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Base Your Frugality On Your Retirement Time Horizon

If a healthcare professional is enjoying practicing medicine and can do so even on a very limited basis for many years to come, then they will likely have very little need to ever dip into their savings/retirement accounts. Whatever they decide to set aside will just keep growing. The longer they go without touching it, the more powerful is the force of compounding interest on their portfolio. This professional will likely die before ever touching their savings and end up with an obscene amount of money in there.

A common conundrum for the new physician household is how much they should be saving for retirement. There are all sorts of little, immediate decisions to make and on top of that, they have to figure out the pig picture thing too.

-How frugal do they need to be?
-Should they lower their annual household expenses from $70k down to $60k?
-From $100k down to $80k?
-Should they cancel the cable TV service?
-Is that monthly gym membership hurting them financially?


The Aspiring Early Retiree

It’s ironic that ‘early retirement’ is considered a new phenomenon, one that many financial advisers apparently aren’t even familiar with. There are quite a few blogs and websites dedicated to this new radical form of retirement.

In fact, my grandparents and many of their peers were aiming to be financially independent as early on as possible. It wasn’t until the 1970’s when high earning households started depending on lifelong earnings, decreasing their efforts spent on achieving financial independence and instead focusing their energy on just working much longer. 

That 70’s generation had grandparents and parents who were vesting in pensions and having a healthy social security income. In fact, in the 70’s, quite a few households witnessed their parents retiring with more money than they needed. Inheritances were no longer just farms and a few bonds – it involved life insurance payout, money in retirement, real estate, etc.

It wasn’t that long ago that factory workers, teachers and professionals were working in their fields while enjoying a sense of purpose. Homes were being built by local builders in order to offer housing for the next generation – low quality track homes built by massive corporations, who get shady tax credits and given permits through backdoor dealings, are a new phenomenon which sprung up in the late 70’s, early 80’s.

That generation wasn’t harder working than us. But their work meant something more to them because corporations operated differently back then. No, it wasn’t all about the ‘good old times’, there was plenty wrong with those systems, too. That generation battled to put every dime back into their own pockets, pay off debt, build their wealth and secure their retirement.

My grandparents and the grandparents of many of my friends weren’t strolling through WalMart-ish stores looking for shit to buy that they really didn’t need. They were making their own wine, they had a few fruit trees, grew plenty of their own vegetables and either had chickens or bartered with friends for their animals. Self sufficiency was valued regardless of how much they earned.


Early Financial Independence

Becoming financially independent early in a healthcare professional’s career is no longer sexy, nor is it easy. Debt burdens are higher than ever, home price disparity based on location is ever-greater, and lifestyles are far more complicated. We are advertised to a lot more and we have so many more hands in our pockets.

In order to achieve financial independence early, a household must run more efficient and leaner than most Fortune 500 companies. They need to be investors, debt negotiators, risk assessors, career planners and parents. It’s fucking hard – that’s a lot of hats to wear, a lot of focus to maintain.

However, the idea of becoming financially self-reliant is still somewhat attractive to most professionals. That’s the sense I get when I discuss retirement with colleagues through a wider lens.


When Do You Want To Stop Working?

If you enjoy what you do in healthcare and anticipate that you will keep enjoying it for many more decades, then there is no point contemplating when you’re going to stop working. It’s almost wrong to call it work when you like it so much that you’d probably do it for free.

A person who can work longer will have the highest chance at an eventual, successful retirement. Even better, if they enjoy their job so much that they never want to stop doing it then they don’t even have to worry about creating a retirement.

This person doesn’t need to be frugal. If they aren’t spending beyond their means, they will always have enough money to live off of. Their income from their job is the most secure form of pension they could ever hope to build and they can still protect it by getting disability insurance.

You’re Done, You Want Out Right Now

From the scenario above, I only know one physician who loves the job for what it is and never wants to stop doing it. I know others who don’t want to stop doing it because they admit that their identity is too far wrapped around their career.

For those who are looking for an escape hatch, frugality is the giant flashing neon EXIT sign. Frugality is probably the easiest way to escape the daily grind because it help you out twofold: 1) it helps you save and invest more money so that you can pull the plug on work, 2) it lowers your monthly overhead so that you will need to save even less than you thought you needed.

This person needs to deeply evaluate each expenditure. Sure, those $200 headphones will bring some pleasure during the workouts but that will be $200 less that you can contribute towards paying down debt or investing in a retirement account.

The $3,000 vacation might be a reprieve from the monotony of work. But that $3k would earn you $10/month if invested in relatively safe, passive index funds – that’s $10 that your $3k would generate month after month.

Should you decide to invest that $3,000, it could be worth nearly $5,500 in 10 years. But you’d be missing out on that vacation. You’d sacrifice one thing for another. So is the vacation more needed or is the desire for escaping your job more important to you?


So How Frugal Should You Be?

I want so desperately to say that it’s best to strike a balance, to spend enough to enjoy life like your peers but to still save enough to meet your financial goals. But I don’t believe that, it’s not what I did, and I am not sure I would be happy if I had followed the balanced method.

Step #1: Time Horizon To Retirement

You are either passionate about your career and could do it part-time/full-time in perpetuity or you are done, checked out, stamped. If you know where you stand, it will be easier to come to terms with how frugal you should be.

Step #2: How Quickly Do You Want To Be Free?

If you want to do it as quickly as possible then an uber frugal approach is what’s needed. If you can carve out a 5-10 year plan then you will be able to enjoy a much more lenient budget.


How To Do The Frugality Math

Hopefully you have come up with some answers to the questions I posted, I think they will help you make your decisions easier. But sometimes you’re torn – too much in love with your pricey hobby and fallen deeply out of love with your career.

I would offer a change of career as an option here but I am realizing that it’s definitely not as easy as I thought it would be. Let’s leave that for another post as I am sort of and on and off struggling with that.

  • Should you cut $1k/month from your budget? Should you take your annual spending from $80k/year to $60k/year?
  • Should you cut the $200 cable bill?
  • Should you take the kids out of the $400/month tennis camp?

I don’t think these are very ‘meaningful’ price negotiations for a high-earning healthcare professional. $10,000 a year, give or take, won’t make much of a difference in your retirement horizon, in your overall net worth, in how quickly you’ll achieve financial independence.

  • Should you move to a cheaper State?
  • Should you get rid of the cars?
  • Should you stop vacations and dining out completely?

These set of questions are a bit more relevant. They can lead to not only far higher savings but when combined with other frugal behaviors, they can drastically decrease your household’s dependence on income. These are in fact meaningful questions worth pondering.


How Drastic Of A Change Are You Looking For?

I’m not saying to ignore all spending. I am not saying to take as many vacations as you like or to buy every gadget that becomes sexy.

But if you are looking to retire at age 40 instead of 65 or to be financially independent in 5 years instead of 25, then it’s the drastic measures which are going to get you there.

Is it worth it? It very well may not be worth it for the majority of physicians. There are 1 million active medical licenses in the US. Of these, I suspect maybe 5,000 would have a genuine interest in becoming financially free as soon as possible. For this group, no spending sacrifice is too big.

The majority of physician households are constantly teetering on whether they should cut X or spend less on Y. And I view such decisions as merely stress-inducing and not really generating meaningful results.


What I Regret

I regret being a workaholic out of residency. It took a lot out of me and made it hard for me to live a balanced lifestyle. I thought that earning more money could offset my poor budgeting skills.

What I don’t regret is supercharging my way towards financial independence. It meant cutting out a lot out of my lifestyle but I am glad that I am where I’m at so quickly.

I know I don’t regret the hardcore frugality because even though I’m retired, I am still generating around $8,000/month – plenty to live a lavish lifestyle and go back to living in luxury. I’ll keep you posted if my opinion changes a few years from now.

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