Physician on FIRE jokes about putting logs in a triangular formation to form a parameter for a fire, but the acronym FIRE and the FIRE movement, is definitely what he meant.
FIRE (Financial Independence Retire Early) was discovered by PoF four years ago which then sparked the desire to write about it shortly afterward. His passion to find FI and RE on his own has since been the model for other physicians to become more knowledgeable about the FIRE movement, in my opinion, than ever before.
We recently sat down and talked about the FIRE movement and the difference between it and FAT FIRE.
The first two letters which indicate financial independence (FI) are the most important according to PoF. I agree since that is one of the main reasons I created the Financial Residency website!
Working toward and achieving financial independence is succeeded by the second letters retire early (RE).
How does the FIRE movement impact you as an attending physician? Let’s find out!
The FIRE Movement: What Is It?
The FIRE movement in a nutshell is having enough money to live the lifestyle that you want without having to work for money. It’s a free pass to define financial freedom for you and build your ideal life, all by having cultivated positive financial habits.
So, what do you do exactly?
Pay close attention. PoF doesn’t disappoint.
One way the FIRE movement could be accomplished is with passive income. However, as I joked with Physician on FIRE, sometimes “passive income” is a misnomer when you are talking about real estate! For example, being a landlord must involve some hands-on participation and oversight. And we all know that producing a podcast or blog is an easy, passive income source (not!).
What is another way?
The FIRE Movement: The Road to Retiring Early Using Investments
Another way of using the FIRE movement to move toward the future you want is to use your investments. If investments are planned carefully, they will be used to support you indefinitely.
The lifestyle you are planning with the FIRE movement is middle class or what an average American family would spend. We are talking the $40,000-$60,000 range.
Conservatively speaking the FIRE movement will take 25-30 times your annual spending saved up in your investment accounts to live from in order to achieve this goal.
25 * your annual spending of $80,000
FI Number = $2,000,000
If you take 4% of that and you are spending $80,000 or 100 divided by your withdrawal rate, in the first five to ten years of retirement, you have moderately below average returns. You are in good shape.
If your returns are average or above average, you could even raise your spending rate above the 4%.
I posed the question: If you have fifty years of retirement ahead of you (as opposed to a shorter retirement period), should you trust the four percent? Instead of saving the 25 times your annual spending, should you strive for the 30 times your annual spending?
Physician on FIRE admitted that he has overshot his 25 times number by a decent margin. He has given himself some cushion because as he stated, “You don’t know how long you won’t be making an income.”
So, you’ve projected your approximate future income and invested accordingly. You’ve built yourself some additional cushion, just in case you need it. What else should you consider?
The FIRE Movement: Looking at Risk
The last time I had Physician on FIRE on my podcast, we talked about sequence of returns and how to become financially independent. This time we are talking about the Monte Carlo simulations in which they run a thousand scenarios and determine the worst sequence of returns you could possibly have.
What is a sequence of return?
It is a way of looking at the risk of receiving negative returns when you make a withdrawal from your investment portfolio. If you plan on retiring early, your investments will need to last longer, so taking into consideration how the risks may impact your portfolio and ultimately your goal of maintaining financial Independence is an important step in the FIRE movement.
The Physician on FIRE pointed out that there are some very good academic papers that looked at Monte Carlo simulations. Which are reviewing past returns and looking at retiring at the worst points you could imagine while looking at historical records of the performance of stocks and bonds in the United States. They look scenarios to see the lowest you can go without failing more than 2-3%.
- 25 times get you a 97% chance of your money lasting 30 years or more based on the Monte Carlo simulations.
Physician on FIRE did make the disclaimer that the future could look worse than the past. He also stated that the median result in these different simulations or actual historical records going back over a 30-year period is to end up with up to 2.8% more money than you started with. It ends up the same amount of money after you’ve considered inflation.
However, if you have the same amount of money that you started with after adjusting for inflation or almost three times as much unadjusted for inflation, you have just hit reset on the stopwatch.
Physician on FIRE indicates it’s wise to work additional time—say up to three years, to build the extra cushion, if you are going to be retired longer than the average time frame.
I personally feel that in the case of a horrible economic depression and seeing a negative sequence of returns, it might be wise to go back to work doing some locums work for a limited period for example.
Should a physician think differently about his spending depending on where they fall on the FIRE movement spectrum?
Now we’ve learned what the FIRE movement is, we know how to use passive income or investment to reach our goal—but do you know where you want to fall on the FIRE movement spectrum?
The FIRE Movement: Lean FIRE Versus FAT FIRE
For discussion purposes, The FIRE Movement might be considered a middle ground. However, there are other ends of the spectrum. What are they? Which one will sound the most appealing to you?
Lean FIRE is a bare bones budget. The opposite of lean FIRE is FAT FIRE. Physician on FIRE typically discusses FAT FIRE, which is an above average budget (spending) while being financially independent. We believe physicians who learn about the FIRE movement will be most interested in the FAT FIRE option!
All things considered, most physicians do spend above median amount—especially compared to the average person. Physician on FIRE advises you to spend less than the average physician in order to achieve financial independence as exemplified by the FIRE movement.
After Physician on FIRE started blogging, he began to track his spending for two reasons:
- To prove to himself and his readers that he was financially independent
- To pinpoint where the money was going
He stated he knew what the credit card bills were each month ($5,000-$6,000 monthly). He said they tracked spending at $60-$70,000 a year (not including taxes). That also didn’t include the mortgage since they paid their current home with cash.
In this particular year they replaced a vehicle which brought their spending up to approximately $100,000. If they pay for their own healthcare, it adds another $20,000 or more per year. He said his family was at six figure spending even without a mortgage or massive student loans to pay.
I considered it appropriate planning that Physician on FIRE had paid off his student loans and paid his mortgage in full. Some people might question paying off a house at historic rates. I personally would rather not own bonds and pay off the house faster. Loans are considered a negative bond. By paying off loans, you are ultimately putting money toward bond allocation. If the interest is 5%, I must earn 6.5% out in the market to cover the tax.
While I consider how Physician on FIRE handled paying off his house as great planning, there are others who in their early forties who couldn’t have paid off a mortgage. Maybe they’ve had their head buried in the sand. They probably haven’t planned carefully or according to the FIRE movement. It is still achievable.
The question is how do you begin to build wealth using a/the FIRE movement logic?
The FIRE Movement: The Expense Side
What if there is a spending problem? And there are doubts about your ability to gain control of the finances according to the FIRE movement principles?
You know the saying: “A journey of a thousand miles begins with one step.” This is the perfect time to take the first step toward financial freedom!
To get you started you must figure out two things:
- Where is the money is going?
- What are your priorities?
Physician on FIRE explains that as a new attending physician, you may start your profession excited about your new position and salary. However, as time goes on you might get stuck in a rut, there might be a change in administration, or you may need to find another job for any number of reasons. During this time in your life you may also have a family and your needs have changed. Your priorities may be vastly different than when you began your career as a new attending physician.
The point is you want to makeachieving financial independence your goal. You want to make having choices your goal. The FIRE movement is your tool to create financial independence, build your wealth and have the freedom to choose what is best for you and your family.
Physician on FIRE suggest looking at what you can do to increase your saving rate. That might mean generating additional income or decreasing your spending. My suggestion is to optimize savings, investing, and looking at tax efficiency.
I asked Physician on FIRE how could these tips be used in relation to the FIRE movement and FAT FIRE?
- Max out retirement accounts
- Then work on 401K, 457B and an HSA (if applicable)
- The backdoor Roth
- Taxable brokerage account (after tax money buying mutual funds)
He likes tax-deferred investments. They are not as advantageous as they were due to the tax cut and job act, but they are still good for people in the upper-income brackets.
- The taxable brokerage is like a bank account, accessible anytime. You pay capital gains on any increase in cost if you sell them. This is an account you can rely on before age 59.5 until you can tap your other accounts.
When I asked him if he had or still has disability or term-life insurance he replied he used to have them. However, due to his net worth, he currently doesn’t have—or need them. He saves $4,000 a year since dropping them. He denied ever having whole life insuranceor falling for that sales pitch!
I want to point out that Physician on FIRE arranged his finances in accordance to the FIRE movement ideals: He had term insurance and disability insurance for doctors he mentioned he didn’t need them anymore. Being aware of his changing needs in relation to his net worth saved him money. The money saved by being aware of changing needs and net worth is now basically income. You may put the money toward your children’s college funds or anything else you choose!
What else do we need to know about the income side to the FIRE movement?
The FIRE Movement: The Income Side
You might be wondering if you need a passive income source, secondary income source or to live frugally to hit FAT FIRE. I asked Physician on FIRE and he stated that for an attending physician—working as a physician is the way to go.
The lowest paid physician makes three times the average household income. There is the late start to earning a living and the larger student debt to deal with; however, it all comes down to how much you can save. If you can live according to the FIRE movement and save half your take home pay you can be financially independent, you potentially will not have to work in fifteen years.
Some considerations on whether you could become financially independent within fifteen years and not have to work are:
- Where you live
- How you practice
What qualifies as FAT FIRE? Physician on FIRE illustrated the FIRE movement and specifically FAT FIRE with the following scenarios:
- If you save 1/3 of your income, you will reach financial independence and the ability to retire early in approximately 20-25 years
- If you make $200K a year with the current tax rates (paying $50-$60K in taxes), you have $150K left; you spend $100K, saving $50K
- If you have a two-income family, live on one save the other income
There you have it: What the FIRE movement is all about. What we mean by FAT FIRE. You know the risks, the benefits and what signposts to look for on your way to financial independence!
Do you have the cash flow or nest egg necessary to achieve financial independence? Do you know how to create the wealth you need to retire early? What steps are you currently taking to begin your journey to financial independence using the FIRE movement as motivation?
Journal Club: Mapped Out Money
For this episode’s Journal Club, I have such an interesting article I want to share that’s posted on the site mappedoutmoney.com titled Stop Pretending That Money Is Easy, It’s Just Not.
The author is none other than Nick True who was on the show a few months ago talking about the science behind positive financial habits. One of our most popular shows so go back and check it out if you haven’t listened to it yet.
I have to say, this is one of the more thought-provoking articles that really hit home for me as I try to help guide you all on your financial journey.
I’m going to quote a bunch of this article as I love it so much. I don’t want to ruin the message by paraphrasing it.
I quote, “Some people are naturally good at handling money. They just get it. Numbers make sense to them, they aren’t tempted to spend too much, they naturally save etc… To them, money is easy.
Then there’s everyone else.
The people who have the ability to learn how to handle money, they just naturally aren’t that good at it. And that’s not bad in and of itself. We’re all naturally good and bad at different things.
But the problem is that the people who teach about money want to act like it’s all super easy.
Well if it was really so easy, then why is it that half the country can’t afford a $400 emergency. Or why is the average household credit card debt $5,883?
Obviously, it’s not that easy, and we need to stop pretending it is.
Knowing how to manage money isn’t too hard. Basically, it’s just two main principles:
- Save more money than you spend
- Invest so that your money starts making money
That’s not hard to say and it isn’t hard to understand.
But actually doing this is extremely difficult.
It’s the same reason that knowing how to lose weight and actually losing weight are two completely different things.
Losing weight has only 2 principles as well:
- Eat fewer calories than you burn
- Workout to burn more calories
Seems so simple, yet the obesity rate in America has more than doubled in the past 35 years.
We all know how to pay debt off. Nobody out there feels like they’ve been given a magic bullet when a financial guru tells them to spend less than they make, and then use the extra cash to pay off their debt.”
But actually following through with this is really hard.
Saving Money Is Tough
This one goes hand in hand with the debt. But it’s a little different.
After you get out of debt, the next logical step is to start building up some savings. But this is much harder than it seems.
There’s always something that’s vying for our cash. Money is emotional, and often times our emotions win.
Which means that most of us don’t end up saving as much as we’d like.
If you’re able to get out of debt and start saving, the next logical step is to start investing.
Luckily we live in the internet age and investing has become wayyyyy easier for the average joe than it was just 20 years ago.
But even still, it seems overwhelming.
You’ve never learned any of this stuff before, how should you know how much to invest, or much less what to invest in?
Nick’s conclusion is that pretending money is easy only makes it harder.
When we think that something is supposed to be easy, but then we struggle with it, we just want to stop trying.
He gave a great example of a math teacher saying:
“Today class we’re going to cover this new topic, don’t worry it’s really easy”
Then he proceeded to show you the most complicated thing you’ve ever seen.
And guess what, now you feel like a complete idiot. There’s no way you’re going to raise your hand and ask a question because it’s supposed to be super easy. If you ask questions, everyone will know that you’re stupid. It’s the same way with money.
We get told that money is easy.
“Just spend less than you make, and save the rest!”
Well, okay, but what if that’s hard? Then what?
We don’t want to talk about money with other people because then they’ll know that we’re not very good with it, and that must mean we’re stupid.
So we just don’t say anything and we keep on living our lives pretending that we’ve got it all together.
Nick goes on to make a few more excellent points but ill stop here.
There is so much truth in this article, I really hope I haven’t let you all down. I hope that I’ve been able to show you that while things may look hard on the surface, that with some thought time and dedication, you too can start to master your own finances. I sincerely hope I am not causing any of you to feel stupid but rather feeling the opposite, that by listening to the show, that you feel empowered over your finances and to gain confidence that you can do this, that you can take back your freedom, break the shackles of your debts and really build a solid foundation that will support you for the rest of your lives.
I’d really love to know your thoughts on this so please join our Facebook community at: financialresidency.com/community and come talk to us.
Let’s break down the communication barrier, open up and maybe get a bit vulnerable but put our best foot forward and really try to help each other out.
Nick, thanks for such a thought-provoking piece.
And if you all haven’t been following or subscribed to his list, you are really missing out. Nick produces some amazing thought proking content that needs to be almost required reading for all of you. It’s fantastic so check it out at mappedoutmoney.com.