Post FI Notes 002: Early Retired Physician Reflects on Investing Hits and Misses

In our second Post FI interview, we learn that you don’t have to do everything right to be a successful investor. You can buy variable universal life insurance, invest in an annuity, bail on individual stocks before they soar, and lose a bunch of money in a master limited partnership and still come out on top.

It helps if you learn to do things a better way, which the featured interviewee eventually did. It also helps to have a physician’s income, which he also did.

Now, the young baby boomer is figuring out what life looks like for a somewhat early retiree with a net worth, as I calculate it, above $5 Million.

If you’re interested in participating in one of three interview series, please download the most appropriate form for your life situation: FIRE Starter, FIRE Crossroads, or Post-FI Notes.

Getting to Know You

Tell us about your household. How many people and at what ages? Are you supporting anyone outside of your home? Where do you live?

I am a 55 to 59 year old very recently retired MD, who lives with his wife in the Midwest.  My wife is a bit older and retired nearly three years ago. We have one child who is independent and had given us beautiful grandkids.

As you might expect, COVID has hindered our ability to visit with them.  Facetime is a helpful option but clearly not the same.

Imagine how much more challenging the pandemic would have been if this was 1991 and not 2021 – no Facetime, no streaming of TV shows and movies, no ordering online with delivery in 2 days,  no electronic news, no Podcasts, no Twitter and Facebook — perhaps we would be better off without these last two!

You’re financially independent. About how much does your household spend in a typical year? How much could you spend while still abiding by the 4% rule?

As the pandemic has altered our lives in so many ways, including travel, which is obviously a major expense, it’s hard to know exactly how much we would be spending annually in retirement as I  retired so recently.  However, pre-retirement, we were spending about $110,000 to $120,000 annually.

The major new expense we have to now account for in retirement is health care. I have planned on annual healthcare expenses of 20 K / year.  I am presently covered by COBRA ($ 600/month) until next spring, at which time I will likely need to get coverage through the ACA.

I expect that monthly premium to go up significantly!  My wife is now on Medicare which runs about $3,500 to $4,000 per year.  When I become eligible for Medicare, our healthcare costs will decline.

Speaking of healthcare, we purchased long-term care (LTC) coverage about 15 years ago.  After they raised our premiums significantly about 4 years ago, I cancelled my coverage.

To reduce my wife’s premium, we changed her coverage from 5 years to 3 years as most people don’t require a long duration of care. Her premium is $2,800 per year.

We continue her coverage because 1) she is older than me,  2) has a chronic health condition, and 3) we never purchased nor needed life insurance for her.  This will reduce the drawdown to our net worth if she does require LTC and limit the financial impact on me, the survivor.

Though I no longer have LTC coverage, if I require this type of care for an extended period of time, my wife will still be in good shape as my life insurance would pay out when I pass, which will more than recoup what would have been used from our funds for the LTC.

Pearl from Christine Benz from Morningstar :

• Net worth < $500,000:  LTC insurance is not affordable.
• Net worth $500,000 to $2,000,000:   it’s a very hard decision!
• Net worth:  > $2,000,000:   self insure

20/20 Hindsight:   Given how our net worth has grown,  I would not have purchased LTC and would have self-insured.

Regarding the 4% rule and how much we plan to draw down – we have just initiated a regular monthly “salary” after using up some excess cash we lived on since I retired.  I chose a sum that works out to a drawdown of 3.5 %.

We use 3.5% not because I think 4%  is too high, but because 4% would result in more money coming in monthly than we would realistically spend (First World Problem due to my wife being Frugal/Thrifty – She made me add this!).

To be perfectly honest, I had planned to draw 4.25 %, but based on highly favorable market returns over the past few years, it’s just not necessary.  Amongst much written about Safe Withdrawal Rates (SWR), my viewpoint has been most impacted by William Bengen who advocates a 4.5 %  draw, and Michael Kitces who wrote:

Plus, now that I’m retired and we have no income from employment, my wife started to receive Social Security (SS).  Much has been written about when to start collecting SS.  Reasonable people can have a great discussion/argument over a few (or many) beers on whether to start SS at 62, full retirement age, age 70, etc…

Although SS is not going away, present projections suggest it will only be able to pay out 74 % of its obligations by 2033.  I have little confidence in our leaders (both parties) who could have made some small tweaks years ago to prevent  the upcoming debacle.

I plan on starting my benefits at age 62. I am more than happy to get a smaller benefit now over a greater period of time and invest as I see fit. I would also rather have these extra funds available when we are still fit and active, rather than later on when we tend to become more sedentary and spend less (i.e., the retirement spending “Smile” as per David Blanchett of Morningstar).

Are you still working? In what career? Did your work schedule or attitude towards work change once you knew you were FI?

Being FI allowed me to transition to part-time several years ago.  It was a great move and I highly recommend transitioning in a similar manner for those wishing to cut back on the daily grind,  but who are not yet ready to call it quits.

Having several days a week off and limited call is beyond wonderful. Subsequently, FI enabled me to push back and ultimately say goodbye when my academic institution began to institute policies I was not in agreement with. Never discount the power of having FU Money !  It is tremendously liberating.

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Investing

How is your nest egg invested? Approximately what percentage is allocated to stocks, bonds, real estate, and alternatives?

Present Nest Egg:  $4.8 Million

• 61% stock.
• 33 % bonds
• 6% Real Estate and Alternatives

Our stocks are all index funds – no individual stocks. I purchased 5 or 6 stocks over the years, and made money overall,  but bailed too soon on Netflix and Tesla.  Elon smoking a joint during an interview and his other unstable behavior spooked me, and I wasn’t about to risk losing my investment if Tesla tanked, so I sold it.

20/20 Hindsight #2:  MAJOR money “loss” selling both Netflix and Tesla too early !

As investing in individual stocks assumes extra uncompensated risk, I got rid of them all.

I have reduced our equity holdings a bit this year (from about 66%) heeding the words of Dr. Bernstein who has said:  Once you have won the game, stop playing.

Home equity and mortgage impact on net worth: I count neither home equity nor our mortgage into our net worth.  I used to, but I stopped many years ago because:

1)  A primary home’s value is not a liquid asset (unless you have a reverse mortgage) so I don’t include the equity we have in our house into my calculations.  It’s not like you can simply draw $100,000 out of your house to meet next year’s living expenses.   A home equity loan or line of credit, as the name implies are loans – you are going to have to pay them back.

2) You have to live somewhere.

3) I do not deduct our mortgage.  It is something we will owe in future months – I do not owe this money now.  Analogy: I don’t deduct what we are going to have to pay for utilities in the future from our net worth.  I am going to have to pay them,  just not now. Similarly, one doesn’t add the salary they are expecting to receive over the next one, five, or 10 years, into this calculation as this is future earnings.  Same for interest and dividends on our investments – I know they’re coming ,but they aren’t included.

4) For those wanting to keep score, our house is worth about $550,000 and we owe about $150,000 to be paid over 7 years, at 2.75 %.

Much has been written in the financial blogosphere as to whether to pay off a mortgage or not. I do understand the “Peace of Mind’ explanation for those who choose to pay off  their mortgage.  Especially when interest rates are high.

But given that rates have been low for quite a long time, I tend not to agree presently.  I will propose that being FI with a mortgage and not paying it off early brings even greater Peace of Mind.

Why?  By definition, being FI, means I can easily pay it off within 2-3 business days should I choose.  The kicker however is that those funds are invested in the market.  That is the “Mother” of Passive Investing.  I am doing absolutely nothing and those funds are working for me 24/7/365.

Michael Batnick and his partner Ben Carlson, from Ritholtz Wealth Management, have a Podcast called Animal Spirits, which drops on Wednesday mornings.  Over the past 2-3 episodes (this being written on 9/20/2021), they both shared that they were going to delay paying off their mortgages for as long as possible to take advantage of what is nearly free money. I obviously agree.

Similarly, we purchased a car last year after our 8-year old car leaked oil like a sieve, and repairs were unsuccessful. We bought a Honda Accord (having already gotten over the fancy car itch in prior years) and financed it all at 1.9 %.

Are your investments primarily in tax-deferred, Roth, or “taxable” post-tax accounts?

All of the above. Having funds in all types of savings vehicles helps to mitigate potential future changes to the tax code and enhances tax flexibility on an ongoing basis due to the different ways the accounts are taxed, RMDs, etc..

Do you have investments in an HSA? How about 529 Plans?

No and no.

What has been your best investment?

I think the best investment is just letting time and the magic of compounding do the heavy lifting. I don’t think anyone has ever regretted investing “too early or too young”

Your worst investment?

All of the following were purchased at the behest of our first Financial planner, prior to having any knowledge of my own:

1) Variable Universal Life Insurance:  as noted by many, insurance should not be combined with investing. I purchased / was sold my policy about 20 years ago.

I stopped paying premiums about 7 years ago and converted it to a paid up policy.  The basis and gains are invested in stock funds and continue to rise with the market.  Undoubtedly, we could have earned more buying term life insurance and investing in index funds separately.

2) Purchased an annuity for my wife about 15 years ago.  I have no friggin’ idea why, and we liquidated it a few years later.

3) Purchased shares in a Master Limited Partnership.

From Investopedia:

• A master limited partnership (MLP) is a company organized as a publicly traded partnership.
• MLPs combine a private partnership’s tax advantages with a stock’s liquidity.
• MLPs have two types of partners; general partners, who manage the MLP and oversee its operations, and limited partners, who are investors in the MLP.
• Investors receive tax-sheltered distributions from the MLP.
• MLPs are considered low-risk, long-term investments, providing a slow but steady income stream.
• MLPs are limited to the natural resources and real estate sectors.

Well, after receiving dividends for about 2 years, they stopped when the price of oil dropped in ~ 2015, and we’ve received nothing since then.

I learned 2 months ago that the oil exploration company we invested in has essentially gone belly up, and we should receive a final statement next month, at which time we can officially kiss our 75 K investment bye-bye.

1. We all mess up !
2. Knowledge is power.
3. In the long run, they were just speed bumps along the journey…..
4. KISS principle: Keep It Simple, Stupid!

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Post-FI Life

What do you like to do with your free time? How much free time do you have these days?

As I retired recently, my newly found freedom is still a work in progress.  It’s been a summer filled with cycling and golf. Still no Senior Golf Tour for me, however !!

We did our first hike last weekend.  COVID continues to affect things, unfortunately.  No indoor dining.  No theatre. No symphony.  Travel so far has been limited to trips by car.   Vaccinations have helped let us get together with friends safely.

I was volunteering at a primary school pre-pandemic.  That came to a halt. I hope to resume that perhaps by the end of the year now that trials of the vaccine in children have proven safe and effective.

Regarding volunteering – you would think that you offer your services, organizations would come running, and you start ASAP.  Not so fast.  It’s complicated.

First, there’s paperwork to be filled out. Second, health issues, i.e., TB test.  Third, background checks including fingerprints.  Fourth, orientation.  Fifth, days and times wanted/needed can make scheduling complicated.  You get the picture!  It can be as onerous as a real job!

Do you enjoy travel? Tell us about a favorite trip you’ve taken.

I love traveling.  My wife, less so. I do have to do some arm twisting to make her come around and then she is game.  Interestingly, after returning from EVERY trip, she reflects and takes stock and says, “You know, that was a really good trip.” Nonetheless,  my bucket list trips to Australia, and Africa for a safari, will be solo!

Do you incorporate giving (money or time) into your post-FI life?

Volunteering is on hold for now.  Financial giving remains unchanged.

If retired, do you miss work? Do you get bored?

I never miss work!  I think winter is a bit more challenging from the standpoint of staying busy.  It’s still a work in progress for me.  I need a hobby for the indoors.  I never learned how to do anything in the kitchen except microwave, so I am thinking about picking up cooking as a hobby.

What advice do you have for others hoping to achieve the financial success you’ve found?

1) Start to save as early as possible.  Let compounding do the work for you.

2) KISS principal.  Complicated sounds sophisticated and fancy, but it’s not of any real value.

3) Leave it alone – it’s not timing the market, it’s time in the market that’s important.

4) Whereas putting in your 10,000 hours will possibly lead to mastery of many fields, in Personal Finance, the more time you work at it, the worse you will do.

5) Index funds

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I’ve shared my feedback privately with today’s guest. I wouldn’t want my opinions to influence yours. Please give your take in the space below!

Again, if you’d like to partake in a future Q&A, please download a FIRE Starter, FIRE Crossroads, or Post-FI Notes interview form.