026 - Physician on Fire

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Transcript

Time Speaker Text Tags
1 - 20 Jonathan Mendonsa Brad We're back and today we got Physician on fire He is going to be talking to us obviously about financial independence but we're going to be dealing with this specific framework of the high income professional in the context of financial independence and I'm excited just to get a chance to go through the information he's been creating over the last several years and explore what this particular framework actually looks like.
highincome
20 - 39 Brad Barrett Yeah agreed. This should be a good episode. Our good buddy Carl over at fifteen hundred was the one who hooked up with physician on fire and. it's Nice to meet another blogger and especially someone who's focusing on high income professionals so I think that's a different perspective than many of the guests we've put on and I think it will really add to the audience. Yeah very exciting.
blogger, highincome
39 - 41 Jonathan Mendonsa All right POF Welcome to the studio. How are you doing today buddy.
41 - 44 Milo "Physician on FIRE" Andersson I'm doing great. I am excited to be here chatting with you.
44 - 53 Jonathan Mendonsa I think the audience that you speak to with your blog is maybe different than the audience that Jacob from E.R.E speaks to. And I think that that is awesome.
53 - 72 Milo "Physician on FIRE" Andersson Yeah definitely. I'm not trying to show people how to live on less than $10000 a year. You know my budget is more of the for us. For us maybe 60 70 80000 a year. But I know my audience they spend up to 200000 or more. So yeah I definitely have a slightly different perspective than some of the other.
72 - 92 Jonathan Mendonsa I think it makes for a very interesting story because when you take someone on an average day without any intentionality is spending close to 200 or $300000 a year and you start talking to them about the possibility of what a 60 or $70000 a year lifestyle might look like. That's got to be an interesting conversation. I mean that's one that I want to be a fly on the wall for.
92 - 140 Milo "Physician on FIRE" Andersson Right and I think it starts at. Well I couldn't well. You don't want to or you're so used to what you're doing right now. But on the other hand when you look at a little closer how we're spending our money we've got certain ways that I say that we cheat essentially because I no longer have a mortgage payment. So I have a nice house but it's paid off and we have a little second home and that's paid off too. I've paid off all my student loans. We no longer have term life insurance no longer pay for a disability which is 300 to 500 a month for most physicians. You know we do a little bit of travel hacking our kids are in public schools and even our donation money. I track that separately because that comes from our donor advised fund which is something I'm building up from our investments. So again there are quite a few categories where we've just knocked that spending down to essentially zero.
college-loans, lifeinsurance, travelrewards
140 - 163 Brad Barrett So when you have that conversation with fellow physicians who are spending 200 K plus a year. How does that go. What do you actually talk about as these are the first items changed. Does it even get down to change or is it just here's what we're doing and it's going to enable us to do X Y and Z retire early or have financial independence however you want to frame it. I'm just really curious what that conversation actually mechanically looks like.
163 - 206 Milo "Physician on FIRE" Andersson Right. And I haven't had this conversation in person in real life too many times. Most of the talking I do is in the form of writing on my site but I was talking with a friend of mine and I kind of told them what our spending was. And it was like Wow. And I was like well yeah there are certain things you can do and where we live you know I'm kind of in a rural area and upper Midwest and there isn't as much pressure to spend a lot of money in the parking lots. Not full of luxury autos. And we don't have competition for the best private schools because we only have a couple of parochial schools. And so I think there's more pressure in bigger cities too be a bigger spender than there is where I'm at. But in real life I haven't had that conversation too many times and I don't think it would go well. To be honest.
206 - 216 Jonathan Mendonsa It probably does help that in some cases because you've created this platform you're sharing your story. They're coming to you as opposed to you imposing your own belief system on somebody else. These are people that are looking for another way.
216 - 237 Milo "Physician on FIRE" Andersson Right. I'm not going around proselytizing trying to convince every surgeon I work with that they should start changing their ways because frankly I'm a live and let live kind of guy like I'll do what I want to do and you can do what you choose to do. But if you happen to like you said stuble upon my site and think oh well that's interesting that's something I hadn't really considered this whole financial independence world.
237 - 300 Jonathan Mendonsa I think it's such a cool picture that you get to create and that you get to talk about and I guess I have a toe in the world I'm a pharmacist so I understand you know a little bit of your framework but in general many of your peers are people that are coming after you are getting their first real job where they're not working for essentially minimum wage especially when you put in all the hours they're putting up but they're getting their first real job with 16 plus years of training now and they're coming out with $300000 in student loan debt and then they're they're making this incredible income potentially. But now there are an extraordinarily high marginal tax bracket and you have not only all the delayed gratification for the 16 years that you put in training and now potentially you're have two kids and you've been telling them just hold on hold on hold on I'm finally about to finish this fellowship. And now after all of that you've finally gotten through it. The desire to just overcompensate for those last 16 years must be extraordinary. But didn't you is getting penalized and crushed by the tax codes so physicians have these unique struggles and this and this kind of this unique framework that you have to work with. And I imagine the ability to resist overcompensating for the 16 year drought that you are in must be very intense.
college-loans, debt, tax
300 - 372 Milo "Physician on FIRE" Andersson You nailed it. I mean I was going to say some of the high points but you just you just nailed them all. It really is. You don't finish until you're usually in your early 30s. For most of us and that's if we didn't take any time off and the debts are becoming just out of control. And then you've been scrimping and so there's kind of two sides to that coin as far as you're used to living on a lot less. Not much more than minimum wage. Based on your hours in one hand. People like me for example are so used to quote unquote living like a resident where you can make. For me it was $40k and now it's maybe closer to 50, 60 a year it's decent living but but it's just enough to live a normal middle class life so if you can continue living that middle class lifestyle for just a little while you can get way ahead despite the tax code and the tax bracket you find yourself in. But on the other hand so many of us have been waiting and spouses have been waiting for that first big paycheck that you're going to reward yourself. And you know it's best to reward yourself with maybe a really nice vacation or a decent reliable vehicle. But on the other hand many physicians just spend the majority of that paycheck and don't even max out their available tax deferred retirement investments which is first thing you really ought to be doing.
debt, tax
372 - 405 Jonathan Mendonsa Just to Dial in that a little bit more so you graduate or not just graduate but now you finish your residency and your fellowship or whatever. You know that ended up looking like. And now you're making you know 200000 plus but you've got $350000 in student loan debt that have been accruing you know interest essentially in the background this whole time maybe you had it on deferment and you're in a now extremely high marginal tax bracket. That is a challenge you know to pay down $300000 in student loan debt that's going to take some time especially when the marginal tax bracket you're you're in is a 40 percent tax bracket. What does that look like practically for you guys.
college-loans, debt, tax
405 - 447 Milo "Physician on FIRE" Andersson You know if you really want to get rid of that debt which I strongly suggest you you really focus on, then you can't really do the big lifestyle upgrade or lifestyle inflation maybe increase your lifestyle by 50 percent in spending but you want to put a lot of money towards those loans. There's a physician up in Alaska. He's also a relatively new blogger but he goes by live free M.D. and he has a post about paying $400000 in debt I think within five years. And that's because that was his goal. He said I could stretch it up to 20 or 30 years like a mortgage but I don't want that hanging over my head. So he just put most of his paychecks towards those loans until they were gone. And that's really you know the best way to do it.
blogger, debt
447 - 452 Jonathan Mendonsa You know let's go I just hop right into this do you want to tell us a little bit about your own personal path of financial independence.
452 - 606 Milo "Physician on FIRE" Andersson Sure. It's kind of a long story kind of a short story. I finished residency in 2006 and for the first couple of years I did what's called a locum tenens work which is just a fancy Latin term for holding a place or working a temporary job. So I was an anesthesiologist for hire working wherever there was a need. And I had a license and wanted to be. So for two years my fiance and then wife during that time we got married traveled around lived in a half dozen different states and tried a bunch of different practices and we were living on the dimes of the hospitals and groups we worked for us. They'd put us up in apartments or you know hotels for a short period of time. And that way I was able to basically save every dollar I was paid. I had a per diem for food and I had lodging and I was able to pay down my student loans while saving up for our future. And then basically almost everywhere I worked there was a job opening and a job offer available to me and one of those places happened to be very near to where my wife grew up. So I ended up taking a permanent job. I should put permanent in quotes. If you could see me I'm doing that with my fingers. The thing. So I took a permanent job that lasted about four years. The hospital actually went bankrupt and shut its doors for a period of time and I was let go during that downward spiral. But we had built a great big house on the water. 400000 square feet was our dream home when we were going to be there for the 20 or 30 years I was planning to work. And of course that got blown up so I realized after that that maybe we overspent on the home and did a little bit more locums work and eventually ended up in another permanent job which is the one I'm in which was my last job but all that time. Well I shouldn't say no what's my last job as far as I know. It'll be my last job I plan to be here for at least another year or two and then we'll see what happens. So after you know 10 11 years of working I had always been a natural saver and I didn't know exactly what I was saving for but I came across an article on Market Watch about this guy named Pete who goes by a silly moniker of Mr. Money Mustache. And it talked about financial independence and what it meant and what the math was behind it and all of that. And I looked at my balances and kind of ran the numbers for myself and realized it was a shocker. But I realized I basically was financially independent after a decade of working as an anesthesiologist and I hadn't really been saving for it. I had been saving but I didn't know for what necessarily but I did realize that if I really wanted to I could retire at any point.
college-loans, familytravel, savings
606 - 629 Jonathan Mendonsa What's powerful about that to me is just by virtue of the fact that you have this massive income if you just do just a couple of things right at the beginning the rest of it rights yourself and the sad thing is how many you know physicians I know and the story is that the age of 60 they have nothing to show for it or at least they're still on the hampster wheel and they're having to work to 70. There's no real timeline for their retirement because they just didn't do a few those things right at the beginning.
629 - 660 Milo "Physician on FIRE" Andersson Right. I mean you can't live paycheck to paycheck and ever hope to get ahead. And so I you know I always I mean even back in medical school I remember playing with compound interest calculators and thinking hmm if I set aside eight thousand a month and then after 30 years I'd be worth $13 million or whatever it is you know. And I didn't know what to do with $13 million or anything like that. But I've also realized I don't need 13 million. That's at least 10 million more than I need. Maybe 11 but yeah I've always been interested in building wealth rather than having a whole bunch of stuff.
medical
660 - 702 Brad Barrett Yeah that's funny about the compound interest calculator because that was one of those aha moments in my life that actually I had a summer internship I think in college it was with Salomon Smith Barney and I was doing grunt work. But one of the things I was able to sit in front of this compound interest calculator and it was ROTH IRA. And if you put in the max which then was only like two or three thousand. You I gamed it out. If I earn X percent a year until I'm 90 and it was like a hundred million dollars and I'm thinking you're falling on the floor it was insane. But as silly as that sounds. That was one of those seminal moments in my financial life just seeing that calculator and knowing that well the count only two or $3000 a year can make such a difference when compounded over many many decades.
college, ira, roth
702 - 741 Milo "Physician on FIRE" Andersson Right and my my parents my dad actually was at a dental practice and he was just down the street from an Eddie Jones guy because you know they're there on every street corner. But he took us down there and had the guy run us through some little scenarios like that and he showed us you put in I think it was 2000 the year. And we were probably 16 or 17 at the time and he showed us 11 percent interest and what that would do. Over the course of a lifetime it was like wow yeah there's those you know DECA millionaire numbers. So this is not a plug for Eddie Jones by any means but he did he did open my eyes to the magic of compound interest and my dad taught me the rule of 72 even before that. So I knew what it would take to double my money with interest.
741 - 762 Brad Barrett Yeah that's very cool. So I just want to actually ask you to put yourself in your shoes like the day before you read that MarketWatch article with Mr. Money Mustache. So had you thought about retirement or early retirement or what do we see what that number was for you. Had that ever consciously came into your mind or what was your plan the day before you read that article.
762 - 844 Milo "Physician on FIRE" Andersson That's a great question and I would say that I hadn't thought a whole lot about it I figured it made sense to work at least as long as I had kids going to school and living with us which would have put me into my early to mid 50s. And I had kind of looked at the numbers and figured if it were till 60 I'd like to have 10 million and maybe even by 55 if things continue to go well with the stock market. But the thing that really drove me to kind of look at all that again I think I stumbled across the money market watch article and then it just kind of stuck in a little place in the back of my mind and then I was studying for a board exam. And it's one that they make us take every 10 years or at least that was the plan back then. They've changed the rules but I was studying for this exam and it was just a whole bunch of minutia that I had to learn that didn't really apply to the job I do every day and I thought geez about that. And if I have to do this again in 10 years like and several months studying for this computer exam that cost $2000 to take and it's very frustrating. And then I thought what did that Pete guy say again what was the what are the numbers there. I looked at that again and that's how I found his blog and read a whole bunch of it and then really honed in on what we had figured out. No I don't have to take that test again in 10 years. I could probably get away with not taking it now but it was all so new to me. It's taken a couple of years just to process it all and then I started writing about it. But a year after that aha moment.
844 - 904 Jonathan Mendonsa You know going back one of the things that was really powerful to me they just said a second ago was basically saying you know and I can have 13 million dollars and then I realized, wait a second, I don't actually need 13 million dollars. In fact that number may be close to it now. Insert a number here doesn't really matter. But what what's striking to me is that in the community that we're in and I love that yes your domain is physician but it's physician on fire so you have centered yourself from the fire community and your framework's is different but your roots are in fire and that's the conversation that we have. Money is not the end goal. This is not a race to be the one with the biggest pot. But what you're doing is you're looking at how much do I need to sustain the lifestyle that I want to be able provide for my family. And that's a function of the math. And then you don't need to pick some willy nilly you know number out in the sky it's not it's not a pie in the sky it's not 20 million it's not 10 million. It's based on the math and you said my number one goal is to be financially independent not to be the richest guy not to be the next Warren Buffett. And my number is significantly less. And I think that's empowering. And I think that really allows you to have a different conversation and a different motive with your working career.
career, families
904 - 973 Milo "Physician on FIRE" Andersson Right. And that's still a big number that I'm shooting for because I don't want to have any regrets. Know I don't want to feel like gee why did I leave this great job. when I was in my early mid 40s and so I'm overshooting a bit and I know that. But you know I'll be more comfortable with. So you have three to three and a half percent withdrawal rate and I'm aiming to have the ability to spend maybe 20 to 30 percent more than I actually do right now because I do like most aspects of my job. There are certain parts of it that I don't love. But I'm trying to balance the regret of say working too many years and not starting to live a more exciting life early versus regret walking away too soon and someday wishing that I had worked longer. But as far as those big big numbers I mean honestly I figured I'd probably just put my name on a building at my alma mater or something like that someday although you know with compound interest if I continue to spend the equivalent of less than 100000 a year and I worked till I was in my 60s. Well yeah I would have 10 million when I retire but maybe 50 million 30 years after that. And of course that wouldn't be worth as much as it is today. But it would still by I think at least a nice break room or something.
973 - 1008 Jonathan Mendonsa That's awesome one of the things that's so unique about the situation that you find yourself in being a physician or high I would say specifically with physicians just because the amount of training that you guys have to go through to be a physician in the fire space what a quandary you are going to be in a situation where you spent 16 years trying to become a physician. And then and I'm not saying that this is a choice that you're going to make but for someone it might be they do it for five or six or ten years and suddenly they say you know what I think I'm pulling the trigger I think I'm done. And I think I read this on maybe your blog or someone else's you know. Is there a potential for guilt there that you're making that choice would you feel guilty that. Oh I think I'm going to get out of this.
1008 - 1032 Milo "Physician on FIRE" Andersson Personally though I think some people have different thoughts on that but we certainly didn't sign any kind of indentured servitude contract when we decided to become physicians. And so I don't think we necessarily owe anything to society. I think it's a good service that we provide but we're also compensated for it. So it's more of a contract with society than a contribution. I feel sometimes unless you're actually doing volunteer work and that's wonderful. All
1032 - 1049 Brad Barrett right. So I want to ask you a question this is just my own ignorance of the profession. So let's say just hypothetically you were to take off a couple of years and you decided hey this early retirement stuff isn't for me. Could you go back to being a physician at that point or do you need to requalify or how would that even work. Is that something on your mind.
1049 - 1144 Milo "Physician on FIRE" Andersson It definitely is on my mind. And when I do quote unquote retire from medicine I'm going to treat it like a sabbatical as though I may come back. At least I set myself up so that I could. And the longer you're away the more difficult it will be for me to set myself up that means having all my certifications up to date and renewed just before leaving. So there are a number of acronyms and certifications that I have to have as an anesthesiologist and that's advanced cardiac life support basic life support pediatric advanced life support etc. so I'll have all those ready to go and they're good for two years and then I'll renew my state license which most of them are good for two to three years. I'll probably do some basic C.M.. E which is continuing medical education attending conferences or doing certain online modules to get credit. So you do have to do quite a bit to keep just the paper certifications up to date. And the other part of that is skills and skills fade in time and people like me anesthesiologists Also surgeons interventional radiologists intervention cardiologists do a lot of procedures with our hands. And if you're away from medicine for too long and not doing that with procedures then you're going to get rusty. And so you know I think for me that window will be closed within a year or two and if I really wanted to come back after five or eight years something like that it's possible but it definitely requires from remediation and I would probably need to work with a residency program and do some sort of you know maybe a one year or a six month remedial training just to make sure that I have the skills and then it's going to be up to your employer the place that might hire you whether they find that's adequate or not.
medical
1144 - 1178 Brad Barrett So one of the things we talk about with FI in general is kind of taking the control back from someone else. Right. So your employer or whoever it is you know things you don't like to do and one thing you mention a few minutes ago really struck me where you said there are many aspects of your job that you really genuinely enjoy. Are there any is there any capability to do just do those aspects as Jim Collins would say when you have a FU money. You can say F you to the aspects that you don't like. I mean is that conceivable in the medical profession is that something that you've thought of or is that you really just want to just say OK I'm really retired.
medical
1178 - 1245 Milo "Physician on FIRE" Andersson There are definitely ways that you can make your life better as a physician and it depends on the specialty. For me I think the number one thing I could do would be to not work overnight call and not carry a pager for 72 or 96 hours at of time which I do quite frequently. And so there are outpatient surgical centers where you can work only their course you take a good pay cut to do it. But again if you don't need the money that's one great way to make your life better. If you're a surgeon and you only like doing certain procedures you may be able to find a position where you're only doing the procedures that you want to be doing in anesthesia specifically for me. You don't have as much autonomy. You kind of need to be where you're needed. So when a woman is going to have a baby it's a wonderful thing. But she needs her epidural at 2:00 a.m. So that's where you need to be. And when the surgeon is ready to do a case whether it's scheduled or emergency. Well you need to be there when he's ready to cut. So I don't have as much autonomy as some other physicians to design the exact kind of practice that I might want but I can do certain things and I'm going to go part time this fall so I'll be working 40 percent less. And I think that'll be a nice nice balance and a nice transition into perhaps working 0 percent time.
1245 - 1252 Jonathan Mendonsa What's interesting about being in such a high marginal tax bracket is just because you're working 40 percent less does not mean that you're making 40 percent less.
tax
1252 - 1284 Milo "Physician on FIRE" Andersson Absolutely. Yeah. And I wrote a post not long ago called So Long full time employment and I just highlighted how much less I make for that last 40 percent that I work on a per shift basis like basically a 12 hour shift. It's not quite how it work but kind of like that. I make five hundred dollars more in the first 10 shifts of the month than I do in the last six because the tax is half of what I earn goes to taxes and those last you know shifts and only about a quarter goes to taxes in the first 10 on average. Remarkable.
tax
1284 - 1292 Jonathan Mendonsa Yeah it really is and it definitely has to change the structure that you're creating as you're creating your own FI plan or a fire plan that has to be part of the calculus.
1292 - 1314 Milo "Physician on FIRE" Andersson Right and I didn't I mean I of course I know the tax code pretty well but I didn't realize just how much less I would be compensated for that extra work. And I used to pick up extra extra work. I used to do a lot of locums on my on my time off just because I like I said I was interested in creating wealth and paying off our debt getting rid of the mortgage and getting the student loans and all that. I worked hard to make it happen. But I definitely paid plenty of taxes in.
college-loans, debt, tax
1314 - 1357 Jonathan Mendonsa So this is really powerful so let's say you're talking your peers and you're having this conversation about how to completely transform your life in your framework. And the question is should I focus on earning more picking up extra shifts or should I work on cutting my lifestyle. And you know you can make that case in any tax bracket I think it's a great conversation to have but when you're in a 40 percent or 50 percent you know essentially after all your taxes are paid. Conversation. It's an extremely dramatic conversation that when you take a look at one yes you could go sacrifice every single week and you could be on call around the clock. But you are only going to be bringing home extra small percentage. Where if instead of that you made this one choice you bailed on this one line item you're going to be recapturing 100 percent of that and putting it towards your ultimate goal which is to buy your freedom.
tax
1357 - 1387 Milo "Physician on FIRE" Andersson Right. A dollar saved is two dollars earned when you're at the 50 percent you know marginal tax bracket which can happen in high tax states. So absolutely focus on the big things you know the home the cars you know even vacations and we take lots of vacations. And our most recent one was to Paris and Iceland Reykjavik with our with our kids but we went there because we found a good deal on a flight that was 400 bucks roundtrip each. And so yeah you know you could spend 15 20 grand on a family vacation to Europe but we spent less than five.
families, tax
1387 - 1405 Brad Barrett So speaking of family. Talk us through like you what does your wife think about this FI plan or FI in general and what if anything do your friends and family think if you've spoken to them about it or do you mention the blog to anybody. Just give us some background on all of this information like in your real life how FI impacts your relationships.
families, relationships
1405 - 1471 Milo "Physician on FIRE" Andersson Of course you know my wife is definitely on board. I think that she is excited and I recorded a different podcast recently with the white coat investor. He asked Doesn't your spouse deserve a really great lifestyle. And I said Well yes and she'll have one. But she deserves my time more than anything. At this point she's basically a single parents when I am on call which is in the past every third night now it's every fifth on average. And so I think she deserves my time for her and for our family. You know more than more than more money so she is excited about some of the plans that we've talked about which include taking an RV around the country living in a Spanish speaking country. Spending months at a time in far away places like New Zealand or Australia or Southeast Asia Europe et cetera. So no she she would not be upset if I quit my job tomorrow. As far as friends and family my parents are definitely on board. I didn't tell them about the blog for about a year. And along with that I told them about our early retirement plans and they totally get it. They know that it's a high stress job and they know that I'm not a spendthrift and we know what we need and we know what we're doing. So they're definitely on board too.
families
1471 - 1503 Brad Barrett It's interesting how a lot of your plans for the future are actually things that I've seen other people in the FI community model like J.D. Roth is traveling around in an RV and Chad Carson from Coach Carson is living in a Spanish speaking country. You know they. Him and his wife had that exact same conversation or Jeremy and Winnie from go curry Kracker living abroad for months at a time. So that's that's got to be kind of cool to actually see people in your community whether you know them personally or not. But your community do that and see how how they describe it literally on their block.
travel
1503 - 1522 Milo "Physician on FIRE" Andersson Right. On one hand I'm terribly an original because like you say this is just other people's ideas not mine. But I do have the benefit of seeing how it works in reality and being able to read all about it and then having those contacts that I can reach out to and be like hey I'm going to do this too. Any thoughts any tips. I don't know. Everything's been done before I think.
1522 - 1554 Jonathan Mendonsa We come back to that Jim Rome quote you're the average of the five people you spend those time with. Keep bringing it up but those ideas yes they're not unique but because you spend time or have spent time you know capturing their ideas trying to figure out if that's something that's feasible for you guys those suddenly become very normal reasonable ideas if the FI people in your world if all of your influences were just get the private school, get the two new cars drive the Mazarati get the biggest house you can afford join the country club get the golf membership. That's where all your energies are and that's going to trap you in that lifestyle. And I love the choices that you're making.
1554 - 1607 Milo "Physician on FIRE" Andersson Yeah thanks and that kind of reminds me of you know I kind of alluded to earlier that where I live that's not the norm which is really great. There's not as much peer pressure but you know in medicine we have this geographic arbitrage I call it where the highest paying jobs tend to be in the places where there's less demand for people to live. So on the coasts and the big cities that's where the action is that's where people want to be. Actually they make less money. Whereas in most professions bankers lawyers tend to be more well-paid in those big cities in a lot of professions you have to live in maybe a six or ten different places if you really want the best jobs. Whereas in medicine if you live in a small town in the heartland you're probably going to not only make more money but also spend a whole lot less and have very little pressure because you can be a big fish in a small pond on a very you know modest lifestyle.
geoarbitrage, highincome
1607 - 1621 Brad Barrett Yes and that's actually a perfect segue for what I wanted to talk about next which is strategies for high earners. And what do you suggest for people who are pursuing FI. Are there specific hacks or strategies that you recommend for other high income earners.
highincome
1621 - 1684 Milo "Physician on FIRE" Andersson Well we've we've certainly talked quite a bit about our marginal tax bracket being high. So you want to do everything you can to lower your taxable income. And so I recommend filling up every tax deferred bucket that you can even if you have a Roth option. It may not make the most sense when you know when you're paying 40 percent or more on every last dollar earned. So for me that means maxing out a 401K a 457 B and an HSA every year if you were in a self-employed situation you may have a solo 401k or maybe a SEP-IRA there are other other avenues where you can still put away about 50000 or more per year tax deductible. After that I think a taxable account is also, it's a bad name, but it's a great account if you keep your funds in it in low dividend funds. It actually can act fairly similar to a Roth particularly if you retire without a ton of income in those retirement years. You can take money out of that without paying taxes as long as you stay in that lower 15 percent tax bracket. Now that all depends on how our tax code changes over the years. But I'm planning on paying very little in taxes once I'm done.
401k, 457, hsa, roth, sepira, solo401k, tax
1684 - 1702 Jonathan Mendonsa Right. That's a great summary in fact we've actually covered a lot of those topics one by one and I think you just pieced it together. You know I think a pretty easy to understand way. So one of the things that I know a lot of high income earners look at in fact there's some concerns that maybe down the road it may not be there is the backdoor Roth do you want to unpack that idea for us.
rothbackdoor
1702 - 1756 Milo "Physician on FIRE" Andersson Sure. I've been doing the quote unquote backdoor Roth for four or five years. And what that is is a way to get some money into a Roth IRA for people that earn too much to be eligible to contribute directly. And for couples that are married filing jointly I believe the cutoff is about 180 or $190000. And so once you're above that MAGI I think it is then you have to look at a non traditional way of doing it which is by making a nondeductible contribution to an IRA and then subsequently converting that to Roth IRA. So you accomplish the same thing as a direct Roth IRA contribution which you're not allowed to do but by doing it in two steps. And so that's why they call it the back door. And as you mentioned that that could go away at any time. So I always take advantage of that right away in January every year and you can do it for yourself and you can do it for your spouse even if your spouse doesn't earn an income because you can start a spousal IRA.
ira, roth, rothbackdoor, traditional
1756 - 1759 Jonathan Mendonsa And so how much money are you able to then get rolled over into it.
1759 - 1776 Milo "Physician on FIRE" Andersson So each year. Fifty five hundred each. So $11000 and it'll be ROTH money and it's really in lieu of additional taxable investing. So basically I'm replacing $11000 that would have gone into my taxable accounts for the year and making that Roth money instead.
roth, tax
1776 - 1790 Brad Barrett That fifty five hundred dollars each year that ultimately ends up in the Roth. Does that count as a contribution to the Roth like does it have the same character as a traditional contribution where you can pull it out tax and penalty free at any time if you so choose.
roth, tax, traditional
1790 - 1799 Milo "Physician on FIRE" Andersson It's a conversion. So I believe those need to be seasoned for five years. So that would be kind of the Roth Ladder idea.
rothladder
1799 - 1812 Jonathan Mendonsa Now one of the things that I see you talk about in your blog and I like it is that you discuss the implications of financial freedom versus financial independence. Specifically there's some margin between those two. Would you like to talk to our audience for a little about that.
1812 - 1922 Milo "Physician on FIRE" Andersson Sure. Yeah. And I think those terms are used for change really quite a bit. But for me I kind of focused in on financial independence. Twenty five years of expenses that is the definition and freedom to me sounds like you have more. You know you have more freedom to do things you might want to do. And so I kind of took it and looked at our annual spending which was about $70000 and I looked and I figured about 40000 was our core expenses and $30000 of it was money that we choose to spend that we're doing fun things with or optional things with you know it's not food shelter utilities et cetera. And so I said well if we took that 30000 and doubled it which would be really big lifestyle inflation it would be more trips to Europe and Australia and opting for the steak every time we go to dinner or that sort of thing it would be a really big upgrade. But that I guess that's how I would look at financial freedom. We need to be a little bit careful with the whole hedonic treadmill concept. But for me I looked at our $70000 annual budget as financial independence. And when we double the 30000 discretionary you get 60. And that would be $100000. And I took you know 25 times that to be our financial freedom number. And then it ended up being about I think 36 times our annual spending as opposed to 25. But I think the concept and for me I'm just trying to kind of figure out when is the best time to retire. Like I don't want to retire and just say OK we've locked in this lifestyle. This is where we're going to be you know unless we get lucky in the market. As long as I enjoy my job and I'm awfully young you know in the terms of physician I've only been doing this for 11 years now I can give it a couple more years and buy us a little more freedom to make the choices that we might not be making now. Maybe we don't want to be as frugal when we're 45 or 50 or maybe our kids eat five times as much when they're teenagers. which I hear they tend to do.
1922 - 1946 Jonathan Mendonsa Yeah it's coming your way. Man there's a couple of things that really stand out to me there one. I think so many people say well this is what my life cost but don't put the necessary effort into determine what are their core expenses and how much of that I like the word fluff fluff can be whatever you want. You make the value choice for it but it's important just to track it and know how much it core. How much is to keep the lights on to make sure my family can survive. And then how much of that is is fluff.
families
1946 - 1957 Milo "Physician on FIRE" Andersson And we have quite a bit of fluff already but I don't know. We might want to add some. And I want to make sure that we have the money there to do it if we choose to. And if not that's great. That's more money for charity or whatnot down the line.
1957 - 2005 Jonathan Mendonsa The other thing that strikes me is just how far that goes I mean you guys don't have a mortgage. You don't have a car payment. You don't have any debt. So and I'm I'm contrasting this with the person that makes $100000 a year but they have all of that. They can afford the payments but there's nothing left. There's nothing left and they're going to be on that hamster wheel for life. So your core expenses you could bring that back if you wanted to if you really absolutely had to. But your core expenses are one level and then you could have 60 grand in discretionary spending which takes you up to 100. But because that essentially for a joint filing couple that's the end of the 15 percent marginal tax bracket. If you have $100000 a year. That's what we're going to live on. Then you have no debt nothing. You are going to live like the billionaires of yesteryear and you get to make the choice to do whatever you want. But it just gives you so much freedom with the tax code right.
debt, tax
2005 - 2024 Milo "Physician on FIRE" Andersson Yeah there's a huge difference between you know salary and spending. You know I think that happiness studies that said you don't get much more bang for your buck after about 75000 a year and they're actually looking at income. But you can spend $75000 a year. That's a lot of money to spend. Once you subtract all of the payments and the debts and all of that.
debt
2024 - 2043 Brad Barrett Yeah That strikes me as a very very conservative number. How how you've set this entire financial freedom up. Right. So if you're saying it's 40 K a year are your core expenses but you're ultimately budgeting if you will for 100k of expenses. I mean that sounds like that's wonderful lifestyle. So yeah really I'm very impressed by that.
2043 - 2060 Milo "Physician on FIRE" Andersson Yeah. And I think we'll go all the way up to that hundred thousand but just having enough of a nest egg to allow for it makes me feel pretty good. And I don't know if I would feel good if I was spending all 100 thousand of it. Probably not. But just to know that that would be there and I could be within at least 4 percent withdraw rate there.
2060 - 2074 Jonathan Mendonsa That comes back to the withdrawal rate you know people freak out about whether or not the number is 3 percent or 4 percent. But when you have this margin you're able to do the math that tells you what's the margin that you should be working with then. And you can pick and choose based on the whims of the market. But either way you guys are going be fine.
2074 - 2104 Milo "Physician on FIRE" Andersson Yeah and then one half or more of it's fluff like you say if we do hit a really bad bear market and other you know 2000 or 2008 style pullback we could also pull back our lifestyle pretty easily. In fact we may very well end up. Right now we have two homes our second home is just a little two bedroom one bath sort of old resort unit that's now called the condo but we call it a cabin that might be our only property for a while if we're traveling most of the year then that could be Homebase and will have far fewer expenses for our homes.
travel
2104 - 2118 Jonathan Mendonsa Very cool. Lots of latitude there. One of the things that's really amazing about what you're doing is your donor advised fund. I know that you actually donate 50 percent of the profit that you make from your blog to different charities. Do you want to talk a little bit about that.
2118 - 2199 Milo "Physician on FIRE" Andersson Absolutely. I started this blog after I had reached financial independence. And so when I started to monetize which I think I did then the second or third day even though I said I wasn't going to do it for a year I thought it made sense to make sure at least some of that money was doing some good. So I decided to make a pledge to donate half my profits to charities and I do a lot of that via a donor advised fund which is a great way to get the most money to charity from your own dollars. So I donate mutual funds that have appreciated that would have capital gains if I sold them. But instead I donate them and the charity will get the full amount of money and donor advised fund is kind of a place for that money to go as an intermediary. And it can sit there for as long as you like and then be distributed to charities from the donor advised fund. Yeah as far as far as donating half the profits it just feels right. It didn't make a lot of sense for me to say hey I'm financially independent and oh by the way the right side bar is going to be full of ads, and affiliate links and I can make even more money. And I do hope to make some money from it because I like to have some skin in the game myself it helps me really have a reason to try to make it the best that I can make it. But also to have a charitable mission and hopefully I'll be able to give tens of thousands or even hundreds of thousands of dollars away from the income that the blog may provide.
2200 - 2220 Jonathan Mendonsa That's pretty cool and that's the first time I've actually seen anybody do that or talk about something like that at least in the FI blogosphere. So I will definitely link to that article in the show notes for this episode as well. Very very very cool stuff. Awesome. All right guys. And now it's time for the Hot seat.
2220 - 2247 Speaker In a world drowning in debt and rampant consumption. Trapped by the chains of lifestyle inflation. These questions highlight the secrets of those who are broken free. Welcome to the choose F-I hot seat.
2247 - 2255 Milo "Physician on FIRE" Andersson It's the hot seat. Yeah I feel it. I mean a chair chair on fire. Physician on fire, chair on fire Let's do it.
2255 - 2259 Brad Barrett All right. Question number 1 your favorite blog that's not your own.
hotseat-blog
2259 - 2279 Milo "Physician on FIRE" Andersson I am going to go with. I have already mentioned earlier in our talk a couple that I really like which are Mr. Money Mustache and the white coat investor but I'm going to go with 1500 days. Every time I read his posts. I laugh. And there's also usually a little bit of a deep thought in there somewhere you know hidden amongst the fart jokes and dinosaurs that.
2279 - 2289 Jonathan Mendonsa I was just going to say a little piece of me is honestly jealous of the dinosaur toys that he still has. Like those are some seriously cool dinosaurs.
2289 - 2289 Milo "Physician on FIRE" Andersson Indeed.
2289 - 2296 Jonathan Mendonsa Question number two your favorite article of all time. This can be one that you wrote or you could point toward one that somebody else wrote either way.
hotseat-post
2296 - 2340 Milo "Physician on FIRE" Andersson OK. Yeah I know you going a link to a bunch of my stuff so I'm not worried about that. All time would probably be the MarketWatch article about Mr. Money Mustache which was entitled How to Retire Early 35 years early but more recently when I really like came from Justin at root of good dot.com and he wrote an article entitled Living a $100000 lifestyle on $40000 per year which really speaks to how good your lifestyle can be once you eliminate so many of the typical expenses that people have which include income taxes and mortgage payments and student loan payments and all of those other things add a little travel hacking and you can live really quite well on a modest income. For him it's 40000. For me it's closer to 60 or 70.
college-loans, midincome, travelrewards
2340 - 2386 Brad Barrett Yeah that's really cool. And one other item that usually doesn't even get factored in is savings. Right. So if you were making $100000 a year obviously to get to FI you're not only paying income taxes but you're saving a significant amount of that money. So whereas you know I always get caught up with the retirement calculators you'll see on fidelity Dot com or something like that and they just look at your current income but that's just right. Right. That's such an odd way of looking at it because savings by definition you get to retirement at some point in the future you have to be saving currently and they never even look at that. They don't look at taxes like you mentioned then obviously you're not going to have a mortgage you're not going to have all these other things. It's such a silly like reverse way of looking at retirement. And I think people in the FI community have really hit it on the head of it's all about the expenses.
savings, tax
2386 - 2417 Milo "Physician on FIRE" Andersson Right. And the assumption in those calculators is that you're spending most of your income and sadly that calculator does work for better than 90 percent of the population because we are for the most part living paycheck to paycheck and the savings rate nationally is about 5 percent which as you know having looked at the math that's not going to get to F-I before you're eligible for Social Security. So yeah and sadly it doesn't work for most people but it makes no sense for anyone who is saving more than even 10 or 15 percent of their income.
savings, socialsecurity
2417 - 2418 Jonathan Mendonsa That's great insight.
2418 - 2420 Brad Barrett All right. Number three your favorite life hack.
hotseat-lifehack
2420 - 2456 Milo "Physician on FIRE" Andersson I mentioned this earlier and it's somewhat specific to my field but geographic arbitrage. So I live in the upper Midwest in a fairly small town and I'm compensated well and make a bit more than the average for my specialty even and the cost of living is much much lower than it would be living on the coast living in that big city. So I you know if I lived in a low tax state which I have before that would be even bigger arbitrage. But you can save an extra you know many tens of thousand dollars a year even hundreds of thousands or 800000 maybe for a physician living in the heartland versus living in San Francisco or in New York.
geoarbitrage, tax
2456 - 2460 Jonathan Mendonsa Wow. All right question number four your biggest financial mistake.
hotseat-mistake
2460 - 2482 Milo "Physician on FIRE" Andersson Well again I think I mentioned this earlier but we we built our dream home back when I landed my first quote unquote permanent job and I thought we'd be there forever. It's really only a mistake in hindsight but when we did sell the place after having tried to rent it out you know a couple of different ways for several years. We ended up taking a loss of about $200000 plus realor fees. So that was a pretty big hit.
2482 - 2484 Jonathan Mendonsa And that hurts hurts. Sounds like you guys have bounced back from it.
2485 - 2486 Milo "Physician on FIRE" Andersson Yeah I think we have.
2486 - 2489 Brad Barrett Alright the advice you would give your younger self.
hotseat-advice
2489 - 2533 Milo "Physician on FIRE" Andersson I would I wouldn't have bought that house and I was going to say something along the lines of Discover Financial independence early on. But actually I almost feel bad for some of the physicians who maybe have found a site like mine or many other fire blogs early on because it's it's tough. If you decide you going to make that your goal and then for 10 15 years that's what you're focused on I feel really fortunate to kind of have stumbled into it. And no I think it's better to know about it and save diligently than to live paycheck to paycheck for 20 years and then realize oh I shouldn't have done that. But at the same time I don't know if I would tell myself because I did I did and I made the right decisions along the way anyway.
2533 - 2559 Jonathan Mendonsa You know if possible and I don't know if you have more to add than that but I think it's worth highlighting just for a second. I'm just thinking that people do stumble onto your site and they do stumble onto our podcast and they're in medical school or some you know you medical profession. They're on this path so maybe they are a resident or maybe there are student and they're just now getting the point where they realize the implications of incurring the 200 or 300 thousand dollars in debt they're going to get. You know what advice would you have for that person.
2559 - 2608 Milo "Physician on FIRE" Andersson I would focus on the big numbers and make sure you do have some fun along the way because I guess that's my concern if I told my self to pursue F-I that I would have maybe chosen not to go to the Galapagos Islands when I was unemployed between jobs or not. Honeymooned in Alaska. Not made some of the choices that although they cost us a little bit of money we certainly could afford them and pursued FI at the same time. So I guess my recommendation is don't buy the most house you can afford don't have two car payments for fancy vehicles that you just don't need and spend some money on having some fun and it's a cliche but spend money on experiences not things and then focus on eliminating those debts and not taking on large new ones.
2608 - 2617 Jonathan Mendonsa Well I think that's good stuff. All right we got a bonus question for you. Your favorite purchase made on Amazon.com last year or if not Amazon your favorite purchase in general.
hotseat-purchase
2617 - 2675 Milo "Physician on FIRE" Andersson Amazon so I look through my orders here recently and that was eye opening. We've purchased a lot of Legos here not only for our boys but of course they go to a birthday party about once a month. And so it took me a while to actually page through and find out just what I want to choose here. But I bought the Amazon tap which is the push button activated portable Bluetooth speaker that hooks up to the Internet. And it does a lot of other fun things to it. It's a smaller version of the Echo which my parents have and I bought that on Black Friday when it was down to 89 99 the normal 129. So that was my favorite purchase and although there are times when I kind of wish it had the voice activated feature. My parents have it. Like I said and when my kids are there they just yell at it all day long and I say Alexa tell me a joke. Let's do this Alexa do that and it gets to be obnoxious So the fact that you have to actually push the button before you talk to it is actually a good feature in my opinion.
2675 - 2680 Brad Barrett That's cool. So the main difference in the Echo and the top is just literally that you have to tap this thing.
2680 - 2692 Milo "Physician on FIRE" Andersson Rather than saying Alexa to get its attention. You tap it. Got it. That's the only difference. Well that's the main difference. But also the tap is portable so you can take it with you outside or into the garage or just plug it in. It's got a battery.
2692 - 2719 Jonathan Mendonsa We are so far past Big Brother now like it's not even funny like I was just watching that movie with Will Smith back in the day enemy of the state right. And I think they had like a couple of camera somewhere else compared to now man. I would probably get it too. But that is funny. This has been great. I think a lot of our audience is going to find this useful. I think that you speak to a very specific bracket I think everybody can relate to your message but there are definitely high income earners that are interested in how they can optimize their finances. And I think you're doing a great job modeling it for them.
2719 - 2720 Milo "Physician on FIRE" Andersson Thank you.
2720 - 2722 Jonathan Mendonsa You're welcome. So how can people connect with you.
2722 - 2753 Milo "Physician on FIRE" Andersson Well the easiest way is just to visit my Web site which is physician on fire dot com. It's P H Y S I C I AN on fire and the reason I spell it is because I do see every day that different searches that come to my site and there are four or five different misspellings or typo versions of physician and other Web sites the best way. Also I'm pretty active on Twitter and my handle is just at physician on fire. So that's probably the best two ways and I've got a e-mail subscription you can sign up and that's really easy to do from the Web site as well.
2753 - 2787 Jonathan Mendonsa All right guys you know we're wrapping this thing up and I love the story the physician on fire told. I know how easy it is to relate to that message and to me what's so striking is when you build a FI framework it doesn't matter what tax bracket you're in. High income earners. This story is still for you too. There's room for you here and you have this advantage of this high income. What are you going to do with it. Don't waste the opportunity. You control your life now. And I love the tools that Physician on fire took the time to tell us about and I hope that you find it useful as you continue to build your own personal fi framework. Brad any final thoughts.
highincome, tax
2787 - 2807 Brad Barrett Yeah I think the entire journey always comes down to getting your lifestyle under control and Physician on fires there might be significantly more expensive than many people pursuing FI. But based on his income that's that's plausible and it's still allowing him this is a very abbreviated path. Towards financial freedom and financial independence.
2807 - 2812 Jonathan Mendonsa Friends the fire is spreading and we'll see you next week as we continue to go down the road less traveled.
Jonathan_Catchphrases

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