Not surprisingly, FIRE (Financial Independence, Retire Early) is a popular concept within the physician community. Many physicians leave med school with hundreds of thousands in student loans. Our income generating years start later than most, so many of us don't even begin contributing to retirement until our thirties. Combine these factors with widespread burnout, it's easy to see why so many physicians are laser focused on the idea of getting to financial independence as soon as possible. At Physician Side Gigs, we're a big fan of the idea of financial independence. What you choose to do with that financial independence is a very personal decision. We'd like to think that the biggest benefit is the ability to continue to practice medicine, but on your own terms, with the leverage to walk away from a bad situation.
Below, we cover the basics of FIRE for doctors: what it is, who it's for, and how to track your net worth and retirement to make sure you're on track to reach it.
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Empower is free way to aggregate your accounts and get a comprehensive overview of your finances. It includes lots of retirement tools/trackers/long-term financial tools that address questions often asked on the group in terms of tracking net worth, a savings tracker that shows you if you’re on track towards retirement goals, budgeting, cash flow, and fancier things like a retirement planner that will calculate your projected monthly income by your desired retirement date, planning for your kids’ education costs, portfolio allocations, and even analyzing the fees in your investments to make sure you’re aware of hidden fees. Empower Personal Wealth, LLC (“EPW”) compensates us for new leads. We are not an investment client of Empower Advisory Group, LLC.
Our financial advisor database can help you find a fee-only, fiduciary financial advisor to pull together a comprehensive financial plan to help build a blueprint to reach your personal finance goals.
Visit our events page to sign-up for our financial grand rounds educational series and find links to recordings of previous events.
Some of our favorite personal finance books are listed here.
Introduction to FIRE (Financial Independence, Retire Early) for Physicians
The financial independence, retire early movement has gained a ton of traction within the physician community as burnout and frustrations with the state of the healthcare system mount. The guiding principle here is that by saving aggressively while younger, typically in the 30s and 40s, you can amass enough wealth that you can live off of the returns of your investment portfolio, thus allowing you to retire well before a traditional retirement age of 65+.
While this is different for everyone, the concept that we really like to embrace focuses on the first two words - financial independence. FIRE doesn't mean you have to retire early, nor does it define what retirement has to mean for you. It simply means you have the ability to shape the life in medicine that you want on your terms because money no longer dictates how and when you work. A big added benefit in today's healthcare environment, where everyone is always trying to squeeze more out of physicians, is the power to walk away from bad situations, which can give you a lot of leverage at a negotiating table.
A lot of times, followers of FIRE in our communities continue to work. It may mean:
continuing to work full time but empowered with the knowledge you can say no to anything without worrying about your financial situation
cutting back on hours
switching to locums to allow for mini-retirements between assignments
changing clinical jobs to something lighter or more enjoyable, but perhaps less lucrative
switching to a nonclinical career
focusing on a side gig passion project
focusing heavily on developing substantial additional income streams such as real estate
We have some more concrete examples of side gigs and options for retired or retiring doctors in our community are doing and how to get started in this article on side gigs for retired physicans.
Types of FIRE
As you can imagine, FIRE means different things to different people. While many physicians could technically afford to retire by the time they're in their second decade of practice if they were to live frugally, it's important to think about what your vision of retirement is. If it's living in a low cost of living area in a modest home with minimal expenses, that "financial independence number" is going to look a lot different than somebody who wants to live in NYC in a penthouse apartment and taking multiple international vacations a year staying in high end luxury accommodations.
The financial independence community has come up with some different categories to reflect this, in case you hear these terms thrown around our communities.
Fat FIRE - This is the dream for a lot of people, as people who categorize themselves as fat FIRE maintain their standard of living in retirement, or maybe even exceed it. For physicians, this generally means they want to be able to spend 6 figures or more annually, and necessitates aggressive savings and/or smart investments early in life (or winning the lottery)
Lean FIRE - Very frugal living, to the point of minimalism. Many self-proclaimed 'lean FIRE' people live on $25k a year or less.
Barista FIRE - An in-between option where you are still earning some money. Often times, people will shift to part time but maintain a job to pay for expenses or get health insurance, and ideally not dip into retirement funds.
So, How Do I Know What My Financial Independence Number Is and If I'm There?
The first thing you have to do is project how much money you're going to need annually in retirement to live the life that you want to live. This requires sitting down and looking at your current expenditures, and making some educated calculations about what expenses will increase and what expenses will decrease once you stop working. Make sure to include things that you may not currently pay for, like health insurance, in these projections.
The next step is to factor in your non-recurring expenses and make sure those are accounted for in your projections. This could include things like your kids' educational expenses, that bucket list trip sailing around the world for a year, a house purchase, wedding expenses for your children, occasional new cars, or whatever else you'd like to be able to pay for.
Then you need to figure out what money you think will continue to come in once you give up your day job. This could include real estate rental or syndication income, side gig money, royalties from a book you wrote, a trust fund, etc. For most people, this will also include investment returns on money that they have in their investment portfolios.
From these numbers, you can plug values into many of the financial independence calculators out there to spit out your "financial independence number" that you need to achieve before declaring yourself able to quit your 9 to 5.
If you aren't seriously considering retiring yet and just want to get a rough ballpark of your FI number, there are some popular quick and dirty ways to do a back of the napkin calculation on your financial independence number.
Rule of 25
This can be calculated either from looking back at the year you spent the most money throughout your working career, or based on the projection for what you want your annual expenses to be every year. Take that number and multiply it by 25, and you have a rough idea of how much money you need to retire. If you want to be conservative, multiply by 30.
4% Rule To Calculate Your Financial Independence Number
The 4% rule follows the same principle as the rule of 25 from a different approach. The 4% rule says that you divide the amount that you think you'll spend in retirement by 0.04 to determine your financial independence number.
For example, if you think you need $100,000 a year in retirement to live off of, your financial independence number is ~2.5 million dollars. If you think you'll need $250,000 in spending money a year in retirement, your financial independence number is going to be ~6.25 million dollars.
Some things to keep in mind:
That number is the amount of money that needs to be invested, as it needs to be earning money, and the assumption is that you are withdrawing from the portfolio gains and not depleting the principles. This assumes steady withdrawals and historical market returns and has been proven to be effective over time, including recessions, etc.
If you want to be conservative, we suggest calculating a safety number using 3% instead of 4% right now given the current inflationary environment.
The number of years you anticipate spending in retirement matters, as this rule has not been proven with early retirement (>33 years spent in retirement). This is because inflation has a longer time to work and costs tend to increase with age.
How Physicians Can Get to FIRE
Three key components of saving for retirement include:
the power of compounding growth over time
consistency with saving and investing
the amount you have to invest
The Power of Growth
Not surprisingly, the younger you start saving, the higher your potential for wealth accumulation, as that saved money is also earning money.
This is why we always encourage graduating trainees to get a financial plan in place ASAP in our Transition to Practice series. We want to help ensure their money starts working for them as soon as possible and to help avoid early lifestyle inflation. The caveat here that we always like to stress is that you don't want to deprive yourself of the occasional splurges and necessary comforts to enjoy the journey. The biggest threat to your wealth building potential is career burnout, so making sure you spend wisely on things that bring you joy is necessary to ensure career longevity. Plus, life is short, and we've all delayed gratification a lot by the time we get that first attending paycheck! Like everything in life, moderation is key.
What you invest in factors into the equation here, as compounding growth is key. If your investments routinely have a low return for decades, you lose out on the compounding ability of your previous earnings to generate more earnings. This is why we caution against using short-term investments like high yield savings accounts as a long-term investment strategy, but rather as a way to get some returns on money that you're going to need to spend soon or on your emergency fund.
Long-term track records and tax efficiency of your investments are other key components.
While some investment vehicles offer a potential higher return on investment, if they fluctuate greater with a higher probably of risk, you might lose out over time. Make sure you understand what you are investing in (check out our books page for recommendations on where to start) and pay attention to your asset allocation. For one popular asset allocation mix, visit our page on the three-fund portfolio, which is a great way to strategize your portfolio with a growth mindset while balancing risk in your prime investing years.
If your investments are highly tax inefficient, you are losing out on valuable growth on money that you earn. We have a significant percentage of our communities that view real estate as a powerful tool for accelerating the pathway to FIRE. It does have several potential advantages in this regard, with the potential for regular tax advantaged cashflow, significant appreciation, and for a stream of income in their FIRE years. Of course, always do proper due diligence when vetting these. Remember that each real estate investment has a different risk-return profile, and major losses can really impact your net worth over time.
Also check out our article on tax strategy for the W2 earners or our page on self-employed finances for ideas to keep your earnings as tax efficient as (legally) possible.
Does starting retirement in your 40s or early 50s mean you're too late to FIRE?
Not at all! You still have the opportunity to retire before the US government's defined retirement age, which seems to increase every few years. If nothing else, you will still reach FI, which is our hope for all of our members.
Consistency in Investing
We've all seen threads on our communities of somebody sitting on a large amount of cash and unsure where to invest it. Honestly, almost all of us has likely been guilty of not making our money work for us while we're stuck in analysis paralysis or while we wait for a certain benchmark to deploy money. Over time, this will hurt the returns of our portfolios. Create a financial plan and find whichever method works best for you to regularly invest.
We are huge proponents of starting with your retirement accounts, which are tax advantaged. Employer sponsored 401(k) plans and HSAs often allow you to fund these tax-advantaged accounts automatically through your paycheck, letting your employer do the work for you. You can also set up an autodraft for your Roth or traditional IRA.
Learn more about the different tax-advantaged retirement plans.
After this, you can choose in your budget to schedule an autodraft into a brokerage account on the same day every month once you've reached your tax-advantaged limits. For those that get stuck in analysis paralysis, target-date index funds and three-fund portfolios are popular investing strategies. They require some initial knowledge and a three-fund portfolio can require occasional rebalancing, but overall they are simple, making them closer to "set it and forget it" strategies, which work great for busy physicians.
Maximizing Your Investing Amount
This is perhaps the easiest to understand. The more money you invest now, the less you have to save later. Fortunately for most physician families, we have a leg up in the potential amount we can save annually when compared to the average income American family, which is why the potential to hit FIRE as a physician is so possible despite starting to earn in later years.
Determining how much you can invest for the future without causing a financial strain in the present is where having a budget is key. Read through our budgeting primer for a detailed guide on setting up your budget.
While you'll likely never regret saving your surplus income and having extra money to work with in retirement, you might wonder how much you need to save every month to stay on track. Some general principles here:
The longer your investments have to grow, the less you need to get to your goals because of compounding growth. If you are starting to invest later in life, you should budget more aggressively for savings.
In general, for most physicians, saving somewhere between 15% to 25% of your household income is a great place to start.
Our partner Empower offers both a retirement planner and an investment check up to keep you on track. (Empower Personal Wealth, LLC (“EPW”) compensates us for new leads. We are not an investment client of Empower Advisory Group, LLC.)
If you've dabbled with personal finance planning tools in the past and don't have the time or interest - or if your particular financial situation is highly complex with multiple variables factoring into your savings potential long term - then you may want to consider hiring a financial advisor. While we are big fans of DIY here, if you're not, you want to make sure you get help in pulling together a comprehensive financial plan. Make sure your money is invested well so that it's growing and using the power of compound interest in your favor.
Rule of 72 to Determine When You'll Hit Your FI Number
The Rule of 72 is a good benchmark used in personal finance to help with assessing your investments and determining your current financial position. This simple formula (divide 72 by your investment's average rate of return) helps you estimate how long it will take your investments to double.
The Rule of 72 can't determine how much you will need in retirement, but it's a quick and reliable way (at moderate rates of return) to estimate how much your investments are likely to grow, so you can plan accordingly in conjunction with your 4% rule.
The Rule of 72 also shows the power of compounding growth and why it's important to be intentional with not just investing but with where you are investing. While we like short-term investment options for certain scenarios, the Rule of 72 shows why they aren't good long-term strategies overall for the bulk of your investment portfolio. It also shows why:
If inflation goes to 8%, the purchasing power of your money will be half of what it is today in 9 years.
Paying 9% interest on your student leans means the amount you owe will double in 8 years if you're not paying them back (think about long residencies/fellowships and what happens to people's loan amounts).
Paying a financial advisor a high AUM fee to manage your money will significantly eat into your earnings and your long term trajectory of your portfolio's growth. This is why we always say that if you elect to use a financial advisor to help you manage your finances, pay close attention to their fee structures and any hidden fees.
Conclusion
Doctors are fortunate to be in a position where FIRE is a very real possibility with some careful planning and budgeting. Whether you enlist outside professional assistance or go the DIY route, be intentional. A few of the key areas to make sure you check off when tracking your personal finances:
Know your goal. You're much more likely to stick to your budget, including your planned retirement funding amounts, if you have a concrete goal you're working toward.
Build your budget and track your net worth. Check out our budgeting and tracking net worth for physicians page if you haven't already. Not only will this help you pull together your budget, but it will give you an overview of your current financial situation and how on track you are to your retirement goals.
Understand your investing. You want your money working hard, which means you have to understand the different investments your money goes into. Never investment in anything you haven't researched to develop a basic understanding of, and be intentional about which investments are building towards which of your financial goals.
If you decide that you do want to retire early after achieving financial independence, but are concerned about the idea of completely retiring, check out our favorite side gigs for retiring physicians for some popular options amongst retired doctors in our community.
You've got this!