While early retirement was not my goal when I embarked on my medical career, it was possible due to some key principles adopted early in my career. An unexpected health scare made me reevaluate my hectic and increasingly stressful life as an obstetrician. Financial independence (having “enough” without the need for a paycheck anymore) was a liberating force that allowed me to make the decision to leave my medical career when I deemed it the right next step.
The worst situation is to feel trapped where you have no control over how you want your life to go. A few relatively painless steps can get you on the right track to creating the life you want, instead just allowing things to happen to you.
There has been a lot of attention paid recently to a movement called “FIRE”- financial independence, retire early. This has been wildly popular with millennials and many cite blogger “Mr Money Moustache” as a key figure for the movement. Many of those who are into the FIRE movement live a life of extreme frugality and save a majority of their income. They live off very little money and stockpile savings to ensure they have enough to drawn down after they retire to continue their lifestyle (frugal as it may be) for the rest of their lives. A number often quoted is saving enough to drawn down 4% per year to live on after retiring.
I have to admit something: I am neither a millennial… missed the cutoff by a few years, nor someone who likes to live a life of extreme frugality. Probably, like you, I enjoy a nice dinner out. I like to go on a nice vacation with my family. I want to make sure my children have their college educations fully funded. I don’t buy a lot of extravagant things. I have a minivan instead of a luxury vehicle to cart around my family, and my wardrobe leaves a lot to be desired for sure. So while I enjoy splurges on experiences, my overall mentality is not to be a big spender.
People think if you don’t live an extremely frugal life there is no way to retire early. I completely disagree. Especially in the case of physicians- who make up a big portion of those following this blog- it can be done if desired. More importantly, the goal is to secure financial freedom so that you have choices regarding the path your life takes and this may very well be to continue practicing medicine into your 80’s. If you have reached your financial goals early you will be able to tailor your career to what you want. Perhaps you may drop a day a week, or instead change your schedule so that you can do volunteer work at a free clinic. You may drop parts of your practice that you find frustrating and only do procedures that you love. This can be achieved without adopting a lifestyle of depravity where you feel like all you do is work and save for the future.
So, how is it achievable and what is different approach from my perspective?
The true way to build wealth is not through saving, but through investing.
Yes, avoiding Starbucks will save you a few hundred dollars over a year, but just placing that $100 dollars into savings will not build up enough to ensure a retirement when you choose to have one. Instead, planning $100 per month to automatically be invested will be a much faster path to financial independence.
Disclaimer: I am not a financial advisor-don’t make any decisions solely based on anything I say. I am only giving information about my own experience that I thought would be helpful for others seeking to learn more.
The absolute first step should be to take advantage of employer plans that are offered. These vehicles for investing such as 401K, 403 B, etc., will be imperative to starting off on the right foot. Even in residency, contribute to these plans and often your employers will match your contribution.
Another plan most people don’t take advantage of is the HSA (health savings account). If your employer offers this, it can be a great retirement savings tool. Your money goes in pretax and you can take it out tax free in retirement. This is often offered with high deductible health plans where you may have to pay a larger portion for copays for medical care out of pocket until your deductible is met. If you have a complex medical history or require frequent medical care, this may not work for you. However, if your family is relatively healthy and If you can afford it, it could be a great option for both health care and long term financial gain. It will be much better to pay any medical expenses upfront now when they occur, and leave the money you have accrued in the HSA to grow and compound over the years. This can become a great additional retirement account.
There are also other tools for investing like IRA’s. Max these out every year.
If you feel intimidated by finance, start small. Knowing just a few concepts will help you accrue thousands (if not millions) over the years. It is very worth your time to learn about the basics of investing. Use a financial advisor if you must, but its not always necessary if you are willing to put in a little bit of work. A financial advisor who is a fiduciary can be helpful, but no one will have you and your family’s best interest more at heart than yourself.
If you don’t have the following (or know what they are), make a commitment to yourself for 2019 to do a little bit of research and start one:
-403B (if offered)
-HSA (if offered)
Lastly, if you have money left over after fully funding these accounts, set up a brokerage account to invest your money in the stock market instead of just putting this extra money in a savings account. You can read more about this here
While there is much talk recently about a possible recession and stock market crash coming, no one can predict the future for the stock market. It is also very hard to “time the market” by putting all your money in when you think the market will be going higher soon. Instead, it is often better to continue contributing a steady amount throughout your career. This way, even if a recession does occur next year you will be continuing to buy stock at much discounted prices from years prior. Historically, being in the stock market long term will help you weather short term periods of financial distress and come out far ahead in the end.
What if you say, “But I don’t have any extra money to invest at the end of the month”. I hate to say it, but if that’s the case, it may actually be time to live a little more frugally. It won’t be painful if you have money automatically withdrawn from your paycheck every month. If you aren’t expecting to see this money, you can’t spend it and you won’t miss it a bit. Meanwhile it will be growing and compounding for you over the years and funding your early retirement.