather at my birth)
- VG S&P 500 Index $28,000 (The bedrock of the portfolio)
- Am Century Ultra $6,000 (Recommended by a friend in finance, never performed)
- Fidelity Electronics $6,000 (Recommended by father in law, never performed)
- Oakmark Interntl $24,000 (ER much higher than similar index funds-oops)
- VG Intm Tax-Ex Bnd $17,000 (Still like this one for bonds in taxable)
- Roth IRA
- TRP Mid Cap $24,000 (Just smart enough to do Roths in residency)
- Fidelity Mid Cap $6,000 (Not index, but Morningstar liked it)
- Fidelity Div Intnl $7,000 (Again, Morningstar liked it)
- Total Assets $333,000
The only reason I have the above information is that 2004 was the year we started making an asset spreadsheet. This is an Excel file that we update once or twice yearly, usually at tax time. After reading a finance book and making our first spreadsheet, we set goals for asset allocation, realizing that we were WAY off. We had lots of cash but a hodgepodge of mutual funds in different classes. And so we learned to rebalance, which we now do every year (for us, always adding to classes in which we are deficient— not selling the ones where we are overloaded).
Getting Serious About Regular Investment Contributions
Toward the end of fellowship in 2006, we were holding 32% of our portfolio in cash, in anticipation of needing a down payment for the house we would buy after training. It wasn’t until late in 2007, one year into our “real doctor” jobs, that we finally adjusted our cash goal down to 5% and got serious about making regular investment contributions. We started transferring tens of thousands of dollars into our mutual funds (right before the market crashed, I believe). This is also when we got some discipline and set up monthly automatic transfers from our bank account to our investments: $4500/month, divided among three mutual funds in different classes. And, of course, we were maxing out our 401k’s.
We continued on in this fashion for several years, making automatic investments monthly. We had a baby and maxed out our state’s 529 fairly quickly (our state offers “credits” for purchase which, upon entry into college, will have a value equal to the cost of a four-year education at our state’s most expensive university). It took us quite some time to realize that one of two scenarios must be true: either our rate of investing was inadequate, as judged by the constant accumulation of cash in our bank account; or, our rate of spending was too low. Given that we were still comfortable living like residents (despite my wife complaining that her receptionist has a nicer purse than she does), we chose to increase our rate of investing.
Moving on…by 2011, we were investing $15,000 per month (on top of our 401(k) contributions), with 68% of it going to Vanguard 500 Index, 14% in Vanguard Small Cap Growth Index, 12% in Oakmark International, and 6% in Vanguard Intermediate-Term Tax-Exempt Bonds. Here is a snapshot of our portfolio in 2011:
- Cash $196,000
- Taxable
- Individual Stocks $40,000 lost a lot of value since 2004
- VG S&P 500 Index $361,000
- VG Sm Cap Gr Index $146,000
- Oakmark Interntl $107,000
- VG Intermed Tax-Ex Bond $41,000
- Roth IRAs
- Fidelity Captl Apprec $28,000
- Fidelity Cap Growth $14,000
- TRP Mid Cap Value $5,000
- Fidelity Divers Intntl $19,000
- 401(k)s
- Aggressive allocation $394,000
- Home state 529 $51,000 (Worth 4 yrs in-state; 1-2 yrs at Yale, if lucky)
- Total assets $1,402,000
Doing Some Financial Planning for Retirement
At this point, we started to think more actively about the issue of retirement. But, it was still more of an abstract concept as opposed to something tangible. We really had no concept of how much money we would need in retirement, or what age we could even shoot for to retire. We took advantage of a free program offered through work that paired us with a financial advisor. He prepared one of those 50-page documents with all kinds of graphs and charts, which was helpful. The takeaway point was that retirement in our mid-50’s was within reach. Naturally, our next question was, “If we can retire in our mid-50’s by investing an extra $15K per month, how much earlier can we push it by investing $20K per month?”
For the past four years, we have been automatically investing $20K per month into our taxable accounts. We rebalance the amount that goes into each fund once yearly to maintain our asset allocation (47% large cap stock, 18% small/mid cap stock, 15% international stock, 15% bonds, 5% cash).
We continue to max our 401k’s, backdoor Roth IRAs, and stealth IRA’s (HSA’s). We also put $1000-1500/month into the Utah Education Savings Plan— just in case our kid wants to go to Yale + med school.
Super Savers Portfolio on Parade
Here is our portfolio now, in 2015:
- Cash $35,000 (Finally learned to hold less cash)
- Taxable
- Individual Stocks $71,000
- VG S&P 500 Index $938,000
- VG Sm Cap Gr Index $278,000
- VG Extended Mkt Index $365,000
- VG Emerging Mkt Index $83,000
- Oakmark Interntl $291,000
- VG Intermed Tax-Ex Bond $267,000
- Roth IRAs
- VG Val Indx $26,000
- Fdlty Captl Apprec $55,000
- TRP Mid Cap Value $7,000
- Fidelity Bond Index $44,000
- 401(k)s
- Aggressive allocation $592,000
- Profit Sharing Plans
- $237,000
- 529s
- Home state 529 $60,000
- UESP $65,000
- Total assets $3,414,000
Investing on Margin (We Still Carry Student Loan and Home Mortgage Debt)
OK, so we’re good at saving. But if we’re thinking about retirement, what about our biggest recurring expenses? Have we adhered to WCI’s advice to get rid of the med school loans ASAP and not carry a mortgage into retirement? Um, not so much. We have $300K left on a mortgage (2.875%) that is scheduled to be paid off by 2025, two years after our planned retirement. We still have $200K of medical school loans (2.88%) that is scheduled to be paid off by 2033. We’re not thrilled about carrying these expenses into retirement, but we’re hoping that the return on our investments makes this a reasonable strategy.
When to Retire
As for when to pull the trigger on retirement: the more we read about this issue, the more overwhelming it becomes, as there are a zillion variables to consider. What we’ve found helpful is to have our portfolio analyzed by different methods and then see if we get similar opinions. We’ve taken advantage of the free financial advising consultations through work, and we’ve also had a couple of portfolio analyses followed by video conferences with the Vanguard CFPs (a free service offered to those with $1 million invested with Vanguard). It has been reassuring to hear similar opinions from several different people regarding whether we are on track. I’ve also entered all of our data into Fidelity’s retirement calculator, a powerful tool that allows you to control all sorts of variables. As best as I can tell, retirement by 50 is almost a certainty, and we may even be able to wean down to part-time by 48.
WCI, Mr. Money Mustache, and my parents all say that you need to retire “to” something, not “from” something. I know they’re right, but that’s going to have to be the subject of another post. I’ve got to get back to work.
[FOUNDER'S NOTE BY DR. JIM DAHLE: I often talk about what living like a resident for 2-5 years after residency will do. This post gives you a chance to see what happens if you do that for even longer (i.e. you get rich a lot faster). We all have a choice in this regard, and it's important to find a balance that's right for you and your family. This is a great demonstration that any reasonable investing plan is fine when combined with a good income and savings rate. Many physician families can't recreate this sort of success due to having much less income, but every physician family can live a lifestyle similar to these docs. If they're making $600K, paying $150K or so in taxes, and putting $300K toward retirement, they're only living on $150K. Their $3M+ portfolio is very close to supporting that lifestyle already. These guys would likely benefit from a little more coherent asset allocation/investing plan, but who am I to criticize? Certainly, their plan is reasonable, as is their moderate use of non-callable margin debt.]
What do you think? Are you a super-saving doc? Do you know someone who is? Do you hate your job enough to save like this? Will you carry debt into early retirement?
Put kids on payroll. Then Roth IRAs
Assures them wealth in their golden yrs
Great post and great comments. As I have mentioned on this site several times I retired from OB at 56 and I am now doing just Gyn at 58. I am not making much money but I have very little stress so I actually like going to work probably because I get plenty of sleep and long weekends. I think what is important is having the ability to retire not necessarily doing it. I am currently trying to accumulate 2 years of expenses in cash. I am 63% equity. I expect based on lifestyle and family history to live into my 90s. I plan to stay at least 60% equity until maybe 70-75. M have you been through a bear market or crash yet? You might want to see how you react before pulling the trigger. I would pay off the mortgage and student loans prior to retiring. I would really track all your expenses for at least a year before doing anything as well. I am sure you know that you need about 30x your spending as a rule before retirement.Have you thought about either you or your wife retire first to see how it goes? You should be honored that the finance buff posted several comments on your post!!
Hatton, I hear you. I think once I internalize that I CAN retire, I won’t necessarily feel like I have to pull the trigger at that moment. But I will likely go part time.
Yes, I’ve been through a couple of bear markets, but never once I reached the level of active engagement I have now with my portfolio. So basically, I was too clueless in the past to really freak out. But now…
Great post and congratulations. One aspect of your portfolio that was left off is how much did you spend on your house and how did you decide what you could afford when it comes to a primary residence?
Sean, great question. We had NO idea how to figure out how much to spend on a house when we were going through the process in 2007. I mean, we looked at a couple of basic rules, like don’t let your mortgage exceed x % of your income, but really…we just picked a number that didn’t make us overly squeamish. So we spent $630k, with 20% down.
M,
Great post, thank you for sharing. We are super-savers too.
Regarding the sustainability of your portfolio for a long-term retirement, can you please share with us:
1) How much you spend on average annually now? ( & what % of your net after-tax income is going here right now)
2) How much of that spending is going to mortgage payments (which will disappear at some point)?
3) Whether your anticipate any lump sum payments prior to college for your daughter (e.g., prep school)
4) How much, really ballpark, do you think you will spend in retirement (that’s a tough one I know) given your hobbies and discretionary goals.
These estimates would help frame spending in terms of a longer term time horizon SWR.
They would also be very helpful in framing input here regarding the saving / spending plan too.
We are also fans of cFIREsim and use it quite a bit. For your goal of 100% success, true enough most planners advise shooting for perhaps 80% or so probability of success, though I can understand your desire to be conservative for early retirement, which you can afford to be.
Have you been using the default cFIREsim settings of inflation-adjusted spending? A more realistic setting may be G-K or another variable spending method since this better approximates adjustment to market conditions. It also is likely to significantly affect your success rate percentages. Are you familiar with this?
SuperSaver, to answer your questions:
1. We spend about 125k per year, which is about 28% of our after-tax income.
2. 32k per year goes to the mortgage, which will disappear in 2025.
3. None.
4. Probably 125k while our daughter is living at home, then 150k (or more) once she goes off to college.
As for cFIREsim, I have been using the default setting. What is your take on the G-K setting?
Thanks for your help.
I love the idea of having 4 years worth of CD’s or cash equivalents on hand in retirement. All financial planning books are saying we still need the majority of our assets in the market during retirement, to offset longevity risk. But of course having a ‘cash equivalent’ would help alleviate the need to sell during a down market. I am assuming at that time taking dividends/interest from the taxable account would help rebuild the cash assets during distribution?
That is an awesome savings rate, my student loans will be gone in 5 years at which point we will be able to save 35% of our income (not including pay increases each year). I don’t count the days until retirement, rather I want to know I could retire at any time, hopefully by my late 50’s. If my health goes downhill or I just get sick of medicine.
M,
I have been dreaming of early retirement since residency, too, and spend hours myself on the topic. I will echo what others have said above, but maybe with more emphasis: WORK PART TIME NOW!!!!
I had an ah ha moment reading a guest post on MMM about FU money. The bottom line was that FU money wasn’t Wolf of Wall Street type money, but for him just enough money to say, I don’t need to do “this” (whatever that might be for each of us). It was a newfound freedom. The real “ah ha” part for me was realizing that I didn’t need to wait until I had enough money to stop working entirely, I had saved enough to work part time, now! I had the power to choose a part time gig or do something else that made me happy, or alternatively be able to say no to something I didn’t want to do.
I could argue you have saved enough to retire now given your annual expenses, but let’s focus on the beauty of working part time: 1) You get to live a better lifestyle TODAY, and 2) You stave off dipping into that retirement money.
1) Work 3 days a week, or shorter hours, or see less patients. Take less call. Think of what you could do with that time! …Whatever you want!!! You’d have time to make dinner, maybe not every night but much more than you do now. Likely you would find work to be less offensive and perhaps you rediscover that enjoyable, rewarding aspect again. I think a balance of work and play is good for enjoying both to a greater degree.
2) So you haven’t reached your “number” yet to hang it all up. That’s ok, but it doesn’t mean you have to keep adding to it. WCI had a post about this. You’ve already done the heavy lifting. Let your money grow to that number on its own. As long as your part time income pays your annual expenses (including your annual travel wishes) you can leave your nest egg alone. Sure the market can drop 20% this year or next, but so far in history it has always recovered. What if it takes longer than 10 years to recover? Work part time for a little longer until it does, or reduce your living expenses enough until your “number” is smaller. In addition, perhaps you find you like this part time gig and it doesn’t pain you to work this way until you are 55 or 60. Now your nest egg has grown even larger, AND you don’t need it to last as long!
I’ll sum it up to say life is too tragically short to be overly conservative. Don’t keep putting off your happiness just so you can “guarantee” you’ll have enough in retirement. Lots of adjustments can be made along the way if needed. Start to enjoy the freedoms you’ve definitely earned TODAY!
Cheers,
Jeff
Beautiful comment!
Jeff, this REALLY resonates with me. Thank you.
Congratulations! It is great to see that my sacrifices now may pay off later. My situation is very similar to yours in regards to income, spending etc but I have not been out quite as long so have not accumulated as much.
How much are you able to contribute to your 401k? 17,500 or 53,000 per person? My wife and I both max out our 53k 401k and have similar spending numbers but I cannot figure out how to save 20k per month in taxable especially with 529, HSA, backdoor roth IRA all maxed (only about 10-12k or so depending on the month). Any hints, tips or advice? I just can’t seem to make the numbers work assuming about a 35-40% effective tax rate. What are you paying in taxes? No state income tax?
It’s really a function of income and spending. Certainly the average physician isn’t going to be able to do two 401(k)s, backdoor Roths, HSAs, 529s, and $240K a year into taxable. That requires a very high income + a very high savings rate. No one should feel badly if they can’t do half of that. Saving $50K a year for 30 years and getting 5% real on it should provide a retirement income of something like $140K pre-tax. That should be plenty of money for most docs to retire on, especially when combined with Social Security. The only reason to save three times that much is if you want a very luxurious retirement or if you want a shorter than typical career.
Thank you for the insightful & inspiring guest post.
Briefly about my experience: I am in my second & last year of fellowship and expect to start on an attending salary mid-2016. I have been maxing out a ROTH IRA since my first job at 17yo. Last year I sold my house to move to a new city to do this fellowship and I have been living off the sale proceeds on a 40K/year budget, while basically dumping my entire salary to max out mine and my wife’s 401K and HSA, in addition to ROTHs. We are basically taking advantage of the lowest tax bracket we are ever going to have (mostly 10%, may slip into 15% marginal). So to medical students reading this: get a side job (desk job sitting at a library, tutor younger med students, whatever) to earn at least 5500 and max out your ROTH. To residents: live as frugally as possible, if you are single save on a pre-tax basis to get yourself to 15% tax bracket and save the rest in after-tax 401K. If you are married, your 15% tax bracket will be around 75K, try to at least get to that level for your combined salary, hopefully lower. Once you are an attending, you will be paying at the very least 28%, probably more on most of your salary. By paying 15% now, you are basically getting a 13% automatic return (well, technically not really, but use whatever works and this is powerful motivation!). Leverage your time & compounding (as Einstein said, compounding is the most powerful lever in the universe).
Cannot agree more with the post & almost all the comments… having savings & peace of mind. Money is NOT a be-all, end-all but it gives you enormous amount of freedom. And of course as had been said by many, many before the converse is also true: debt = slavery (especially high interest CC debt).
If you want to cut back today and see fewer patients, take less call, have shorter days and longer time slots per patient, longer weekends and vacations, etc. I think a reasonable target is to make cut your combined current salaries to something on the order of $240K. This would allow each of you to keep making max contributions to social security and max out your respective 401k’s but stop the after-tax savings and start living on 80% of your salary, which is what most “average savers” are already doing. As has been said, you’ve already done the “heavy lifting” so now you just need to move into a more sustainable and satisfying practice that you would be able to find meaningful and pleasant indefinitely, rather than feeling like an indentured servant working a specific term of servitude for his freedom.
M, thank you for sharing your story. You’re doing an awesome job and your story is an inspiration to many. Just to offer some unsolicited nit-picking, I am not averse to debt in retirement. https://www.whitecoatinvestor.com/the-value-of-debt-in-retirement-a-review/ was an eye-opening articulation of something that I intuitively understood all along. The larger your portfolio, the more you can safely use leverage if you’d like and be invested in the stock market 120%, if you want. That approach doesn’t seem to jibe with you’re extremely risk-averse personal values, though. I think you’ll enjoy becoming more vested in social security and you may even want to buy a small SPIA at some point in the distant future as a way to piggyback on social security and ensure a minimum income you can’t outlive.
I agree with several of the other posters that you would probably be well served throwing $2K to $20K/month at the student loans and then the mortgage for a few years. The sequence is debatable, because the students loans are forgiven upon death while the mortgage interest is tax deductible. I think if you run the numbers you’d find you’re getting more in tax savings from the mortgage per year than you’d pay for a year of $200K in term life insurance, but it may not be such a slam dunk if you’re in AMT territory and not getting much of a tax deduction for mortgage interest. It’s definitely a better rate than you can get from CD’s, so it would seem like an integrated/coherent way to decrease your stock market exposure and lower your required post-retirement withdrawal rate from your portfolio.
Im not sure that works out math wise. Yes, he could easily pay off all their debt, not blink, and keep on trucking…oh, and then quit work. They’ll be fine. Since they have so much emergency funds and are basically self insured, there is zero reason to pay of the mortgage which is super low interest anyway and gone shortly. Putting that money in the market is much more likely to grow substantially and reduce their percentage of withdrawal than putting less into it. Let inflation (well, if there was any) work against the debt and let the market work against it.
Paying off debts should be a priority, and a high priority for safety sake and from a freedom standpoint, but we know that basically they could pay everything off tomorrow and still have substantial nest egg left over, so I dont see the necessity to it and the interest rate arbitrage is weighted to long term compounding of investments.
Great post and comments. Some of the discussion about going part time or slowing the workload, is interesting however I think in many specialties this option is still limited. Sure an ER doc can just do fewer shifts, but in some specialties even if you have less patients or work less days, you still have to answer phone calls, respond to results, do paperwork etc… Although they may get some job satisfaction, the draining aspects of the job may still overwhelm you even at a reduced pace. And while i agree your employees etc.. derive a benefit from you, I don’t think that’s a reason to keep working.
Also, as some say above (paraphrasing)”you can do part time work if you feel your nest egg shrinking too fast..” I also this can be difficult for those in the medical profession. For example, if I retire and then 5-10 years later think I need to supplement my savings, it would be very hard to maintain certification and pick up where you left off…
I think you misunderstood my point about employees. Of course, you don’t keep working because it benefits them. You can learn to use them better to benefit yourself if you decide to keep working. Phone calls, results, and paper work can be dished off to ancillary staff that you train freeing you to do whatever part of your practice you like better. So it is a win-win for everyone including the patients.
For me, the frugality mindset was very draining and unfulfilling. Might not be that for others. But between the ends of frugal blinders singularly focused on getting to retirement as fast as possible on one end and the actual retirement on the other end, lies a spectrum of options that I would suggest be explored fully before retiring.
I don’t know about that SJ. Granted, I’m just a year out of residency and I went part time in an outpatient clinic from the get go and have no call and plenty of time off. But the way I feel about my job and my patients now vs when I was in residency (even in my 4th year, where I had the same patient population, no call, no weekends, just working outpatient full time) has been life changing. I now have plenty of time to take care of myself, to balance work with my life and that has made all the difference. Those “draining” tasks such as returning patient phone calls, emails, writing letters, filling out disability paperwork, etc don’t bother me at all. When I was in residency, I felt like those tasks were soul sucking. I wondered why my patients were punishing me. I kind of hated everyone and everything. But it was because I didn’t have time to take care of myself and therefore had nothing left to give anyone else. But going part time has changed everything and now I seriously love my job and my patients and I’m able to willingly and happily give my patients my time without resenting them for it. I know I am much happier in my job than my friends who are working full time. So maybe I’m just really lucky (OK, I know I’m really lucky to be in a position to only work part time), or maybe psychiatry has less draining tasks than other specialties, but I wouldn’t knock the power of part time work to make your life awesome until you’ve tried it.
The secret to a happy life as a shift worker right there- fewer shifts. Because you can always work one more.
I like this line : “I didn’t have time to take care of myself and therefore had nothing left to give anyone else”
I did misunderstand your point then. But I think what you are saying is great in theory, but in reality is not so easy and may lead to even more job related stress. To use your example, it is hard enough to find competent office staff for basic job duties harder yet to find those to handle expanded responsibilities. And hiring a NP/PA is also not an easy decision, and in many states can open you up to even more liability/insurance/paperwork challenges. But I see your point, that there are many options between full steam ahead and full retirement. There are also a lot of options for professional fulfillment while “retired” (volunteering etc) I would assume most people considering full retirement have at least explored some of these opportunities.
Our reality is that we are slowly making these changes and seeing benefit. We are also a 2 physician couple and have both only ever worked part time. We are on track for retirement spending similar to M, but yes it will require more years working to get there. But, since we enjoy work it isn’t a bad plan and leaves lots of free time along the journey.
if you save 25% more than your goal you will be able to invest a bit more aggressively and you will sleep much better during market slides
with physicians salaries reaching 3-4-5 million at age should not be a problem
Great thread on this post. I wanted to piggyback on what Trackjunke said above in regards to state taxes and effective tax rates. I’m a high earner currently but find it extremely difficult to save any more than 10-15K/month into a taxable account due to the progressive nature of the income tax…and that’s even in a state with no state income tax!! When your effective rate keeps climbing, every dollar you earn over that top bracket is taxed like crazy, and also subjects your taxable investments to the extra 3.8% Obamacare taxes, etc. It really makes you question whether the work for those extra dollars is worth it. I guess it was different with Reagan but I’ll leave that discussion for another day and website!!
In this vain, it is frustrating that taxable accounts don’t grow as quickly as tax deferred accounts, because those extra dollars just don’t add up as quickly with the tax drag. Just venting! I know there’s no answer other than to invest in tax efficient products and just stay the course…
First world problems
10-15 K a month in taxable accounts, already puts you in top 1% of savers among MDs. Very few can afford that. Feel lucky and keep doing it
Thanks to everyone for the comments. To address a couple of recent points made:
Xeno, I agree that my conservative personality does not seem, on the surface, to jibe with my aggressive asset allocation. But, I’ve been more scared that retiring very early with a bond-heavy portfolio would lead to “portfolio-failure” over 45 years, than I have been about a portfolio collapse due to the allocation. I won’t repeat the discussion above, but I thought my plan made sense (though Harry Sit and others may very well be right, and their reasoning may be sounder than mine).
Talking about part-time work, SJ makes great points. My organization discourages part-time work, though it is possible to rig something. I will very likely pursue this in the near-future. As far as having the ability to go BACK to work part-time after fully retiring…that would be a difficult mental obstacle to overcome. Once I pull the trigger on retirement, I want to be darn sure it’s going to stick.
As for how to invest the amount we have been in taxable accounts, the posters above did not mention if their income is similar to ours. As WCI said, it’s a factor of income and spending. We don’t have any real tricks, other than making a lot of money and spending a small percentage of it (about 28% of after-tax income). I realize this is akin to counseling overweight patients to eat less and exercise more, but that’s really all we’re doing. That being said, the posters here are saving an awful lot of money, and I expect they will achieve their goals.
Remember not to take anything too personally. Posting your own personal financial details/values on the internet, even without your name attached to it, invites lots of criticism. You wouldn’t believe how much crap I get for buying a boat this year and writing about it. There will always be someone who thinks whatever you’re doing is wrong. But you’re the “Man in the Arena,” and that’s what it is all about. We’ve all got our own arena.
So take what you think is useful from the comments, and leave the rest on the internet where you found it. You are far better off financially than the vast majority of people, the vast majority of Americans, the vast majority of physicians, and even the vast majority of WCI readers. That’s why you wrote the guest post, and they’re reading it.
Wait…you bought a boat!?
Yea man, I’ve already got 75 hours on it this summer! There’s a picture of it in this post.
M- It seems that longevity in your family is one of the reasons why you are trying to build a large nest egg (the other reason being your conservative nature). Another option for you would be to run the numbers for a 30 year portfolio and buy a SPIA (Single Premimum Immediate Annuity) at around age 75 as longevity insurance
The downside of buying a SPIA is that you MIGHT not leave as big an inheritance to your daugther (but it seems that that’s not an issue that concerns you)
Thank you M for the helpful details.
Just one point of clarification – I think the 3.4M = liquid investments, right? Your level of debt and the equity in your home should arrive at net worth.
Are these numbers comparable? If you have the numbers for home equity and mortgage outstanding / true net worth, that would be helpful to make sure we are not missing anything.
Looking objectively at your data, we are talking, without social security:
SWR, based on current spending (more on that later):
125K/$3,414K = 3.7% SWR before mortgage is paid off.
Of course in practice you will need to take somewhat larger withdrawals to factor in taxes. However if you were truly retired and only pulling from your savings, taxes can be surprising low (see https://www.bogleheads.org/forum/viewtopic.php?t=87471 ), and at this point we are not factoring in your social security kicking in later (which subsequently would lower the average SWR) – these numbers are just meant as a ballpark.
Now if the mortgage was paid off this would now be down to:
93K/3414K = 2.7% SWR.
Even with early retirement & longevity in your family, I think you are essentially already FI: https://www.kitces.com/blog/adjusting-safe-withdrawal-rates-to-the-retirees-time-horizon/
The numbers are even more optimistic for a variable spending scenario (see #2 below).
I would focus on the following details:
1) You mentioned using the detailed fidelity calculator, another great resource. These tools are only as effective as the assumptions however: garbage in, garbage out. You may want to look into the assumptions that went into your statement that while your daughter is at home expenses are 125K/year including mortgage, and then rise to $150K/year when she leaves. Over time as I have refined my estimation methods, I have found quite the opposite. I think WCI’s post https://www.whitecoatinvestor.com/percentage-of-current-income-needed-in-retirement/ to applies to the vast majority of high income households. I now estimate our income needs will decline to ~ 30-50% of present expenses during retirement. Before actually pushing the numbers, we had substantially over-estimated our anticipated retirement needs. Have you pushed the numbers for the specific details situation taking an approach similar to WCI’s post link above? I suspect you will need a lot less and have crossed financial independence by a comfortable margin already.
2) Regarding cFIREsim, our fixed expenses are very low, and we feel comfortable tightening the purse strings a bit when markets are down so G-K is appropriate for our situation. I think it far better approximates real spending than other models and at also permits a lot more spending flexibility at a given confidence level. I think you will find the results enlightening. See https://retirementresearcher.com/guyton-and-kitces-with-continued-discussions-on-safe-withdrawal-rates-and-spending-decision-rules/ and posts by Siamond on the Bogleheads forum for more on this. Taking a pure Bengen / Trinity study approach is likely to lead to a substantial estate problem as to reach a high success rate the SWR set so conservatively that the median result leaves millions behind. Responding to the market and present portfolio values in real time (whether its G-K or one of a number of dynamic annually adjusted variable withdrawal approaches) is much more responsive to the sequence of returns permitting earlier FI milestones, enhanced consumption smoothing, greater peace of mind, and less worry about spoiling the next generation. Pfau’s research looks at it from one angle at https://retirementresearcher.com/making-sense-out-of-variable-spending-strategies-for-retirees/ but if you search at bogleheads.org you will find critiques of the work. It is not perfect, but a great start.
3) Have you considered crowdsourcing your situation (after this thread dies down of course) at bogleheads.org ? It’s a great resource — if you do (or have), consider posting a link to the thread for cross-fertilization of input at both sites.
SuperSaver
SuperSaver, thank you for this extremely helpful, detailed answer. To answer your additional questions:
1. The 3.4M does = liquid investments (combination of all taxable and non-taxable accounts). The student loans are 200k at 2.88% (paid off in 2033) and the mortgage is 300k at 2.875% (paid off in 2025) on a 630k house.
2. As far as financial needs in retirement, we also initially greatly overestimated our needs. The current estimate of 150k is based on a detailed analysis of all our expenses from 2014, then subtracting out the expenses that will go away, and adding in more for travel and healthcare. In the Fidelity calculator, I am able to put in end dates for the student loans and mortgage, to take that into account.
3. As for crowdsourcing our situation on Bogleheads, I have thought about that, yes. I have been a “lurker” on that site, much in the way I have lurked on WCI for quite awhile now, never posting until now. I will very likely do just that, thanks for the push.
As for all your links and suggestions, I will check it all out and re-post any additional findings/thoughts. Thanks again!
Great comments super saver. I also read Kitces and Pfau’s blogs. Some of their research about starting with a low equity allocation and increAsing it as you age does not make sense to me. The rising glidepath.
Another great blog for anyone who is considering eArly retirement is written by Darrow Kilpatrick. CanIretireyet.com. He has a review of every retirement calculator available. He started a software company and retired at 50. He has articles about health insurance after retirement, rent versus buy, and what to do with all your time. Personal Capital recently released a new calculator that is very simple to use. I think you have to use multiple calculators and read what their assumptions Are before you do anything.
Hatton, I like Darrow’s site, too. That’s how I arrived at the Fidelity calculator. I would put in a plug for Personal Capital, which I just started using within the last 2 months. For those who haven’t seen it, their website is free to use. You basically put in all your bank, brokerage, mortgage, loan, credit card, etc information into the system, including passwords (that may be a dealbreaker for many people). Personal Capital automatically updates all your financial information, in real-time. You can analyze your data in multiple ways, seeing exactly what you spend, how much you make, how your investments are doing, etc. It will even dig into your 401k and break out all the little investments in there, making it SO much easier to use a global asset allocation for your entire portfolio. This way, you don’t have to break out your 401k allocation by hand on an Excel spreadsheet anymore.
You just have to accept the fact that these guys will email/call you periodically, trying to get you to sign up for asset management through them.
M and others
Is it safe to give personal capital your account logins and passwords? In this age of hacks, I am always scared what if some one gets to this information?
Anyone has recommendations?
PK, I was quite concerned about this as well. I researched the issue and found that their security is regarded as very tight. That being said, I believe that any security system may be compromised, so it is a risk/benefit situation. I love their software and plan to use it long-term.
I use personal capital and the password part of their website was my initial concern. However, I have enabled 2-step verification on all websites that have that option to add an extra layer of security for my own piece of mind.
On a side note, I always found it funny that my student loan website had the most strict password requirements and security verification steps. I wish it didnt and someone could hack it and pay off my loans. 😉
Well, I know those who gave their information to Ashley Madison sure seem to be regretting it.
that what scares me too. On top of supposed to be anonymous, a lot of people gave around $19 to completely remove their information, and that was still there.
But I think I am going to take the risk for PC. And pray they stay sterile. It definitely beats excel spread sheets.
Fantastic post.
You have 3.4M in a taxable account. Is it all in one joint account, or is part in an account in your name, and part in an account in your wife’s name? I ask for asset protection reasons.
I’m the doc in my family, and my wife stays home. We have our taxable account in her name only so that it isn’t available to creditors in case of large malpractice verdict. We have umbrella insurance to protect from her liabilities (car wreck, etc).
I’m just curious what you (and other readers) think in regard to this issue. I think my strategy is good unless my wife runs off with the mailman.
Steve, the 3.4M = all our liquid investments, taxable + non-taxable. Since we are both physicians, and both at risk of being sued, everything in taxable is joint (we did not see an advantage to putting money in just one person’s name). However, I suppose you could argue that we should put half the taxable accounts in her name and half in mine.
WCI has several posts that address asset protection. If I may paraphrase, the chance of divorce (running off with the mailman) is higher than your chance of a judgment that exceeds your malpractice maximum, so some folks would say that your strategy is risky.
Yes, I think there is great wisdom in splitting your assets in that way.
This is an interesting point. I live in Texas, which is a joint property state, so everything is split 50/50. I suppose, given that, I ought to put more in my stay-at-home husbands name.
You understand the risk very well. I guess I’d hesitate to put the house or a big taxable account in my wife’s name, but the truth is I don’t own a boat. 🙂 Umbrella insurance protects you against everything but malpractice risks, and the likelihood of going over your limits is very, very low.
Several people have commented on asset protection. I have been sued and gone through a trial. I won the case. It is a very rare situation that a doc is going to lose any money above your insurance limits. I am aware of one case in my state where that happened and the judgement was reduced to malpractice max coverage on appeal. Most lawsuits never see a courtroom. If they do even if the jury comes in with some ridiculous verdict it will generally be reduced. Also remember most docs win their case in front of a jury. So try not to lose sleep over asset protection. Worry about your marriage, buy an umbrella, and do not necessarily use the low cost malpractice provider and you will be fine
Are ret plan assets protected
In most states. Read your own state’s laws here:
https://www.assetprotectionbook.com/forum/viewtopic.php?f=142&t=1566
In the editor’s note, you note 150k tax on 600k income. how do you get it so low? shouldn’t it be near 250 or 260k tax depending on state tax? I would LOVE to get mine down to 25% total tax on similar income. Thanks
$260K on $600K in income represents an effective rate of 43%. That’s impressively high. Where do I come up with my numbers? I take what I paid and add a bunch to it assuming most people aren’t as tax savvy as me. Apparently you feel I should add even more.
But if you’re just interested in paying lower taxes, then live your life by the rules of tax law. It’s not like it is a secret. Want to pay less? Make less. Put more toward retirement. Pay more in interest and property taxes. Give more to charity. Start a business. Invest more tax-efficiently. Get married and have some kids (kids might not help actually at your income level). Move to a state with no income tax. Incorporate to lower your medicare taxes etc etc etc.
https://www.whitecoatinvestor.com/what-i-learned-from-doing-my-2014-taxes/
My tax bill on a similar amount of income for 2014 was: 23.9%- 15.3% federal, 5.2% payroll, and 3.4% state.
Congratulations — as someone who retired early (at age 57, now in my 5th year) let me offer a few suggestions. First of all, my wife and I never earned as much as you did — we were both employed by State Govt and the not for profit sector) so our earnings (joint) peaked at about 150K total — still we managed to do what you are doing, invested it well, and lived beneath our means…..our total net worth is about $1.6 million (probably more like $1.5 million after this week) and we are living on about $75-90K a year, with only about 55K in total debt (mortgage) which brings me to my advice — if I were you I would get aggressive on paying off your student loans and mortgage asap — especially the student loans..that would seem to be the more prudent thing you could do
M,
The extra details were helpful, thanks. Your home equity roughly compensates for your debt level, so a fair trade and your liquid assets approximate your net worth. In my mind paying our debts now vs. later is a matter of personal preference with fine arguments at both sides of the aisle, and subject to our own risk version profile, goals, and values. The stronger argument is for paying them off when and if you both decide to stop working entirely to reduce your fixed expenses. I suspect with your asset base and spending flexibility it is unlikely to make a difference.
I believe the $150K expenses when your daughter goes off to college is prior to paying of the mortgage. Just for fun I inputted some of your data (with some assumptions / approximations) to cFIREsim. Since you haven’t commented on G-K I maintained the default inflation-adjusted spending assumptions which is highly conservative. Fast-forwarding to 2023 and pretending you are about 50 and entering full retirement now, I inputted the following into cFIREsim
* 118K/yr in annual spending (the 150K minus your 32K mortage)
* 10 years of paying an addiitonal 32K mortgage so it comes to 150K/yr spending for the first 10 years ( via “additional spending in cFIREsim). I selected not inflation adjusted here since your mortgage if fixed.
* 40 years of retirement (projecting to age about 90… if you like project to 95 or another age; the numbers don’t change too much)
cFIREsim would give you just over 90% chance of success. This is *without* any real growth in your assets above and beyond inflation. The numbers would not be very different extending your retirement period another 5-10 years simulating retirement right now. All of this without social security again. You are in great shape.
Yes, it took me a while also to not to focus on getting to 100% and I see this mistake all the time, even on Bogleheads.org. If we use the most conservative assumptions for longevity, floor of income required, level of confidence, etc. and in this processes exponentially inflates the estimated level of wealth required for retirement and (im)probability of the event. The probability of the “perfect storm” is multiplicative so that if there is a 10% chance of living to 90, and a 10% chance of requiring my conservative estimates for living expenses we are down to a 10%*10% = 1% chance of that event. Throw in another variable and it will drop to 0.1%, and so forth We also tend to dismiss potential favorable factors such as spending a bit less, working a bit longer, making adjustments as we go, even a small possible inheritance on some situations, the high probability of substantial albeit probably means-adjusted social security, etc…. you get the picture. Having reasonably conservative estimates and contingencies works far better.
In that vein being highly conservative yet realistic, 80-90% success rate is the industry standard: See https://realdealretirement.com/will-an-85-chance-of-success-give-me-a-soft-landing-with-my-retirement-planning/ for example.
Part of the rationale is the already conservative assumptions, and plenty of time to make modest adjustments that do not appreciably impact the quality of life over a multi-decade retirement time horizon (and very high probability those adjustments would go towards more spending rather than less). For more on this you may want to check out: https://www.kitces.com/blog/why-does-everyone-think-safe-withdrawal-rates-are-an-autopilot-program-theyre-not/ provides a nice overview on this.
SuperSaver
SuperSaver, once again, very helpful. Thanks so much for your time and energy.
Very inspirational and impressive to be able to do that and stay the course for your working career so far. I’m still within the first five years of practice and it’s tough not to let the reins loose even though we are still a decade behind our non-medical peers in finances.
Since I am an employed physician, there is no way to shove away such a large portion of my income pretax towards retirement. Side hustles (until I make a breakthrough) aren’t going to generate a much as doctor money, but as WCI has mentioned for the life of his website, you have to pick your priorities to do what makes you happy. If that means buying a boat, then so be it! 😉