FIRE | Smart Money MD

Tag: FIRE

Weighing the geographical arbitrage scale for doctors

Posted on January 8, 2021January 30, 2021 by SmartMoneyMD

Large cities with robust public transit and cultural hotspots are the ideal place for some of us. Vast nature and open spaces will appeal to others. Some of us can only imagine living in warm weather next to sandy beaches. Fortunately all three of these locations need healthcare. As physicians, we are likely to be able to find a job nearly anywhere we’d like. Unfortunately some more coveted regions of the country come at a cost. This cost can manifest in several aspects:

high cost of living
low wages
competitive market
extenuating commute times / traffic
natural disasters (read: southern California)

For those doctors graduating with an average debt in the six-figure range, the lifestyle of where we choose to work can strongly influence where we decide to settle. How much of a range can we expect to see? Let’s take a look at a few cities:

Honolulu, Hawaii

Who doesn’t like beautiful beaches, tropical weather, and poke all year round? There are aspects of your life that you will have to compromise on if you decide to live there.

Median home price in Oahu in 2018: $810,000

Average physician salary in Hawaii in 2018: $241,000

Pros: Great climate, natural landscape, paradise in what people otherwise would vacation

Cons: bad traffic, high cost of living, rock fever

Toledo, Ohio

Unless you have family in this area, it is unlikely that any physician would consider moving there for career reasons (other than potentially high pay/opportunity).

Median home price: $68,000

Average physician salary in Ohio: $275,480

Pros: High salary/housing ratio, no traffic, low cost of living, proximity to a Great Lake

Cons: limited culture, relatively isolated area of the country, cold, snowy winters

If your main goal in choosing between Honolulu and Toledo is to get out of debt and build up your net worth as quickly as possible, then there is no comparison. There is a good chance that in Toledo you will find a better paying job with less work, less demanding clientele, higher reimbursement schedules, and lower living costs on all accounts. Yet, there are still people who will opt to practice medicine in Honolulu over Toledo…

According to a recent Doximity poll, the majority of the income-favorable metro areas aren’t in the coasts:

San Jose may actually be an outlier on the map, but the Bay Area poses challenges mentioned above that aren’t necessarily compensated by a marginally higher doctor salary. What polls typically don’t reflect is the rigor of the daily grind. For instance, one of my colleagues currently works in a six-physician group in the Bay Area. His group has five offices and two surgical centers to commute among during the week. He takes practice call every three weeks since the practice has a rule that the senior three doctors do not have to take call. In addition, he takes shared call for five regional hospital every five weeks. Practice building events include lectures at monthly seminars and trade shows.

Using the Geographical Arbitrage Scale in job selection

I define the Geographical Arbitrage Scale (GAS) to be graded with five variables, each with a maximum score of two points (decimal points are okay!). These are common variables that physicians consider when taking a job:

Income — earning potential includes retirement options and benefits
Work/life balance — includes access to family and friends
Environment outside of work — weather and activities that you’d enjoy
Career satisfaction — opportunities to innovate or lack thereof, depending on physician preference
Cost of living — higher score means lower cost of living

The GAS comparison between Honolulu and Toledo might look like the following:

Find out what situation you are in, and adjust your career goals accordingly:

If your GAS is too low, high tail it out of your job!

It would be interesting to see how long one could tolerate a low GAS score that might offer a very high income potential. In a case like that, one could “rebalance” the GAS score after five years to achieve a happier medium.

What is your GAS score?

Why every doctor needs to think about early retirement

Posted on November 30, 2019January 30, 2021 by SmartMoneyMD

While there’s no strict definition on what constitutes “early retirement” (FIRE, or financially independent, retiring early), those in the non-medical field who can enter the workforce in their early twenties can potentially build enough savings to retire with less than ten years of “working”. Obviously this calculation is dependent upon many assumptions on savings rate and expenses, but since the term came into use I don’t recall anyone publicly announcing that their early retirement experiment actually failed. Only time will tell perhaps.

Doctors, by nature of their protracted education duration, are typically a decade behind in earnings compared to their peers in other professions. Many doctors are also burdened by educational debt, which averaged around $200,000 for graduates in 2018. Fortunately our profession can still overcome these financial disadvantages and still sustain a relatively good living in the long run [for now]. If doctors can’t “retire by 30”, then is it possible for them to retire in a similar amount of time once they obtain “real jobs”?

Doctors can definitely opt to retire “early”.
The rate at which we can build our nest egg is directly proportional to the amount that we can save. Non-doctors with six-figure salaries can FIRE within a decade of work. Doctors, if maintaining a comparable standard of living other “FIREee’s”, can potentially retire early within their first fifteen years of medical practice even if they have to pay off a six-figure educational debt. There are definitely doctors and other high-earning individuals who have opted to retire before the expected age to hang up their hats, but that is not the norm.

Why?

That’d be bucking the trend. Most of the time it’s not practical to give up on a stable profession that pays well. Why would you want to spend your twenties studying and working off your tail to become a doctor and then quit? The other problem involves lifestyle creep. As we all know, it’s easy growing into your income. Sometimes it’s no fault of our [mostly] own, but rather the environment where we live. It’s normal that people would opt to live in more affluent neighborhood to raise their children. These areas not only have more expensive homes but also have higher association fees and requirements to keep your front lawn green and manicured. I have a friend whose lawn bill costs $800 a month! I know doctors who maintain a professional clothing budget of $250 a month. Most of these doctors opted to live in the neighborhoods attached to the most desirable school systems yet still send their kids to private secondary schools. These recurring expenses certainly make it difficult to scale back without having to relocate.

You might also like: Is a degree from a prestigious medical school advantageous for doctors?

The evolving medical landscape
Those of us in medicine know that regulatory changes (for the worse), reimbursement cutbacks, and increasing physician responsibilities can turn the most visionary of doctors into cynics. The worst part about being in the healthcare industry is that it is constantly an uphill battle for doctors.

You might also like: Can the health system afford to give doctors raises?

With a fixed or diminishing amount of funds in our existing healthcare system, most of us are aware that it is only a matter of time that new unfavorable rules to doctors are passed. Not a day goes by in the hospital that I don’t see some doctor griping about some change that puts doctors at a disadvantage:

Anesthesiologists losing a hospital contract to another group predominantly staffed by midlevels.
Nocturnist shifts that pay the same as a daytime Hospitalist shift.
No more bottled sodas in the doctor’s lounge.
Revised RVU bonus compensation schedule that is unachievable.
Emergency room doctors getting fired and replaced by midlevels due to lower costs at the expense of training.

As most things in life you can complain about anything and everything, but most of the gripes we hear are well-warranted. I’ve met too many doctors who are simply stuck in their jobs because it helps them pay the bills.

If you grow your own oranges, you will be less susceptible to fluctuations in the produce market!

Break the cycle
The strongest negotiating chip one can have is the ability to walk away from the deal if the other party doesn’t agree to favorable terms. The only real way to do that is if your livelihood doesn’t depend on the job itself. The same analogy goes for several of my colleagues in academic medicine—some of them with independent family wealth opted to take a significantly lower paying university-based job in order to practice medicine without dealing with the insurance hassles (epilogue: they still deal with insurance hassles).

So aiming to reach early financial independence even though you have no intention of quitting medicine early may serve as a buffer to any changes in medicine that are out of your control. If your working conditions end up become intolerable, you have more freedom to walk away. Most doctors won’t have to use their exit strategies but having one might be the most foolproof option not to lock yourself into golden handcuffs.

Does your financial strategy involve aiming to reach financial independence early?

The key to financial success as a doctor – staying hungry

Posted on September 29, 2018January 30, 2021 by SmartMoneyMD

We all know the importance of compound interest in building wealth. The fuel for compound interest is time—the longer you are committed the greater chance your investments will grow. This applies not only to financial growth but also to essentially everything else. As a rule of thumb, the more you study for a test the better you ought to do. The longer you have practiced medicine, the more likely you will have brand recognition by the public. If you bought a few homes in remote parts of Astoria, New York in the 1970’s, your properties will still be worth a lot without any effort. Time builds. Time erodes. The key is to strike a balance.

The hungriest doctor gets the best dinner

The medical training environment can make even the most satiated student hungry. I’ve witnessed, during medical school, a seemingly mundane presentation on bezoars evolve into a history lesson on surgical management of gastrointestinal obstructions to the cocaine addictions of William Halsted. That’s right. This five-minute presentation after morning rounds probably took an all-nighter to prepare. I sure felt sorry for the student who had to present a topic after this gunner.

The longer you can stay hungry, the higher the chance you can achieve your goals. There are studies on successful people, with the most successful people having characteristics nearing hypomania and insomnia. If you are in that category, you are engineered to be highly productive. The rest of us normal people will undoubtedly run out of gas if we operate at 110% all of the time.

If we want to become financially successful, we really need to tap into that hunger and stick with the plan as long as possible.

Financial success is multifactorial

We already have the formula for financial success—spend less than you earn. If we can stay hungry on both our earning and savings power, we can accelerate toward financial freedom sooner.

Staying hungry on your earnings is not easy. Early into your career as you are still mastering the clinical routines, nuances in the workplace, and billing terminology of your work, you are hungry. Everything is still new and hopefully challenging. Most of us in this period are building our practices and are building up to our earning potential. Eventually your routine becomes routine. Perhaps you max out on your earning potential at your job, or worse yet, start earning less. For instance, Hospitalist medicine is one field that often plateaus early in one’s working career and become dependent upon quality metrics for bonuses. If you are finding that you are losing your hunger for earning, it’s time to figure out how to continue your financial success.

You could explore secondary responsibilities in your existing job, like participating in quality review committees. Sometimes these extracurriculars come with certain stipends—more money in the bank. Alternatively you could start exploring alternative income streams to build upon your income.

One of my colleagues decided to cut back on his work schedule to four days a week. This was a means to reduce exposure to stress in the workplace, combat burnout, and prolong his overall working career. Due to logistics in his work situation his income dropped by more than 20% for going down to a 0.8 FTE, but he is much happier. Doing so will likely prolong his working career by at least another five years—five more years of working income to help build the retirement fund.

On the savings front, it is easy to loosen the reins as we build our net worth. Maybe we decide to upgrade to a nicer car when we hit our first million, or a larger house when we hit two. Junior might need to enroll in private school or join the lacrosse team. One method to remain focused on saving is to stick with your financial plan.

Creating a financial plan is one of the fundamental steps in achieving financial success. Part of the plan should include how much of your income you intend to allocate to savings. As long as you meet your savings goals, you can feel less guilty about making larger purchases. As your income grows with your career, you can adjust your expenditure guidelines in your financial plan.

There’s really no rocket science in financial success as a doctor. Focus on your career. Create a plan for success. Stick to the plan, and modify as needed. It doesn’t matter if the plastic surgeon in your hospital is getting rich from real estate ventures or time shares. Getting rich doesn’t have to be sexy.

The key to physician success: it’s okay to be missing out

Posted on September 1, 2018January 30, 2021 by SmartMoneyMD

It’s human nature to be social. The collective sensation of being in a group or organization helps us belong. We see this in school, where kids band together for activities. We see this in the doctor’s lounge, where the anesthesia guys chat about the latest hospital gossip. Occasionally we see the loners who shed the collective mentality and shine through their own path. If these novel beliefs are compelling enough for the masses to adopt, then the long wolfs become mainstream.

There has been a push over the last year in the online physician community to venture into seemingly radical pursuits, like trying to retire early. Other more tempered pursuits seem to revolve around doctors finding self-sustaining means to escape medicine itself. Multilevel marketing, real estate, side hustles, and other income-producing hobbies are the rage. I am always amazed at how motivated my peers are. The irony is that sometimes it seems like more effort is put towards pursuing something outside of medicine. Nearly all of the side hustles that I’ve encountered don’t require having gone through the pain, time, and intelligence of medical training.

I had a classmate in medical school who finished his medical degree and a year of internship before joining a huge medical consulting firm. I never really knew why he did that, since medical school isn’t exactly a walk in the park for most people. Unless he ends up in the C-suite of a major hospital or healthcare behemoth, it is difficult to justify the financial advantages of the career route that he chose. Fast forward to today. He’s not exactly in the C-suite, but he has a similar income trajectory as most doctors his age and a much greater potential to impact healthcare that most of us will never even dream of doing. Go big or go home, as one might say.

Dare to be normal

Most people would prefer to live according to their own terms, and blend into the crowd. This applies to doctors as well. Some of us are workaholics; some of us want to do the minimum amount possible. But average is still somewhere in the middle. I only know a handful of doctors who actually love booking elective surgical cases the Friday after Thanksgiving or rounding on patients every weekend. Everyone else just wants to be able to play a round of golf on their off-days, and take their families out on a road trip in a nice U.S.-made German-branded SUV.

Not missing out on this would mean more inches to your belt.

Not every doctor wishes to own a dozen homes, a private jet, or a Maybach. On the other end of the spectrum, most doctors aren’t going to want to pack up their medical practice, travel the world for weeks at a time, and homeschool their children. It’s okay to teach your kids about World War I by renting an AirBNB in Sarajevo, but a textbook will probably do just fine.

It’s important for practicing doctors to focus on what is important to their family and careers. There is a lot of noise in the online community with anecdotes of doctors who are able to build an escape route out of envious medical careers that most people would only dream of being in. There is nothing wrong with being a doctor working 55 hours a week, taking call every fourth weekend, and earning a comfortable living.

There is nothing wrong with being out of the loop

Fear of missing out, or FOMO, can be self defeating. It doesn’t matter what your colleague down the hall is doing with the latest real estate craze. You might be missing out on the biggest financial opportunity of the day, but you could also be missing out on the biggest flop. Just because your roommate quit her stable job as a gastroenterologist to join a startup doesn’t mean that you need to find some radical way to prove yourself. The key to success is to keep your head in the game. You are already a physician. You have a better income and lifestyle than many other professionals. Don’t sabotage it. Hone your plan for a successful career and follow it.

The financial Achilles heel conundrum of doctors

Posted on July 28, 2018January 30, 2021 by SmartMoneyMD

The most common hurdle that doctors have to becoming rich is overspending. The notion that good income guarantees great buying power not only delays building financial worth but also confines doctors to lengthier careers than needed. The solution, in a nutshell, is to make sure that we make prudent financial and career choices to complement our financial velocity. Easy, right?

You might also like: Debt-free medical school a financial blunder for doctors?

The reality is not so simple. Psychology is fascinating. Human behavior can function, at times, stochastically, yet can be very much predictable. Most people entering the field of medicine know that they ought to end up with relatively high incomes. Does a potentially high income actually harm our financial choices? Is the promise of high income a financial Achilles heel for doctors? If we can tackle this belief, we’d be able to secure a smoother path to financial success. Let’s look at two scenarios:

Wealth begets wealth

There is truth in the saying, “the rich get richer”. The best way to have wealth is to be born into it. Your hand is loaded with face cards, and if you are prudent with your life choices you can bring home the entire pot. When I was in medical school, my net worth was a solid negative six figures. Common financial choices I faced included whether to get the combo meal at Five Guys or just a burger so that I could cut the cost of my lunch down by half. Do I take the flight with two layovers in order to save $50? I lived in the present, and that meant finding out ways to reduce my student loan burden. Even with an income as a resident, I had no desire to borrow from “future me” for a better lifestyle because that would mean having less to repay my student loans.

One of my classmates frequently bought real estate thousands of miles away. He played the stock market in residency, and ran apartment rentals he owned on the side. We live in America. A $50,000 resident salary can fortunately be leveraged for the right investment. But I am probably too conservative to risk my residency salary for greater riches especially if I’m going for the burger without the drink. While I may never know his financial situation, I doubt that he solely relied upon his salary for his activities.

Likewise, one of the radiologists I know bought a $1100/square foot apartment in upper Manhattan straight out of residency. Six months later, he bought the adjacent unit and combined both units together. Radiology is a high-paying medical field, but this endeavor clearly had backers.

Once I am out of this cone, I will be unstoppable!

Those who began with greater financial firepower are generally more willing to take bigger chances. Sure they can stand to lose more, but they can gain a whole lot more with the appropriate risks. In this scenario, the thought of becoming a doctor made no impact on a one’s financial decisions.

What about everyone else?

I have a coworker who has an uncanny ability to borrow from her future self. Mercedes in residency. House in residency. Nicer house with world-class vacationing as an attending. Vacation home on an island. As far as I know, she doesn’t utilize balance transfer checks or credit card debt. But I cringe at the number of big ticket expenditures she is able to make without much second thought.

The fascinating aspect about appearance is that no one else would have any idea how much net worth exists behind the facade. I asked her recently how she was able to manage a seemingly envious lifestyle, and she bluntly replied that it was because she knew that she doctors earned good money. The mindset was cemented long ago, and she knew to borrow from future self.

This mentality actually is quite common most of my coworkers, although all of them have certain degrees of financial compunction. Several of them proudly proclaim that they contribute the maximum amount to their 401k’s, and still have plenty to go around. The problem is that saving solely through a 401k is insufficient at the spending rate that most doctors are accustomed to. Why don’t we realize it?

Are doctors delusional about their earning potential? Some of us truly are, but the majority of us are simply misinformed. You don’t know what you don’t know. Until you sit back and do a few simple calculations, you won’t really know how much or how little your bank account has. Only then will you be able to protect your financial Achilles heel.

Track your progress towards financial independence with Personal Capital. Sign up for a free account. Shed your financial Achilles heel!

Five aspects of your financials that you can clean up for the New Year

Posted on December 31, 2017January 30, 2021 by SmartMoneyMD

As we’re counting down the hours until 2017 is no more, I’m going through my victories, failures, and resolutions for the upcoming year. It’s important for personal development to identify what has worked in our lives, what hasn’t, and what we can do to become better people. Financially, 2017 has been a rocky year for me—medicine has hit various professions hard, and the unlucky have been hit. I personally took an 80% pay cut while working longer hours and bringing in 8% more revenue (Yes, that’s collected revenue and not charges) for my employer! C’est la vie. We hope that 2018 will be a better year for medicine.

Despite what happens with our jobs, my financial plans remain as focused as ever. The upcoming year will still be too soon for me to declare financial independence or cut back on my job, but I hope to hit more milestones within the next five years.

In the meantime, I’ve dusted off my Top 5 Financial Checklist that I will be reviewing for the upcoming new year to keep my financial plans sharp:

Fund the Roth IRA

Anyone who is drawing a paycheck who has no tax-deferred IRA space should be contributing to a Roth IRA. Even if you are in early retirement, you ought to plan to fund your Roth IRA as you are withdrawing to cover your lower tax bracket space as conversions. If you don’t quality directly for a Roth IRA due to high income, you should still fund a backdoor Roth IRA.

You might also like: How to fund a Backdoor Roth IRA.

If you have the funds, go ahead and contribute to your Roth IRA in January. I’ve definitely had years when I “never found the time to contribute”. Your future self will thank you for it.

Strategize means to pay off those student loans

Although student loans are fortunately immaterial for me, they were a psychological burden when I was still in repayment. With federal loans in the 6.8% range, recent graduates will benefit greatly by knocking out those loans as if your hair is on fire. It doesn’t matter if your college roommate tells you she can get a 7% return on stocks that will compound while your student loans remain on simple interest. It doesn’t matter if a college acquaintance who became a real estate mogul gives you a lead on a 14.5% real estate return. Repayment of a 6.8% student loan is a guaranteed post-tax gain. If you have to refinance at a lower rate, do it. If you receive a sign-on bonus on your first job, consider contributing a portion of it (or all of it) towards your loans. You could probably live without a fancy new car for at least one year, right?

Reassess liability.

Liability to me involves situations that could devastate your financial situation. This includes:

Disability insurance
Homeowner’s / Renter’s insurance
auto insurance
umbrella insurance

One interesting aspect about umbrella insurance is that it ties into your auto and homeowner’s insurance. Most insurance companies do require a certain minimal coverage on your vehicles before umbrella insurance takes effect. If you drive a very old beater car that really isn’t worth insuring, you still have to increase the coverage. Yes, you have to pay more to get covered more because you have more money. I’d take more money any day.

Update your financial plan.

Everyone will have different levels of details in their financial plans. Some of us will calculate down to the month and year when we will be able to say goodbye to our daily jobs. Other people are simply going to have a basic financial statement declaring their investment strategy stratified by age. I keep my financial plan relatively basic, and I assess my annual savings rate, stocks to bonds ratios, and whether there are any planned big expenses like home purchases or real estate investments that I need to save for at the beginning of the year. This takes maybe fifteen minutes of additional thought and planning each year. No more, no less.

Update any employer-sponsored retirement savings.

Employer-sponsored plans include HSA’s, FSA’s, basic 401k’s, and the like that should be pretty much on autopilot. Not every household is suited for high-deductible health insurance plans to qualify for HSA’s, despite what we commonly seen among financial bloggers. Believe it or not, some of us have families with chronic medical conditions that still benefit from health plans with higher premiums but more coverage. Many FSA plans allow you to carry over $500 or less of your balance into the new year. Be sure to make note of any details—you certainly don’t want to give away any money that’s rightfully yours.

Happy New Year everyone! What other financial housekeeping duties do you go through at the end of the year?

How the Financially Independent can plummet back to Financial Dependence

Posted on December 24, 2017January 30, 2021 by SmartMoneyMD

Merry Christmas everyone! I hope that everyone is having a safe and relaxing holiday with their families, whether that means opening presents in front of the cozy fireplace or watching films while eating Chinese food.

While I do feel envious of those in the blogosphere who have reached financial independence, I do realize that everyone is in a different situation and phase in our financial journeys. The financially precocious of this world have surely gotten a head start, but building up hoards of money isn’t the name of the game. We just need to be smart about what we put our labor towards and enjoy ourselves during the journey. Doctors enter the workforce—money people call this the wealth accumulation phase–later in life, but we are fortunate to have good earning potential. I’d pick compound interest over earning potential any day, but earning potential can get you pretty far in life. Well, if you are a doctor who doesn’t have good financial firepower, I hope that you are still saving lives and healing people. ?

One aspect of financial savviness that I was skeptical about early in my financial readings was how one can be confident that safe withdrawal rates can actually be safe? The financially bold were able to set their expenditures within a tight range, build up to a 3-4% safe withdrawal rate, minimize their tax burden, and tell off their employer a la Office Space style.

I see others simply working a “few extra years” with strong savings rates over 50% to build up additional buffer. Then there are the exceptional prodigious who actually develop additional income after declaring financial independence. There are many roads to Rome, as they say.

But out of the prominent few out there who are truly level-headed and are able to make unemotional financial decisions, how many out there with decent financial sense, make it to financial independence, and then fall back to financial ruin? Anything can happen in this world, and here are a few habits and life choices that can erode away your financial independence:

Rising Eating Habits

While food in general is much cheaper than what was available a decade ago, there are clearly more wallet-gouging options available now as well. Foodie cultures, microbreweries, organic foods, fad-diets, and Manuka honeys all contribute to increasing the cost of food. Perhaps you have a dream to dine at every Michelin-starred restaurant you can get your hands on. Maybe your daughter decides to become vegan and your wife goes gluten-free, too. Uncontrolled, the cost of food for a family of five can easily double or triple with selective eating. If there is any redeeming aspect of rising food habits, it’s that we only have one stomach. No matter much you crank up your food expenditures, you probably aren’t going to undo years of prudent financial decisions that got you to financial independence.

Vacations

Once you cut back on your job, you will undoubtedly have more time to jet set. Travel can get quite pricey, especially if you go heli-skiing or drink champagne in a glacier. However, most people who can handle their finances well should be able curb their need to splurge on vacation. I consider vacations to be a possible financial sink, but the financially astute ought to be able to curb their expenses if the going gets tough.

Heli-skiing this area looks like fun but is going to cost a pretty penny.

Kids

The danger with spending on your kids is that they are your kids. Since you’re not spending on yourself, it is easy to convince yourself that you’re contributing to their success. Raising children can be economical but it can also destroy your ability to retire. Just because you thought you had planned out their public school trajectory by moving into a good (read: expensive) housing neighborhood doesn’t mean that your kids will actually go to public school. I’ve seen plenty of highly intelligent parents who, against practical judgment (and sometimes at the urging of their spouse), send their kids to private school. Think that the fifth grade couldn’t possibly get any more expensive when your daughter started attending a $25,000/year private school? Wait until she asks you for an iPhone X because all of her classmates have one too! You’d better work a few extra years if that happens.

Divorce

No one ever plans for divorce, but it happens to more than 40% of Americans. If you have children, you’d better believe that there is likely going to be legal influence on that constitutes child support. The toughest part about dividing up retirement savings exactly in half is that it may not be possible to divide up everything in half. I’ve seen some families in these situations forced to sell property at a loss simply to convert real estate to capital so that it could be divided more easily. Your spouse may not necessarily have the same financial goals as you do, and divorce may prohibit both sides from ending up in a good financial situation.

What other situations can whittle away your financial independence?