Editor: Wealth isn’t defined by what you own, how big your house is, or how fancy your car is. That doesn’t mean you should spend on things you enjoy. But there’s something about living with steath wealth. Leif shares all about it in an interview that was origianally posted on Physician On FIRE.
Stealth Wealth and Financial Independence: A Q&A with PoF
A while ago, I was interviewed by a site much bigger than this one for a story on stealth wealth and financial independence. Knowing this would reach many people, I put a fair amount of time and effort into it.
Below is the complete question and answer session. I hope you enjoy getting to know me a bit better. Stick around to the end and I’ll share the article that was written based on the interaction below, making this something of a “how the sausage is made” experience.
Questions on Financial Independence:
How did your journey with financial independence begin? How long did it take for you to reach that point?
I graduated from anesthesia residency in 2006 at age 30 with a net worth of about zero. I had a bit of home equity that was offset by student loans. My salary jumped nearly ten-fold overnight, but my expenses didn’t change much at all, particularly for the first couple years when I was a locum tenens physician, traveling from hospital to hospital earning a healthy daily wage.
Before long, I was married with children and living in a big, beautiful home that we had built. Still, I saved a substantial portion of my income — more than half of my takehome pay most years. I didn’t know exactly what I was saving for, but we were spending all that we cared to spend.
After nine years earning a physician’s salary, I discovered the concept of financial independence via Mr. Money Mustache and other FIRE blogs. I started doing some math on a napkin, continued the calculus on the back of the envelope, and realized we were more or less financially independent already. I was 39 years old, and my wife was 33.
You also have a family (including kids!). How did that factor into the way you approached financial independence?
We weren’t actively pursuing financial independence when we started a family, but my wife and I are both relatively frugal by nature. We didn’t go out and buy the latest and greatest in terms of baby gadgets, toys, and necessities. I’m not at all ashamed to admit we bought some of our baby gear slightly used and later gave it away in essentially the same condition.
Having a family does increase the target number to be able to claim financial independence. If it were just me, I think I could get along quite well on $30,000 to $40,000 a year. With a family, which includes two boys now eight and ten years old, our annual spending is about twice that.
We also need to anticipate increased expenditures in the coming years. Teenagers eat more, spend more, and once they start driving… I do not look forward to footing the bill for their car insurance. With any luck, the increased costs in the teenage years will be counterbalanced by disappearing costs as they enter their twenties and gain some independence of their own.
An additional consideration is the cost of higher education. We have funded 529 Plans to the tune of $100,000 each with plenty of time for the balances to grow before they’re tapped.
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What’s a question you wish people asked you more when it came to financial independence?
What are the benefits of financial independence for someone who has no interest in an early retirement?
With the FIRE acronym and so many people striving for financial independence in order to afford an early retirement, people don’t give enough credence to the other benefits of financial independence.
To me, it’s all about options. You can choose to work in a different field, volunteer more of your time, work part time (as I did), or of course, not work at all. There are some additional benefits like being self-insured and safe to forego disability and term life insurance. Skipping those payments can allow you to live on less and save more money.
What’s a common misconception with financial independence?
Those with only a peripheral understanding of financial independence often assume that anyone chasing it must hate his or her job. There are plenty of reasons to pursue financial independence as I have outlined, and one must also consider the fact that they may not feel the same about their job in five, ten, or twenty years. People change, as do our life circumstances and sometimes the nature of our jobs.
I don’t hate my job; if I did, I would have quit years ago when I realized I was financially independent already. I will say that I prefer my days off over my workdays, but not enough to say I’m fully ready to walk away from this lucrative career.
With all the different ways to approach financial independence (eg leanFIRE, fatFIRE) it can be confusing to the newcomer. Which method do you use and why?
To be leanFIRE is to subsist on a comparatively low level of spending — much like most of us did in college. Jacob Fisker of Early Retirement Extreme lives a happy leanFIRE existence.
Conversely, fatFIRE is to be financially independent on a more typical level of spending. I’d say to qualify as “fat,” your anticipated spending should probably be somewhere north of the national average. To pick a number, I’ll say that’s annual spending of at least $80,000 which lends itself nicely to a round number of $2 Million required to have that budget with a 4% safe withdrawal rate.
When you add in the cost of healthcare — or our best guess, anyway — I would say we’re planning on a fatFIRE life. I’ve exceeded the money requirement by a decent margin, and I don’t want my family to feel we’re making any sacrifices because I am choosing to retire in my forties.
For me, it’s about balancing the competing likelihoods of regret. I’d rather regret working too long than retiring too soon. The former leaves us with “too much” money, which is an issue I can live with.
What shape does investing take? What percentage of their income should they invest if they hope to retire within 10 years?
Investing comes in all shapes and sizes. Mine is a rhombus. Or is it more of a parallelogram?
Either way, unless you fall into some great luck, you’ll have to save about two-thirds of your takehome pay to retire in ten years if you’re starting from scratch. You can’t escape the math.
I encourage my high-income readership to live on half their takehome pay. For most, that’s still a six-figure lifestyle and financial independence will come in about fifteen years with that strategy. Perhaps closer to twenty years if you start out with several hundred thousand dollars of student loan debt, as many physicians do.
How can people best optimize earning more money in order to become financially independent?
Unless the status quo is particularly outstanding, don’t be satisfied with the status quo. Look for opportunities to moonlight. Don’t be afraid to start a “side hustle” or entrepreneurial venture.
Geographic arbitrage can be your friend, particularly in medicine. Some of the highest salaries can be found in areas of the country with the lowest cost of living.
Finally, do all that you can to legally reduce your tax burden. If you max out your workplace retirement accounts and an HSA, you can deduct a significant sum from your taxable income. There’s only so much a wage earner can do, but do all that you can to pay the least and save the most.
When people think about FIRE, images of checking payphones for pennies and selling your hair often come to mind. What are some of the best ways to optimize saving in order to hit your goals without resorting to scummy tactics?
I don’t see payphones very often these days, but when I do check them, I check them for quarters. ?
When pursuing FIRE, keep in mind that the budget you’re now is the life you’re basically locking yourself into if you stop earning money when you reach financial independence. If you’re making too many uberfrugal choices that don’t jive with your persona, start living the way you want to, and base your FI target on that.
Also, realize that the small stuff is just that — small stuff. The biggest expenses are the big stuff like housing, transportation, and travel. Don’t rent or buy too much home, spend too much on a luxury auto or lengthy commute, and learn to be comfortable at a Comfort Inn. The Four Seasons can wait until you’re a millionaire several times over.
If you’re going to get married, stay married. One house, one spouse. Don’t lose big money on the big stuff, and the small stuff is almost a non-issue.
Questions on Stealth Wealth:
You didn’t always used to practice stealth wealth. What made you decide to embrace the lifestyle, rather than keep the convertible and the other luxuries of “outward wealth”?
When I was a resident, I drove a Mustang convertible and lived in a pretty swanky downtown condominium. I was in my twenties. I wanted to be cool, or at least look cool, and I figured that cool factor might help me with the ladies.
I don’t think my car or condo had much to do with it, but by the time I finished residency, I was engaged to the love of my life. From that point forward, our shared values drove our spending decisions, and neither of us had a strong desire to flash any wealth. Of course, early on, we didn’t have any money, anyway.
In what ways would you say you embrace stealth wealth?
The stealth part is easy. The wealth part takes more work.
We embrace stealth wealth by driving average cars, living in a respectable and safe middle class neighborhood, and doing normal things that normal people do. My wife is in a book club, I’m in a curling league, and our kids attend a great public school. We have neighborhood campfires, watch football, and drink quality craft and homebrewed beer.
What’s a common misconception with stealth wealth?
I wrote a post on the concept of stealth wealth which was shared on the Bogleheads forum, leading to some entertaining discusion. The most common misconception among the 446 comments was the belief that stealth wealth is a sneaky con, an intentional deception.
While there are some advantages to blending in, I don’t go out of my way to craft a particular image. I’m just doing my thing and deciding not to spend most of the money I earn. I continue to make frugal choices because that’s what got me here, and I don’t think a major lifestyle upgrade would make me happier. It could easily have the opposite effect if it caused me to lose my financial independence.
A part of the reason some people practice stealth wealth is the social aspect – people will expect more from you if they know you’re wealthy. Do you find that this is the case? Has the social aspect affected why you chose the stealth wealth lifestyle?
There’ probably something to that, but I haven’t really experienced people expecting more from me, even though they know what I do for a living. I like to pay my fair share, but I’m not picking up the tab for a large group — that’s a precedent I’d rather not set. It helps that I was pretty close to broke until after my 30th birthday.
Can you imagine what it’s like for a lottery winner? You’d feel bad not picking up the tab and helping and supporting family and friends, but when and where does it stop? How do you know who your real friends are? The money would be nice, but you’d be in a very trying place, socially.
The more powerful social benefit of stealth wealth for me is approachability. I live in a rural area. If I drove a Maserati and lived in a 6,000 square foot estate, people might see me differently, and not favorably. I think most of the people I hang around respect the fact that I don’t flaunt my wealth — if they even realize I have any.
When is it okay to break out of the stealth wealth mold (eg make a big purchase)?
It’s always OK to take the stealth from your wealth. You don’t need my permission or anyone else’s — it’s your life.
You may find that major upgrades that showcase your wealth can introduce you to different social circles. The result could be quite positive, particularly if exposure to an upper-crust clientele would be good for your career or business in some way.
The result could also be negative. You run the risk of alienating your current friends, peers and coworkers, and you may find that one upgrade leads to another. There will always be someone with a bigger, better, grander vehicle / house / helicopter. The hedonic treadmill can hit ludicrous speed.
What advice would you give to a wealthy, young person who wants to start living a life of stealth wealth?
It’s best not live a flashy lifestyle in the first place. If you haven’t started displaying the trappings of your wealth, great! Keep doing what you’re doing, and upgrade slowly and prudently.
If you’re living the high life and want to hop off that rollercoaster, you may need a fresh start. When you change jobs, and especially when you move to a new location, it’s pretty easy to reinvent yourself.
Decide why you want to live a more stealth wealth lifestyle — define some financial goals — and start living like your neighborhood accountant, school teacher, middle manager, or stealthy physician. Drive a Chevy or a Honda. Buy or rent in a place that’s nice but not ostentatious. Belly up for a burger and a beer. Like I said, the stealth part is easy.