MtoM #123 - Family/Sports Medicine Doc Becomes a Millionaire and Finance 101: 4% Rule

This is the White Coat Investor podcast, Milestones to Millionaire.

Celebrating stories of success along the journey to financial freedom.

This is Milestones to Millionaire podcast number 123. Sports medicine doc becomes a millionaire.

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Alright. Welcome back to the Milestones podcast. This is where we celebrate your financial accomplishments and use them to inspire others to do the same. We have a great guest on today. It's actually a repeat guest, but as you listen to him, you'll realize this is somebody that's got it figured out and he's going to be hitting a lot of milestones in his life. And so I think it's fun to catch him early in his career and see these early ones and just dream about where this could take him and what can be accomplished. So let's get him on the line. Stay tuned. Afterward, we're going to be talking a little bit about the 4% rule, or the 4% guideline, whatever you want to call it, and really getting into the basics and the nitty gritty behind that. Our guest today on the Milestones podcast is a repeat guest. This is Dan from Ohio. Welcome back to the podcast, Dan.

Thank you for having me. Love to be here.

Yeah, we celebrated you paying off your student loans way back in episode 60. Here we are in episode 123 and you have become a millionaire. Congratulations.

Appreciate it very much. Again, I appreciate you and your help in that journey.

Yeah. So this is a cool milestone because it still means something to people. Now, obviously a million dollars now is not what it was 10 years ago and certainly not 100 years ago, but it's still a big chunk of money. And it's probably, as milestones go, I think the one people think about the most. Was this a big goal for you to become a millionaire at some Point or just something that happened at some.

Point I would like to retire. So I think it was meant to happen along the way, but I would not say it was a grand goal for me.

Yeah, it's just kind of something along the way to reaching your real financial goals. All right, remind us what you do for a living, how far you are out of training.

So I'm a family physician and I'm about a little under four years out of training right now.

Four years out as a family doc, and you're already a millionaire. Tell us how you did that.

Yeah, so I did a sports medicine fellowship and I do a little bit of cash pay regenerative medicine with that. And my wife is a neonatal nurse practitioner, so we still have dual income, which is very helpful.

Okay, so approximately what's your household income been the last four years?

Last four years, probably on average 350. So last year was our highest earning year and we were probably a little under $500,000 between the two of us.

Okay, and four years ago, did you have a negative net worth?

Yes, we were right around net neutral. So we still had significant student loans, but between retirement accounts, I think we were right around broke when I finished fellowship.

Okay, so this is cool because if I do the math right, approximately 350 a year, you add that up 350 times 4, works out to be 1.4 million and you've still got a million of it left, basically. So that's pretty awesome ratio to think about there. And part of that's obviously the money that some of the lifting too. But it's pretty cool to think about what percentage of the money you've earned you still actually have. And for people late in retirement, often they have more money than they ever earned if they've been saving and investing well. But even early in your career, you've still got a pretty awesome ratio. So what did you and your wife do that allowed you to use so much of your income to build wealth?

We live well below our means, obviously. And what I said last time is we use the template from the Tale of Four Physicians and we kind of followed the most frugal lifestyle on there and we never really upgraded the lifestyle or found a reason to do so. So we're pretty content living at the lifestyle we have. We're expecting our second kid and the first kid raised our household budget a little bit just to get childcare. Kind of expect the same thing, but from our lifestyles we never really increased.

So you basically earn like high income professionals While living like an average American. Is that fair to say?

That is very accurate. Middle class life.

So why are you doing this? Tell us your why. Why it's important to you to be building wealth this quickly.

There's actually a little bit of a spiritual component to that, I do believe. A net worth. I view it as essentially how much you've given to society versus consumed. Ultimately, what I want to do with wealth is just continue to give back to others in the community. And I think if you have the resources, you can do that. I have another philosophy about being quote, unquote, antifragile. And I think that being in good health and in good financial health makes you pretty resilient to anything that can come up in life. And then when you see someone who's in need, you have the capacity to give to them. So taking care of the household finances, our own health, and our family is number one. But if someone in our community needs something, we also have the plus to give in their time of need.

Yeah, I absolutely agree that it's easier to help others from a position of strength. I mean, I've met a lot of very charitable people that are relatively poor. You know, they, they give a lot, way more than you would expect given how much they make and how much they have. But there's a limit to how much they can help somebody. And. And you can just help a lot more when you've really taken care of business financially. So that's pretty cool. I like that. Thanks for sharing that. All right, let's divide up your net worth. What's it divided up into? I mean, how much is in bitcoin, how much is in Ethereum? What's your net worth divided up into?

I still have a thousand bucks left in bitcoin and like $200 in Ethereum.

There you go.

All right, I put like a hundred bucks into there, but 50,000 in cash, 100,000 in investments, 50,000 in the TSP account, about 450 in our 401ks, 150 in taxable, 100,000 in a Roth IRA and about a 50,000 into another IRA, 200,000 in equity, and 100,000 into a couple different real estate syndicates. Still have about 90,000 left on the house.

Okay, so pretty broadly diversified mix of investments. All right, and do you expect that mix to change going forward as you continue to build wealth?

I would like to, you know, one of your milestones on the 14 milestones is, you know, be done saving if you want to work until age 65. And we actually Hit that right around the same time we became millionaires. And now, you know, I talked to my uncle who's into financial planning, and he said, you know, look at other ways to use your money. So I would like to actually buy a gym and combine it with a practice that I'm going to. So I'm actually converting from an employed status to a direct primary care practice and include it in that subscription fee. People just get a free gym membership. So it's a good way for people to be able to improve their health.

Yeah. The fun thing about building wealth is it allows you to do things like that. It opens up opportunities, whether they're career opportunities, you know, whether this ends up being super profitable for you or not. It's a contribution you can make to your practice, to your community, and that's pretty awesome. So. All right, well, what's been your attitude toward debt? I mean, we obviously had you on paying off student loans relatively early in your career, but what roles roles debt played in you building wealth?

I struggle with that. I tend to be very debt averse, so I've tried paying off almost all of it as quickly as possible. I consider just paying off the rest of our house too. And being a debt free millionaire at that point, I just find it gives you more options and I very much value choice and freedom. Do I think that's the fastest way to maximize wealth? Absolutely not. I think there is value in debt and leverage, but traditionally I just have not pursued options that were high on debt. So I know people can do it. Well, my brother's gotten into short term real estate rentals and he's done very well with that. But for me, I just found I'm happier when I don't feel obligated to anyone else.

Yeah, you know, what I tend to find is the people who build wealth, the people who save money, also tend to be the people who pay down debt. And so I think it's actually relatively rare to find somebody that's wealthy that's also really highly leveraged. I think it just doesn't happen as often as some of those real estate books out there might have you believe. All right, so how much of this came from family money? I mean, did you get your parents help pay for your school? Did you get some big inheritance? Or is this all just money you carved out of your earnings?

So they did help pay for some of my undergraduates. I got a ton of scholarships for that. And the rest of it's all been from us. We've never gotten an inheritance. No tuition Assistance beyond the undergrad phase of life. And it's just been what my wife and I earn.

Would you say your attitudes toward money, your philosophy, was this influenced by your upbringing in some way, either positively or negatively? How you were raised affect how you manage your money?

Very much so. So I started working as a paper boy when I was 12 years old, and I learned the value of a paycheck. It gives you the ability to spend money on what you want. My dad is an outpatient internal medicine doctor, and he never really valued financial education or personal finance. And where he was in private practice, I really saw him struggle with the business decisions more than the medicine decisions. And so that's what pushed me to get my MBA when I was in residency. You know, at that time, I got the tuition benefit and was paid for by the university I was at. And that helped me very much in my career. Early on, I realized quickly, MBA does not teach you personal finance. And so your website's been integral into getting that information. And then I like structure, so I read at least a book a quarter on personal finance just to look at additional ways to, you know, grow and learn from a personal finance standpoint.

We got to step back on this. You got an MBA during residency?

Yep.

Tell us about that.

So there was a working professionals program at Ohio State where I did my residency, so they essentially paid for all the tuition. So two nights a week, I was going to nighttime classes with other professionals locally, took a gap year when I was in fellowship training, and then came back and completed it my first year as an attending. So it was very valuable. Tim Ferriss, who's another blogger, always talks about, you want to try to be an expert in at least two different fields, and then you're going to be hirable in any setting. So I kind of took that to heart and used it to just diversify my knowledge base, and I learned from that. I love continued learning, and I've done a couple other, you know, online fellowships every single year, and it just makes you more hireable and valuable to patients.

Have you started thinking about estate planning at all? I mean, this is a ways out for you, but you're almost surely going to have an estate tax problem. Have you given much thought to that down the road or just that's a few years away before you really get too crazy putting something to take care of that into place?

So I'm actually getting deployed again this summer, and one of my buddies, the last time I got mobilized, the JAG attorney that was there as a reservist was an estate planning attorney before you shipped out. So I'm hopeful that I get the same opportunity and I get it done for free just before I mow. But if that doesn't happen. Yeah, we need to meet with an attorney when we get back.

I mean, your net worth, obviously still a long ways away from the estate tax exemption limit, but when I see somebody building wealth so quickly so early in their career, you can kind of see what's happening. You've obviously become not only financially literate on the personal finance side, but on the business side. And, you know, I just see the pattern and what's going to happen here. You're going to do very well in your life. You're going to be able to help out a lot of people, and you're probably going to continue building wealth throughout your life. So congratulations to you. I think your story will be very inspiring to other people that listen to this podcast just to see what's possible out there. And so I thank you for coming on, and congratulations to you on what you've done.

Thank you again to you and your staff. You mean a lot to a lot of physicians, and you bring a lot of joy. So thank you again.

It's our pleasure. All right. I hope you enjoyed that. Repeat guest on the podcast. There's a lot to learn there. He's done some cool stuff, and I think he's going to do even more cool stuff as he goes forward. It's amazing what flexibility and financial freedom can allow you to do with your career. All right, I promised you at the beginning, we're going to talk about the 4% rule. What is the 4% rule? Well, back in the 1990s, financial advisors were telling their clients that if your portfolio makes 8% a year, you can take 8% out. The problem with that is that if people got what's called a bad sequence of returns, even if they had 8% average returns throughout their retirement, if the bad years came first, if this sequence of returns risk showed up, they ran out of money. So despite the portfolio making 8% a year, they ran out of money because they were having bad returns. The portfolio is losing money, and they were taking money out at the same time, and they ended up a bust in retirement. So some researchers started thinking about this, and they're like, well, I mean, we gotta be able to account for bad sequences of returns. So obviously, we have to return. We have to withdraw less than the portfolio is returning on average in order to make sure our money lasts throughout retirement. How much less do we have to withdraw in order to make sure that happens. So they thought, well, let's design a study and let's try to figure this out. Let's go back and look at all the past returns we have in any sort of reliable database of stocks and bonds. And so they looked for databases and they said, well, the most reliable one we have goes back to 1927. That's not all that much time, that's not even 100 years. So we'll use rolling 30 year periods, you know, starting 1927 through 1957, 1928 through 1958. And they looked at all of these rolling 30 year time periods and imagined that a retiree that retired in that year started withdrawing money from the account, adjusting upward each year for inflation. They said, well, let's start at 3%. They'll take out 3% of the account and 4% and 5% and 6%, 7%, 8%, 9%, 10, 11, 12. And what is the likelihood that they run out of money historically if they did this? And so this study is famously known as the Trinity study because it was done at Trinity University down in Texas. And if you haven't looked at the money shot from this study ever in your life, I put it in all kinds of blog posts and presentations. But the money shot is Table 2, and it's labeled retirement portfolio success rates by withdrawal rate, portfolio composition and payout period, in which withdrawals are adjusted for inflation. And if you spend some time with that, you will quickly realize where the 4% rule comes from. For example, if you look up at a portfolio that is 50% stocks and 50% bonds over a 30 year time period, historically, and this is updated, I think they updated it in 2009. So this is updated since they did the original study. But historically, if you took out 3% of that portfolio a year, adjusted upward for inflation, none of the portfolios ran out of money. There was no rolling 30 year time period in which you ran out of money. Same deal, 50% stocks, 50% bonds. If you took out 4% of the portfolio, you ran out of money just 4% of the time. 4% of those rolling 30 year scenarios. However, if you bump it up to 5%, you ran out of money a third of the time. If you bump it up to 6%, you run out of money half the time. If you bump it up to 7%, you run out of money 80% of the time. And if you bump it up to 8%, what financial advisors were telling people they could do in the 90s, you ran out of money over 90% of the time. So that's where the 4% rule comes from. 4% rule, 4% guideline, whatever. Now, keep in mind, this takes into account a lot of very terrible economic situations. The Great Depression is included in this data. World War II, included in this data. The Korean War, included in this data. The stagflation of the 70s, Vietnam, 9, 11. Right. That terrible day in 1987 when the market lost, whatever it was, 27% of its value. The dot com crash, the 2008 global financial crisis. This is all included in the data. And even so, 4% works essentially all of the time. So that's where the 4% rule comes from. And the cool thing about it is you can reverse engineer it. If you know you can take out about 4% of your portfolio, you know that you need about 25 times what you spend in order to retire. So if you're spending $100,000 a year, you need $2,500,000. If you're spending $200,000 a year, you need five million dollars. And so you can reverse engineer and figure out how much you need to retire. Now, is this method like the recommended method for how you should spend your money in retirement? No. I know basically nobody doing this that takes out 4%, adjusts it up for inflation each year and takes out 4% plus whatever inflation was a year. Nobody does that. Everybody adjusts as they go. If sequence of return risk shows up, you tighten the belt a little bit. Most of the time it doesn't show up. And so you can spend a little bit more, or you end up leaving more for your errors behind than you thought. On average, somebody who did this, who took out 4% adjusted up each year for inflation, leaves behind 2.7 times what they retire with on average after 30 years. If you die sooner, you leave behind even more. So most of the time you end up with far more money than you need. So if this bad sequence doesn't show up in the first five or 10 years of your retirement, you can loosen the purse strings and start spending more. And if it does, then you've got to tighten your belt a little bit and realize you're one of those situations that really can only spend about 4%. Some people think because yields have come down because maybe future stock returns won't be as high, that 3% is the new 4%. Or some people get insane and start talking about 2% and 2.5%. But the truth is, even if you want to be really conservative, you dial it back to 3.75 or 3.5 to start with and then adjust as you go. That's going to be plenty. But if you'd ever heard about the 4% rule, that's basically what it is. And the cool thing about it is that gives you a number for retirement. Retirement is not an age, it's a number. It's an amount of assets. It's 25 times what you are spending or want to spend in retirement. And you can hit that when you're 35 or 40 or 45 or 50 or 55 or 80. Just because the government says you can't have Social Security until you're 62 doesn't mean you got to wait till you're 62 to retire. Or just because they say you can't have your full Social Security benefit until you're 70, you don't have to wait until 70 to retire. You have enough money. You can retire if you want to. Otherwise, you can just enjoy the benefits of being financially independent and still working like I am. And it provides a lot of freedom in your life. It's very nice. Trust me, medicine's a lot more fun to practice when you don't need to practice it.

No more wading through dozens of books at the library, scrolling through hundreds of blog posts on dozens of blogs, or checking in daily with online forums, trying to gain a financial education the way the hobbyists do for a fraction of the price of hiring a professional financial planner. The Fire your Financial Advisor online course will take you from feeling anxious and having no plan to having a written financial plan. You can follow the rest of your investing career as a professional and a retiree. This course is the material that should have been taught to you in college, medical school or residency, but never was. Fire your Financial Advisor also has a version eligible for CME Credit. Get your financial life in order today. Go to whitecoatinvestor.com courses to sign up. You can do this and the White Coat Investor can help.

All right, thanks for listening to the podcast. If you want to get on it, whitecodeinvestor.com Milestones until next time, keep your head up, shoulders back. You've got this and we can help.

The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.