Debt Free Doc Interview 2

 

Here’s our latest interview with a debt free doctor (or soon to be). These stories allow us to continue to learn from those who are free of debt or currently on the path to do so.

If you’d like to be considered for an interview, drop me a note and we can talk about specifics.

Be sure to read all the way to the end and either leave your questions or comments.

My questions are in bold italics and his responses follow in black.

Let’s get started…

OVERVIEW

How old are you?

I’m 40 and my wife is 38.

Do you have kids/family?

We don’t have children.  I’m a general dentist.  I own a dental office, and my wife works in the office.  We have been married for 5 years, but we started dating 12 years ago and lived together for 4 years prior to getting married.  Our families gave me a hard time for being such a slow mover, but I couldn’t have done it any other way.

What area of the country do you practice in?

We live and practice in a small mountain town.  There is a big city less than 20 miles away.  It’s really the best of both worlds.  Our house is only about 1.5 miles from our office.  Mr. Money Mustache wrote a great article about the cost of commuting.  Our close proximity to work has saved us a significant amount of time and money.  A great rule of thumb for any dentist who plans to purchase their own practice is to first find and buy (or build) the office and then buy a home.  It’s typically much easier to find a house close to work than vice versa.

 

DEBT

How much student loan debt did you have?

The military gave me a full scholarship to dental school.  So, I was able to limit my total student loan debt to $26,000.  Still, if I have been smarter I could have had significantly less in student loan debt.  Mistake number 1 was not working harder in high school.  Mistake number 2 was choosing to attend a private university.  I transferred to a state university after my freshman year.  Approximately a third of my total student loan debt was from my freshman year.  I consolidated my student loan debt to a very low interest rate, but I still paid it off in less than 2 years after graduation.

How much other debt did you have?

My wife and I have had very little debt in our private lives.  We both took out loans for our first cars (both used).  My wife had a small private loan before we met.  This debt was gone before we met in 2006.  My wife didn’t even have a credit card when we first met.  Neither of us has ever carried a balance on our credit cards.

In 2009, we were both debt free.  We then moved to our current location and purchased a small dental office.  I took out a practice loan (with no down payment) for $386,000 with a fixed interest rate of 7.55%.

We rented a very modest house less than a mile from work.  We would end up renting this same house for the next 8.5 years.  Our initial rent was $1100 per month.  Because we had great landlords and we were great tenants, our rent had only been raised to $1125 per month when we moved out.

In 2010, I purchased the commercial building where we practice.  The purchase price was $264,500 and I put $60,000 down.  The interest rate was fixed at 6.55%.

How long did it take you to become debt-free?

So, in January 2011 we had over $550,000 in debt (just the practice loan and mortgage for the building).  We also didn’t own a home.  We began making just minimum payments on the loans.

In early 2010, we had started a 401(k) plan for the office.  We used the same financial adviser as the dentist who sold me the office.  The financial adviser encouraged active management.  I had been managing my own investments passively.  But, I wanted to provide this benefit to my staff and myself.  And, the previous dentist had been able to sell his practice at age 59, so the plan’s management couldn’t have been that bad.

I was still skeptical, though, and called this the “401(k) experiment.”  I gave the plan 3 years (February 2010-February 2013).  I noticed that staff did not consider the 401(k) to be a valuable benefit, and my now wife and I were the only ones contributing.  The fees were also hard to track.  I did track the fees, though, and they were too high.  I am happy that we chose to structure our contributions as a Roth 401(k) as it was more appropriate for us at that point in our career.

In February 2013, I ended the 401(k) experiment and my now wife and I rolled our Roth 401(k) in to our Roth IRAs.  We then began only maxing our Roth IRAs (backdoor) and HSA account each year.  We used and continue to use our HSA account as a “Stealth IRA” account.

We then shifted our focus and aggressively began to pay off debt.  We paid off the practice loan in June 2014.  We paid off the building mortgage in April 2015.  We were again debt free!

At this point our only investments were in our Roth IRAs and HSA account.  Despite understanding the value of tax-deferred investing, we chose to not start another retirement plan for the office at that time.

Instead, we chose to save for a house.  We built a house close to the office and moved in this past December (2017).  We paid for the house in full instead of taking a mortgage.  The house is not a McMansion.  It is approximately 2000 square feet.  But, it is perfect for us.  The builder called it a good starter home, and our realtor called it a modest home.  We (probably naively) call it our forever home.

Earlier this year (2018), we bought the first car either of us had purchased since meeting in 2006.  We did buy a new car, but we paid in full.

EARN

What is your salary?

Our average total adjusted gross income over the past 5 years is $347,318.

What does your work life balance look like?

Our work/life balance is poor.  The quest for the perfect (or at least healthy) work/life balance seems to be the goal for many people seeking financial independence.  I feel like I have a stressful full-time job and a stressful part-time job.  I’ve always felt tied to the office.

However, since becoming debt-free I’m no longer tied to office with a knot.  In reality, we could completely walk away from the practice today without selling it.  We have enough invested to maintain our current lifestyle for 10+ years.  We have no plans to walk away, of course, but just knowing that we could is psychologically liberating.

Do you have any sources of income besides your career?

We have no side hustles and no active sources of income other than our career.  Although we own our home and commercial building we don’t actively invest in real estate.  Our investment vehicles are currently our HSA, Roth IRAs, and brokerage account.

Beginning in 2019, we plan to open a SIMPLE IRA for the office and discontinue contributing to our Roth IRAs.  We chose a SIMPLE IRA over a safe harbor 401(k) plan for the office because my staff (other than my wife) are all older than me.

This means that although we could save $73,000 per year in a tax-deferred vehicle, it would cost us approximately $24,000 per year in fees and matching (this is the best case scenario).  Although all costs are also tax-deductible, the numbers did not add up in our favor.     (DFD says: I too have a Vanguard Simple plan for my staff as they are also older than both my wife and I)

 

SAVE

What is your annual spending?

Over the past 3 years our average annual spending has been $69,601.  In 2018, we are no longer paying rent ($13,500 per year) and our goal is to limit our annual spending to $60,000 or less.  I chose to leave the home purchase (December 2017) out of our annual spending calculation.

In February 2018, we paid $32,578 for a new car.  We will include this when tallying annual spending in 2018.  Our rationale is the home is a onetime purchase.  We will be purchasing a car every 10-15 years in the future.  Health insurance premiums are also included in our personal spending.

What are the main categories this breaks into?

We don’t have a mortgage or rent or car payments.  We also don’t really have a budget, but we consult each other before making major purchases.

What percentage of your gross income do you save and how has that changed over time?

Our total annual spending is approximately 20% of our AGI.  We save or invest everything after that that isn’t going to taxes.  Our mindset on this hasn’t changed, but we have been able to save more as our income has increased and debt has been paid off.  We have limited lifestyle inflation as our income increased.  There doesn’t have to be a correlation between income and lifestyle.

What do you secretly love spending money on?

I wouldn’t consider it a secret because we aren’t ashamed of anything that we buy or consume.  We do really scrutinize each expense (outside of basics).  This helps us to determine if a purchase will really make our lives happier.

That being said, I love watching sports, and my wife loves watching movies.  So, our Directv bill is fairly high.  We also like visiting craft breweries and eating at “hole in the wall” type restaurants.

 

INVEST

What is your investing philosophy?

I’m a DIY investor.  We don’t have a financial advisor.  We have a passive buy and hold strategy.  Our asset allocation is well diversified although we only own a few index funds.

What’s been your overall return?

I began investing in 2004.  We have had a total return of approximately 25%.  This number is so low because we only recently began to contribute significantly to our investments.  Our asset allocation is fairly aggressive.

What is your current net worth?

I choose not to include our home, practice, commercial building, cars, or possessions when I calculate our net worth.  I see our home (we paid approximately $385,000) as a place to live instead of an investment.  Likewise, my practice is a place to work.

Although we will likely sell the practice and building in the future, I like to envision this as the icing instead of the cake.  This way, I can practice and update/make renovations to suit my practice style instead of worrying what another dentist will want in the future.

Our retirement and bank accounts have a total balance of approximately $740,000, so our total net worth is $740,000.

Do you have a target net worth you are trying to attain?

Our goal is to reach financial independence by the time I am 50 years old.  According to the Trinity Study our target net worth (which is also our FI number) is $60,000 (our target annual spending) x 25 (the 4% rule).  This would make our target net worth $1.5 million.

I like to expect the best but plan for the worst.  So, we may choose to spend $70,000 per year in retirement (in today’s dollars) and will definitely plan to only withdraw 3% per year and adjust for inflation.  Therefore ($70,000 x 33), our target net worth is actually $2.31 million.

 

FUTURE

When do you plan on retiring?

I choose to define retirement as the age where we are no longer actively earning money.  I don’t know when we will retire.  Our plan is to put our practice on the market when our retirement accounts have a total balance of $1.5 million.

If we don’t sell the practice, we will walk away (or more likely give the practice away to a dentist who will take good care of our patients and staff) when our retirement accounts have a total balance of $2.31 million.

What are your retirement plans?

Our financial independence (not necessarily retirement) plans will include remaining physically active.  We like to run and go to the gym now.  But, I would also like to join a tennis club again. (DFD says, “When you do, we can plan on playing a match!”)

My wife is already a member at a tennis club, but she would like to play more tennis.  We will also want to stay busy and productive.   This may include part-time or full-time work and/or volunteering.  We will finally have a perfect work/like balance.  This, for us, is the true purpose of financial independence.

 

MISCELLANEOUS

What advice do you have for Debt Free Dr. Readers on how to become debt free?

It’s incredibly important to educate oneself on the basics of personal finance.  Because personal finance isn’t taught in school and is taboo to discuss, the biggest obstacle is just getting started.  Fortunately, the basics of personal finance are incredibly easy.  Play strong offense (hard ambitious work) and strong defense (spend significantly less than what you earn).  Learn about the magic of compounding interest and passive income.

Learn to hate debt.  Good debt helped get me to where I am today, but I never liked the debt and tried to minimize it wherever reasonably possible.  Good debt like student loan debt or a practice loan or even a house can become bad debt if one is overleveraged.  If one is overleveraged now (like maybe we were in January 2011), live like the couple at debtascent.com until financial stability is reached.

How did you learn about finances?

My financial education (or lack thereof) began at home.  My wife and I both come from lower middle-class families.  My parents chose not to work hard or ambitiously, and my childhood was filled with financial instability.  This was especially confusing (but was clarified when I read The Millionaire Next Door) because both sets of grandparents were successful small business owners.

3 of my 4 grandparents were coddling toward my family and bailed us out of any serious financial problems.  One grandfather was not and frequently spoke of the value of hard work.  I was taught to resent this grandfather and my parents still resent him.  My parents retired a few years ago with a mortgage and credit card debt.  Despite having parents, siblings and children who are financially responsible, they believe that success is reserved for the lucky.  I don’t believe in luck.  I do love my parents, but the reality of their financial mindset is something that my siblings and I struggle with.  It has also profoundly shaped my financial mindset.

When I moved away to college I chose to work as hard as I could.  I waited tables full time and still graduated magna cum laude.  I was fearful of financial instability and chose to live frugally.  When I graduated from dental school, I continued to maintain the same work ethic and also spent way less than what I made.

I began to read Money Magazine and recorded Suze Orman.  I read books like Jim Collin’s A Simple Path to Wealth.

I then found websites like:

Who inspired you to excel in life?

I’m inspired by Jack Bogle.  I went in to dentistry because I saw it as a profession where one can help others and treat each person as if they are a friend or family member while still earning a great living.

Jack Bogle created the first index fund in 1975.  He could have followed a Gordon Gekko approach and made more for himself, but he knew that low cost index fund investing was (and is) the best way for a personal investor to grow their wealth.  He was able to be both successful and altruistic.

Do you give to charity and/or tithe?

We do give to charity and the church but in non-traditional ways.  We believe in helping others to help themselves.  We believe in the famous adage, “Give a man a fish and he’ll eat for a day.  Teach him to fish and he’ll eat for life.”

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3 comments

  • Congratulations on becoming debt free. You did quite well despite what you call some mistakes along the way but you are far ahead of where most of us would be given the same circumstances.

    It is easy to do lifestyle inflation which gets most docs in trouble coming out of training. Renting for as long as you did helped a lot.

    You will find that once you start having a 7 figure net worth the growth of your net worth actually accelerates. It’s because you have a significant amount of money working for you and contributing to the pile

  • What a great example of someone who’s got it all figured out. It’s interesting to me to read that you are an aggressive investor, yet you plan to be very cautious before considering yourselves financial independent. For example, you aren’t including your practice in your net worth. You’re planning on a $10k buffer to your annual expenses, AND you’re planning on a 3% safe withdrawal rate.

    If you were to ignore even one of these things, your FI date would pull in considerably. Even if you gave your practice away, even if you plan to to spend $70k a year and want a nest egg of $2.31MM and just sock away your savings in cash, you’ll hit your number in under 10 years based on my estimates. If you want to hit $1.5MM and sell your practice, I’d estimate you’re looking at around 4 years or so assuming no enormous market shift one way or another.

    I hope your 10 year estimate is just another way of you being extra conservative rather than admitting you’re walking up the driveway if not actually already on the doorstep of reaching financial independence.

    If I were in your shoes I’d look at your FI number as a range. What if you considered needing only $1.5MM total to reach FI, but also considered the value of your practice and building? Given the initial purchase price, I’d imageine you’re close to that $760k ($1.5MM – $740k) already with those numbers included. I would imagine that would put you at FI in the matter of months rather than years. Perhaps at that point is when you can start to breathe easier and focus more on your poor work/life balance rather than waiting until hitting your more conservative estimates, even though you most likely won’t want to step away.

    It seems to this reader that you’ve got it made. It’s just a matter of (a very short amount of) time. Congratulations on building a successful financial life with your wife. Wishing nothing but happiness for you two.

  • You are crushing it! I’ve worked with over 1,000 dentists and published over 50 articles in Dentaltown Magazine over the last ten years. You stand amongst the top ten.

    A big key was to keep your school debt as low as possible. You had some advantages other dentists do not, yet most of them can keep total debt much lower than they do.

    Then, you took out $550K in loans for your practice, paying that off in a little over four years! $135K per year pay down!!

    To evaluate the existing office retirement plan was also smart. Many doctors’ plans are awful, with hidden and high expenses. And no, staff rarely appreciate or invest in the plan.

    Also, you evaluated a safe harbor 401(K) plan vs. a Simple IRA with after tax savings of the difference. And you found no advantage with the complicated plan! Kon Litovsky, a cohort of mine, wrote a definitive article in Dentaltown Magazine in November 2015 that covers the pluses and minuses of the same plans. He found that there is a slight advantage for the safe harbor in some cases. Obviously with mainly older staff, it would make no sense at all!

    Budgeting: My wife and I actually did exactly what you are doing while saving for retirement. We didn’t budget yet talked to each other about any purchase over several hundred dollars. Today, I use Mint to track our budget….it works extremely well.

    OK, now things get weird…..you live on 20% of your AGI? That’s wild! With your federal and state taxes probably totaling about 25% to 28% in your income range, this means you are saving over 50% of your total income per year. That means you can save about $175,000 per year! Yes, docs, very little of his income is in the 32%+ range.

    I averaged about 23% savings per year and retired at age 53. You guys will be financial independent with no need to work well before that!

    4% rule: Be careful there. With an early retirement think in terms of about 2.5% spending per year. 4% is for a 30-year time frame. You may be looking at 40-50 years of retirement, So $2.5M X .025 comes to $62,500 per year. I’d think of that amount as a prudent goal. And remember, that $2.5M does go up with inflation. With your spending and saving habits, though, you will probably end up with well over 2.5M.

    I ran some numbers through a Bank Rate calculator:

    All numbers are in 2018 dollars. $740K savings to start at age 40. Invest $175K per year with a very conservative 3% rate of return after inflation. At age 50, you will have slightly over $3M in today’s dollars. Using that 2.5% rule, you can take out $75K per year for the next 50 years at age 50! And note that all assumptions are very conservative. Selling the practice/building would add even quite a bit more.

    By the way, I don’t consider my home as an investment either. Eventually it becomes a legacy for most doctors.

    Walking away from your practice and giving it away? Are you nuts! No. In fact, I’ve worked with two dentists who did just that. Ten years out from leaving their practices they both are very glad they were able to help someone else out at the beginning of their careers. That’s giving back.

    “Learn to hate debt.” That’s been my mantra for years and it’s paid off. I’ve been out of active practice for 15 years. It’s so nice to pay for everything in cash, including two homes along the way.

    Financial literacy: Again, you nailed it! That’s crucial to having enough to retire when you wish. So many docs take the easy way out by investing with any “shark” out there. Most would be much better off using any of the Robo Investors out there, or do-it-yourself.

    And finance is incredibly easy! After years of academic study, my portfolio now requires practically no work at all. 90% is in Vanguard target date funds. It’s passive investing at it’s finest with no work at all needed on my part. No rebalancing, no changes needed along the way. And my returns are academically superior to almost any other plan. The key here is that the investments are BORING! How often do I check? Maybe once every couple months. The October ups and downs will not have any effect ten years from now as long as I do nothing.

    For the readers, any target date fund group is fine. Schwab, Fidelity, etc. ‘

    Enough of the soapbox! Thanks for sharing real wisdom with doctors!

    Doug Carlsen

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