Fire

YFP 354: From PharmD to Debt Free to FIRE with Derek Schwartz, PharmD

Posted on by YFP Media

Derek Schwartz, PharmD, returns to talk about his debt free journey and his path toward FIRE: Financial Independence, Retire Early.

Episode Summary

On this episode, we check back in with Derek Schwartz, PharmD, on his debt free to FIRE journey. Derek was an early guest on the podcast back in 2017 when he was working toward becoming debt free by ambitiously paying off $180,000 in student loan debt.

Today, Derek returns to share a life update after successfully eliminating his student loan debt – from getting married to owning a home to becoming a father of two – Derek explains how he continues to save and view spending and how his journey toward an early retirement evolves as he pursues FIRE. Derek shares encouraging advice for new grads and anyone looking to pay down debt and what it can mean when you are truly financially free.

About Today’s Guest

Derek Schwartz, PharmD, RPh is a 2014 graduate of Ohio Northern University Raabe College of Pharmacy who currently works with the Kroger Company in the Cincinnati, OH area. After graduating in 2014 with over $180,000 in debt, he paid it off in March 2018. Derek and his wife, Jessica, married in October 2020, and have two children: Julia, age 2, and Calvin, 8 months old. The family of four have a happy and busy life in Cincinnati, Ohio.

Key Points from the Episode

Financial independence and retiring early with a guest from 2017. [0:00]
Debt repayment and financial independence with a young family. [2:04]
Budgeting and financial goals with a focus on breathing room and flexibility. [8:46]
Financial Independence and Retire Early (FIRE) journey with Derek Schwartz. [13:13]
Financial independence, debt management, and retirement planning. [17:20]
Retirement planning and debt management. [20:49]
FIRE (Financial Independence Retire Early) journey and determining the FI number. [27:44]
Paying off student loans and saving for the future. [31:49]
Investment advice and updates from a guest. [37:49]

Episode Highlights

“So my debt repayment that it finished was March 30 of 2018. So just in a couple of days, it’s been six years, which is just crazy. Because it’s been so long, it was such a big part of my life. And it’s so far in the distant past, I hardly think about it anymore. And that was always the goal for paying off that debt because it sets up everything else so nicely.” -Derek Schwartz [3:07]

“When you have that much debt, it stops you from saving, it stops you from investing, it stops you from using your income to benefit future savings, having fun, just doing anything.” -Derek Schwartz [5:40]

“Having that much debt and trying to do other things, is like trying to run a marathon without stretching. You’re not gonna get far, you’re not going, you’re gonna get hurt, you’re gonna have to restart, and then you get to go back to square one.” – Derek Schwartz [5:58]

“And once you are completely out of debt, it’s like shutting a book and just tossing out the window. It’s done. You don’t have to go back.” -Derek Schwartz [6:20]

“And that was the motivation for such a rigid budget is I knew exactly when those loans would be paid off. And now it’s completely changed. Because when you’re talking about no debt, what are you saving for? What’s your goal? You can be so much more flexible, when there’s not some restraint of I’m budgeting to get over this, instead of I’m budgeting to get to this.” Derek Schwartz [11:06]

“But it’s just always been a passion for both of us because we have so many more interests that aren’t tied to our jobs. We both love our jobs, we love our work. But, we love other things, too.” -Derek Schwartz [18:28]

“So we’re planning for those to just not be there. And so that’s kind of a, a different way to look at it. Because most people will assume that Social Security will be there, they’ll have some some kind of health insurance. We’re looking at it as, hey, if we retire at 50, on our own, can we do it?” -Derek Schwartz [22:50]

“And that’s, that’s such the nice thing about being in the FIRE mindset of, first of all, being in the FIRE mindset, you’re out of debt. And then secondly, how can we use factors around us to benefit us. And that’s something you can’t do when you have when you have a lot of debt, and you don’t have the the FIRE mindset if you’ve already been saving.” -Derek Schwartz [26:45]

“So, and we couldn’t do that without being out of debt. I keep going back to getting out of debt. But that’s just so important because it just allows you to be on that platform to just do so many different things with what you want to do with your money.” – Derek Schwartz [34:22]

“Paying off debt is not fun. It is not glamorous, it is not full of constant rewards. You’re not doing a lot of things; you’re just watching a number go down. And that’s all it’s doing. But once you get out and pass through that, your options just expand so much.” – Derek Schwartz [36:18]

Links Mentioned in Today’s Episode

Episode Transcript

Tim Ulbrich 00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week I welcome back Derek Schwartz, a guest from episode 14 way back in 2017 to share his journey from PharmD to debt free to pursuing financial independence/retire early. We discuss why he and his family are on the fire path, how his financial decisions, post-graduation helped put them on a path towards building wealth, the biggest challenges that they’re facing in pursuit of fire, and how he striking the balance between living a rich life today and saving for the future.

Now, before we jump into the show, I have a question for you. Have you ever wondered how to evaluate the benefits package and offer you receive once you’ve landed the job? If so, our upcoming webinar supported by APHA is for you. On Wednesday, April 17, at 8:30pm. Eastern my partner in crime YFP, Co-Founder and Director of Financial Planning, Tim Baker is hosting a free webinar titled: Money Moves: How to Evaluate Benefits Packages and Job Offers. During this webinar, Tim will dig into the valuable connection between career and finance and the ins and outs of benefit packages and offers. He’ll teach you how to navigate components of employer benefits, including insurance, FSA, HSAs, employer sponsored retirement accounts, as well as help you understand components of a job offer and how to evaluate one. Plus, Tim is going to do a live walkthrough and evaluation of real pharmacist job offers from you, the YFP community. So send us your pharmacist job offer current or past to [email protected] with the subject line: job offer. Don’t worry, we’ll keep these anonymous. And if you attend live, you’ll have the chance to win a $50 Amazon gift card or YFP bundle which includes a YFP t-shirt and our four books published at YFP. To save your seat and to register visit yourfinancialpharmacist.com/offer. Again, that’s yourfinancialpharmacist.com/offer.

Alright, let’s jump in my interview with Derek Schwartz.

Tim Ulbrich 02:02

Derek, welcome back to the show.

Derek Schwartz 02:04

Great to see you again.

Tim Ulbrich 02:06

So excited to have you back. This has been a while in the making. For our community to know we had Derek on way back when, nearly seven years ago at this point, Episode 14, September 2017. We talked about your journey – graduated from Ohio Northern University in 2014. Go Polar Bears!

Tim Ulbrich 02:23

You were paying off $180,000 of debt in just about four years. That was 2018 when you guys finished that debt repayment journey. We’ll link to that episode in the show notes so folks can go back. And we’re going to talk a little bit more about that. But really focus on your journey now and where you’re at present day and how you and your family are on this path towards financial independence. So Derek, since it’s been such a while, 2017 what what’s changed since since we last spoke?

Derek Schwartz 02:23

Go Polar Bears!

Derek Schwartz 02:51

Man, what hasn’t changed? So when we recorded the podcast, and I begrudgingly listened to it. So I think I join everyone that they don’t like to hear themselves talk. So I, I struggled through that I had not paid off my debt when I recorded that. So my debt repayment that it finished was March 30 of 2018. So just in a couple of days, it’s been six years, which is just crazy. Because it’s it’s been so long, it was such a big part of my life. And it’s so far in the distant past, I hardly think about it anymore. And that was always the goal for paying off that debt because it sets up everything else so nicely. So you know, it’s a typical story, you know, you, you meet someone, you get engaged, and my wife and I got engaged in January of 2020. And I was like, you know, this is gonna be a great year. Nothing bad’s gonna happen in 2020. It’s gonna be smooth sailing from here, as everyone knows, wasn’t the case. But it was an opportunity for us to buy our future home, we moved into a good part of town where we wanted to raise kids, and then we started the family. So we have two kids. I have a two year old daughter and an almost an eight month old son. So things have been great so far.

Tim Ulbrich 04:13

That’s a lot in a short period of time, as we often see, with new practitioners coming out, you know, you’ve been out now a decade coming up here, right this spring, but you know, you graduate, start your first job, get married, you’ve got a couple of kids, pay off your loans. I mean, just a lot that happens and one of the things I was sharing with you before we hit record, which I think is a great example here, Derek and the work that you and your family have done is you know the decisions we make in that first five to seven years is the window I often talk about this transition right from student to new practitioner, really is so critical to setting the foundation upon which we can build and we’re going to talk about how now you guys are on this path towards financial independence, which I presume is probably not possible or possible to the degree that it is. If you didn’t work hard to put some of those rocks in place some of the foundational pieces in place early on in your journey. And so, you know, again, we’ll link back to that episode so people can hear the details of that debt free journey, but just remind us of the motivation, the why behind a pretty aggressive debt repayment $180,000, about four years. Everyone’s on their own journey, everyone feels different about their debt. But for you guys, obviously, it was in a decision to be intentional about paying it off in a short period of time, which again, has led to the place that you’re in today, why why was that such an important piece of the plan for you guys to get out of that debt as quickly as possible?

Derek Schwartz 05:40

I think it was, because there was no other option. When you have that much debt, it stops you from saving, it stops you from investing, it stops you from using your income to benefit future savings, having fun, just doing anything. Having that much debt and trying to do other things, is like trying to run a marathon without stretching. You’re not gonna get far, you’re not going, you’re gonna get hurt, you’re gonna have to restart, and then you get to go back to square one. So the goal of getting out of debt was just to get past that. So that options, were actually on the table that were available. And once you are completely out of debt, it’s like shutting a book and just tossing out the window. It’s done. You don’t have to go back.

Tim Ulbrich 06:27

Yeah, and I think, you know, I often shared Derek that when I think back to my journey, Jess, and I have paid off a couple $100,000 of debt and making every mistake you can make along the way. You know, it was really when our kid most of that journey was before we had kids and the end of that journey. Our kids were very young. But I now think about that monthly payment, right that we were making, which was pretty aggressive at the time. And basically, as I now see the expenses with kids rising, right, which is natural, you know, I’ve got some older, older boys that are starting to eat us out of the house. But you know, for other people, it’s daycare, right? It’s other costs, it’s saving for kids college. But the point being that, you know, that payment that I think of that we’re making towards their student loans, you can pretty much just put that money over to expenses, right, that are associated now with having young children that weren’t there before. And for us, I know, personally, it would be a burden currently if we were still trying to work through those payments, while other expenses were rising. Does that resonate as you guys are, you know, obviously, growing a young family, you know, having that margin through having that debt paid off has allowed you to really have have some more flexibility as naturally expenses will rise as you have young children.

Derek Schwartz 07:37

Yeah, for sure. And we we started with our daughter in daycare. And we quickly learned that wasn’t for us. We were getting a lot of sick calls, we had to go in, bring her home, my wife and I both worked full time. And we were seemed to be a some of us, one of us is going to have to work part time to have to get around daycare. So we’ve hired a nanny, which was the best decision that we made. And, you know, we couldn’t afford that with student loan payments, we couldn’t afford that with a credit card payment or a car loan, or anything that, you know, requires a monthly payment like that. So it’s the setup to getting flexible with the budget has to start with being in a position where you can be flexible. And without any, like debt that’s just holding you down. That flexibility is just gone. So it limits your options. And we don’t want to have to, you know, talk about every single transaction that we do, where we buy something. Like hey, can we afford to have a date night? We don’t have to have that discussion because we don’t have, you know, all these loans and like this massive budget that we have to worry about. We still budget, but that’s in the budget, so you don’t have to think about it.

Tim Ulbrich 08:52

Yeah, yeah, what I hear there, Derek, is breathing room, right? You’ve used the word options, flexibility a couple of times already. But when you have breathing room, we underestimate the mental space and clarity that can come from that. And, you know, I think you can probably appreciate this working on this topic together with your spouse, like a lack of breathing room, a lack of margin is a recipe for stress and arguments. And you know, not not being on the same page financially. Right. So creating that breathing room, which we know is easier said than done. We look at today’s graduates are coming out with $150- $200,000 of debt. You know, you and I were fortunate to not necessarily be buying a home where home prices are in 2024 and interest rates. There are headwinds, right that today’s graduates are facing that are real. And unfortunately, those eat into that breathing room, they eat into that margin, but we know when we can create that breathing room and space. We have options. We have flexibility, you know, we’re able to really progress and move forward with the financial plan and play offense instead of constantly being on our heels playing defense. I do want to poke for a moment on the budget because I think that’s something that, you know, when I talk about budgeting, you know, to a group of pharmacists, you know everyone again is on their own journey, but I often see the look of like, like, do I have to right? Do I have to track? Do I have to do these things? And I tried to reframe the budget as being the really the mechanism by which we’re achieving our financial goals. Now, how detailed do you want to get is up to you. Whatever works for you, and everyone, again, is going to be different. But if we reframe it, that the budget, the spending plan, the system, whatever you want to call it, is simply the execution plan for achieving our goals, I think we can get behind that a little bit more. And you made a comment that, hey, we’re, we’re budgeting, but we’re maybe not tracking things at the granular level of hey, can we go on a date night tonight or not? And is the budget $20 or $30, or whatever that number is. So tell us about what your budgeting system looks like right now. And maybe how that’s evolved over time.

Derek Schwartz 10:46

Yeah, the budget before when I had debt was so rigid, because I knew exactly how much I was making. I knew exactly how much was going to, at the time was living in an apartment. So rent utilities. And it was a very locked in number. And that’s what it was going to be every month. And that was the number that would, that would knock down that debt. And that was the motivation for such a rigid budget is I knew exactly when those loans would be paid off. And now it’s completely changed. Because when you’re talking about no debt, what are you saving for? What’s your goal? You can be so much more flexible, when there’s not some restraint of I’m budgeting to get over this, instead of I’m budgeting to get to this. And when you’re budgeting to just have that independence that you want in your life financially, you can be so flexible with it. And my wife and I, before we had kids, we were saving a ton of money, I want to say at least 40 to 50% of our income, we were saving that. Because we were in a position where we’re like, hey, we want to have kids. So we know the timeline that we want to be on, we wanted to have a couple of kids we wanted to family, we knew it was going to be in a couple years. So we’re like, you know what, let’s just save for the next couple years, and then put ourselves in a position. So we just saved super aggressively. And then when the kids came and expenses come up, and you you dial that budget back, it doesn’t hurt as much because you’re still saving. And when you’re so aggressive to start, it’s so much easier to for it to be malleable, just mold it what you needed to be. And then we then look forward to having goals of hey, we can we can get that back to where we want it once kids are in school. And once you have less expenses, because they’re both we had two under two for quite a long time and not only was financially stressful, just in general stressful. And it we we see where it can get back to and that’s the motivation now.

Tim Ulbrich 12:46

Yeah, and I think Derek, one things you share that resonates with me is because of your early aggressive savings, we’ll talk about more of that here in a little bit with your FIRE journey. You know, that gives you some permission to say, Hey, this is a season we’re in. This is a season of expenses, you know, may not be forever, it’s gonna look different in a few years. You mentioned that already. But let’s say the opposite was true. Let’s say you guys didn’t save it all in the first five, seven, now 10 years, a decade coming up on graduation. That’s another layer of stress, right? Because, hey, we’ve now got rising expenses. And we feel like we need to play catch up. And because you saved early in the journey, there probably isn’t that nagging feeling of hey, we’ve got to catch up. Right. So again, breathing room, and margin. So our theme for today is PharmD to Debt Free to FIRE. So again, graduated 2014 Debt free journey – paid off those student loans in 2018. Now you’re really on this path and evolution towards building wealth and towards financial independence. We’ve talked about FIRE on the podcast many times, we’ve got a lot of resources on their website, if that term is new to those listening: Financial Independence, Retire Early. So we’re going to spend a bulk of our interview talking through that with Derek what what does that mean to him? Where is he at? And the journey? Why are they on the fire journey? And what has that looked like practically for them and their family? So, Derek, let me start there. It seems that the the term FIRE while there’s formulas, calculations, all these things about how we can determine what our FI number is, I recognize that can mean something different to everyone. So what does FIRE mean to you and to your family?

Derek Schwartz 14:18

For us, it just means that we retire on our own terms. We both had the goal of retiring when we were 50. That’s the goal. And because I love my wife, I will not say how old she is on a podcast. I am 34. That means I want to retire in 16 years. By the time I’m 50, we are done working and we want to pursue other interests. The nice thing about being on this FIRE journey and being aggressive with saving when we did is with two kids, we looked at each other we’re like, hey, this might be 55 now. that’s still really early. Hey, we might push it back to like, you know, 57-58. Maybe 60, we work part time that’s still early. The the financial independence side of the FIRE to us just means, hey, we’re on our own terms. If we want to pursue other interests, we can do that if we want to, you know, scale back how much we’re working, we can do that. If we want to explore other interests that can make us money, we can do that and just leave our professions that we have behind. But once we get to that point, we’ll know that we’re covered financially. And then you know, the sky, the sky’s the limit from there where we can, you know, instead of diversifying your your money, where it’s going, diversify your interests and see what you know, what calls for you.

Tim Ulbrich 15:40

Yeah, what I really hear there, Derek is options and opportunities that you could pursue, and it might be one of many different pathways. Maybe you decide to work part time, maybe you don’t, maybe decide to travel a bunch, you know, maybe there’s grandkids at that point in the future, and you want to have the flexibility of time, like, you know, maybe it’s something that you’re not even thinking about at this point, whether it’s volunteering, and you know, there’s a ton of different things that could be, but having the option to, right, that that is what really resonates with me when people talk about financial independence, regardless of what the number is, or what the age is, is, you know, maybe it’s retire early, maybe it’s not. But there’s options to pursue A, B, C, D E. I talked with somebody recently on the FIRE journey, I guess, we’ve had on the podcast before Corey Jenks. And he gave an example of, you know, I think he referenced like walking into a sporting goods store or another type of business. And he was like, Oh, that’s interesting. Like, maybe someday I just would want to try to work at one of these and kind of see what it’s like. And when you’re on an FI pathway, like, those are the kinds of things that you can, quote, take a risk on or roll the dice and say, oh, this would be interesting to do for, you know, six or 12 months, whatever that might be. So I love what you’re sharing there. One of the barriers I often see, Derek is two individuals getting on the same page, not just in general with their finance. But here’s we’re talking about with FIRE. And you know, often you might have one person who’s gung ho, let’s go. And maybe they even started the FIRE journey before they met their significant other, spouse or partner. So my question for you is, have you guys always been on the same page? Has this been an evolution, it sounds like you’re very much in the shared vision of 50, or 55-57. Whatever that age is. Tell us more about how you’ve been able to work together and get on the same page.

Derek Schwartz 17:25

Yeah, I’m, I am so blessed to have my wife. Because on our first date, we talked about just being financially independent, that was just such a goal for both of us. Probably weirded out a lot of people were sitting by at the restaurant we were at. But that was just a goal for both of us. She was debt free when I met her, she owned her own home, she wanted to get into real estate, she was already on that path I had, you know, my path is so much different from hers, because I had all this debt I had to pay off that she still had some, but she had paid it off years before I met her. So we were on the same journey of getting to financial independence. But we started completely different areas, and we just happen to meet at the time where, you know, I was ready to start saving at the level that we wanted to. So at the time we met, I was talking about, you know, buying my first home, eventually, we as we dated, I kind of weaseled my way into her house, decided to just live there and pay her rent and then we got married from there. But it’s just always been a passion for both of us because we have so many more interests that aren’t tied to our jobs. We both love our jobs, we love our work. But, we love other things, too. And part of that is with our kids, we want them to be also financially independent. And that’s you can’t do you can’t preach that you’re not doing it. And that’s just that’s really that’s a hard place to be in of you know, teaching discipline with your kids and teaching, you know, financial independence and you know, being your own person and not you just you know, having so much debt that you can’t, you know, do the goals that you want to do.

Tim Ulbrich 19:10

Yeah, and I appreciate the perspective you have on that Derek and I know you’ve got young ones you mentioned the the ages a little while ago. One of the things I’m appreciate with my boys, my oldest now going to be 13 in the summer, as they are observing and picking up on things way younger, you know, then you would think. Sure, they might not be able to articulate it. But there is definitely a culture in the house around money. They become very aware of how individuals are talking about money. Is it you know, fearful? Is it stressful? Is it an open conversation? Is it a closed conversation? And we’re gonna be talking more about that on the podcast here in the future about kids and money. It’s a really, really important topic. But you know, I think just a note of encouragement to parents out there like hey, we’re not going to get it right all the time. I haven’t gotten it right. Jess and I haven’t gotten it right all the time. But, you know, really being cognizant and aware of the dialogue, the culture, the tenor, the tone of what’s happening financially in the household. I think it’s so important. Derek, you mentioned 50. And I heard that evolve 53, 55, 57. You know, when I hear that age, often an objection that will come up is, well, how are we actually going to be able to fund that, right? You know, we’re not yet at Social Security age, you know, maybe we’ve got dollars that are tied up predominantly in traditional retirement accounts, 401k, 403B’s, IRAs can’t access those to 59 and a half without penalty. You know, so then becomes this question of, well, how do we actually produce a paycheck when we’re at an early retirement age, and of course, all the fears that may come of hey, we’re gonna run out of money too early, and where we need health insurance benefits. Talk to us about how you guys are thinking about that, while still a ways away. I’m sure it’s something that’s been on your mind.

Derek Schwartz 20:49

Yeah, that’s, that’s something that we, that one of the first things we talked about as, hey, if we retire at 50, what do we do? So we have different accounts that, you know, you can’t touch certain retirement accounts until a certain age, we also have taxable accounts that we can dip into. We have money that’s set aside just in savings that we can get to at anytime. By that time, we we have a 15 year mortgage, so our house would be paid for. So it’s kind of just like leveling with what do we have to anticipate paying for? What to what accounts can we get into what can’t we get into? What does that mean for hey, if we retire at 50, are we actually retired? Can we do all the things we want? Or do we have to kind of like, play it slow a little bit until we can get into into some more taxable accounts that we’re holding on to? And, you know, it’s flexible. And we’d rather have that conversation to 50, than than 70, or 75. So it’s kind of a non answer, it’s almost a we’ll see when we get to it. And that’s why it’s so nice, just for it to be so flexible, because we don’t know, you know, what that looks like at 50. And then, you know, if, like, we have to say, hey, we’re gonna work till 55 now, that’s not a big deal. And that might not even be a full time at that point. That might just be like, you know, hey, we’re both working part time both our kids are, you know, 18, maybe out of the house and college, maybe they’re doing their own thing, you know, and we can downsize our house, there’s a lot of options that you can have. So, another thing that we look at is, instead of saying, hey, at 50, what do we do? We’d rather do that and say, hey, we’re, we got to 65, Social Security is not there. Hey, we’re not getting the health insurance we thought we’d get because you don’t know what things are going to be. And with all those variables that are so many are out of your control that you don’t know. So we’re planning for those to just not be there. And so that’s kind of a, a different way to look at it. Because most people will assume that Social Security will be there, they’ll have some some kind of health insurance. We’re looking at it as, hey, if we retire at 50, on our own, can we do it? And we think we’re on track to do that. But if we have to push it, we can push it.

Tim Ulbrich 23:12

Yeah. And what I hear there, Derek, is being comfortable with the uncomfortable and the unknowns, but not necessarily just kind of put your hands up and saying, hey, there’s not planning that can be done, right. You mentioned several variables, assumptions that any one of those can change, some of them will change, some of them may be better than you thought, worse than you thought. So there’s planning that needs to be done. And we so often talk about the accumulation phase. Right. But we don’t often talk about the de-cumulation phase. Whether that’s early retirement or not, you’re gonna have several of these buckets of assets, right? You mentioned brokerage accounts, you mentioned traditional accounts, you’ve obviously got your home, that will be an asset, perhaps there’s real estate now or in the future. I mean, you’re gonna have all these different buckets, maybe there’s social security involved. And it’s a matter and function of okay, well, for 55. Where are we drawing from those? And how do we do that in a tax efficient way? And how do we make sure that we’re optimizing which buckets we’re drawing from, and essentially, what we have to do is, you know, our working career, we work and we get a paycheck, right? Well, when we’re not working, or working part time, and we need to fill up the rest of that income bucket, we have to produce our own paycheck in retirement, whether that’s early or not. And I think there’s so many nuances and planning opportunities there that we just don’t talk enough about how do we actually produce that retirement paycheck? You mentioned 15 year mortgage. I want to talk about that for a moment. Because, you know, obviously, you’re, you’re a math guy, you’re on the FI journey. And, you know, there’s this debate that’s always ongoing of 15 versus 30. Year and what’s the opportunity cost and, you know, getting out of debt and versus carrying a low interest rate debt for a longer term. As you’re someone who’s looking at an aggressive savings rate, you know, an argument could be made potentially that hey, anything you’re paying on a 15 year that you could, you know, have paid on a 30 year or lesser amount than you could have invested the difference. You know, obviously there’s an opportunity there to way of paying down the debt versus investing for the for future, the most common question we get, hey, should I be paying down my debt? Should I be investing? How did you think through that process of, hey, let’s make a higher monthly mortgage payment. And therefore, you know that that is money that could have potentially been invested versus maybe you did decide to take out a 30 year, and it’s a lower amount, but you’re able to invest more talk us through that.

Derek Schwartz 25:20

Yeah, that’s an interesting story, because we bought her home in the summer of 2020. And taking, taking some time to look back on that time in the mortgage arena, we got a 3% fixed interest rate. You’re not getting that anytime soon, anywhere else. So we made the decision of hey, like, this is an interest rate that it’s basically non-existent. 3% it’s is absurd, and especially in today’s market. So a 15 year mortgage, that’s not really that much of a difference between a 30 year and then you also you still have something like wiggle room to, you know, take some money on the home, and do that sort of things. And it’s funny, what do we do that now, probably not. It would probably be a 30 year, if we were to move and buy a new home. It would probably be a 30 year mortgage. And it’s just interesting, because when you’re out of debt, you look at different ways to I don’t want to say manipulate what you’re doing with your money, but to just kind of be flexible with it, is that instead of saying, Hey, we have to, you know, think of a different way we’re paying on our home, we might have to think of a different differently. We think of it in a way of, you know, how can we take advantage of the situation that we put ourselves in, we were both out of debt, we bought our home? How can we make this situation benefit us? And that’s, that’s such the nice thing about being in the FIRE mindset of, first of all, being in the FIRE mindset, you’re out of debt. And then secondly, how can we use factors around us to benefit us. And that’s something you can’t do when you have when you have a lot of debt, and you don’t have the the FIRE mindset if you’ve already been saving. And that’s not a realistic expectation for people right now. But if you set yourself up to be in a position where you want to be FIRE, and you want to be really aggressive retiring, that is a situation that anyone can easily be in.

Tim Ulbrich 27:24

Yeah, I appreciate that. And I presented the question as a dichotomous variable of hey, you could have either taken out debt longer invest that, of course, it’s not that simple. And one of the variables that’s unique to you guys, is you did aggressively save early on. So there already was that that base of savings. You know, if someone isn’t in that position, and they’re weighing, you know, should I be taken out a longer term mortgage or shorter term? And where am I investing? The question they have to factor in, among many others is, am I on track? Am I ahead? Am I behind? And, you know, certainly that will, will change the equation, how we look at that, as well. When you guys came up with your FI number, I’m curious to hear more about how you determine what this is and how you evaluate this on an ongoing basis, you know, in the FI community, which you’re more plugged in than I am, but there’s everything from back of napkin, you know, rule 25: take your total annual expenses, including taxes multiplied by 25. That’s based on the 4% rule. We’ve talked about that on the show before. And then there’s, you know, much more nuanced calculators that are out there and available. So tell us more about how you guys have evaluated what your FI number is?

Derek Schwartz 28:28

Yeah, we’re much less we’re not even that nuanced. We just, we pick a number, hey, 50, what do we need to do to get there? And that wasn’t a let’s calculate what we have what we’re saving it, plug it into something. And that’s what the number comes up. We started our FIRe journey being like, it’s going to be 50. What do we need to do to get there? And I think, looking at that way, it simplifies it a lot more, because you look at it from a perspective of, if that’s the goal, all right, um, when we started, that was a couple years ago, so it was like 18 years to 50. What are we doing in the next 18 years to get there? And at that point, we didn’t have kids, and then kids come, and we’re like, alright, 50 might not be possible. We went to push it, but 50 it still could be possible. What can we what can we cut back on a little bit to get there? So I think that’s such a nice thing about FIRE is that, you know, it, it’s so adaptable to what you want to do. You can it can be 55, it can be 60. It can just be an unknown age, where you just you have your, your budget, you look at it, you look at what you’re saving, and you’re like, yeah, we can just do it now. And then just start your, you know, FIRE journey from there. Yeah, an important thing and for those that are new on this FIRE journey, what you’ll quickly realize is you start to run numbers is your annual expenses is, is really the factor that’s going to drive this equation the most both in terms of what you need, right? Because your projected need is based off of what you’re going to have to potentially draw. So if you have two pharmacists, let’s say both making $125,000, one is able to live off of 50% of their income, one’s able to live off of 80% of their income, their FI numbers are going to be very, very different. And thus, their savings rates are going to be very different because of the percentage of their income, right, that’s available and able to say, so easier said than done. You know, we know that pharmacists cost of living, individual situations, but you see this on the regular where you know, someone who’s able to really drive down cost of living expenses. And there’s a balance here that we have to factor in, versus someone that is not able to for whatever reason, those numbers of what that FI number is going to be in the timeline to get there are going to be drastically different for sure. Derek, one of things we talk a lot about on this show is we firmly believe from personal experience and working with hundreds of pharmacists, one-on-one on this topic that a good financial plan, it’s a marathon, it’s not a sprint, we really have to be striking this balance between, yes, we have to be ready for the future. Yes, we have to take care of our future selves. But we also have to be making sure we’re prioritizing living a rich life today. And we tend to think about these on one end of the spectrum or the other. Right, there’s some that we see are very, very aggressive savers. But aren’t necessarily comfortable with spending in any capacity. And then there, of course, is the opposite end of the equation as well. How have you guys been able to, especially with a young family, strike this balance between, hey, we need to continue to push forward with getting our FI number. And whatever that age and goal is, but also like, hey, this is a season in a phase of life, that we also want to make sure that we’re living a rich life, we know that eventually this season will pass as well.

Derek Schwartz 31:49

Yeah, that’s, it’s always something when you have kids, everything changes. And you know, everyone’s gonna tell you that you don’t believe it until you’re in it. And that’s something that, you know, you want to enrich your kids lives with different experiences and do things. And, you know, we’ve talked about, hey, we could take them to Disney World, we can take them on a nice vacation, we could also go to a national park. There’s a different cost difference with those, especially if you can like drive to one. We live in Cincinnati so we’re close to Mammoth Cave systems, Red River Gorge in Kentucky, it’s a really nice places that you know, the kids will enjoy. And that’s a big cost savings as opposed to like a more expensive vacation like Disney. Nothing against Disney, my daughter loves frozen, she will eventually go. But that’s something that right now with, we have more expenses, because we have two very young kids, we have a nanny that we’re paying for. Once they’re older, and they’re in school, we don’t have the the nanny costs, some of that costs goes towards maybe a new car fund, maybe that goes to vacation funds. So we can do like a yearly vacation somewhere nice. That goes back into retirements, and it just kind of like just kind of morphs, it’s kind of like a primordial soup of just the funds are there. They’re being used for this, they’re being used for that. What can we do now to make sure that, hey, when the time is right, we can afford that vacation, we can afford to take them on, like really, you know, fun, like family trips to like Disney. And right now that looks like you know, more affordable options, we take them to the Cincinnati kids museum, which is a great place for kids, we take them the national parks. And those are so much more affordable and fit within our current FIRE budget without, you know, just sitting at home and not doing anything. So it’s, it’s in terms of what you do with family enrichment, it depends on what you want to do, how much you’re paying now for expenses that won’t be there. And for us, we have expenses of a nanny that won’t be there for too long. It’s going to be here for a couple of years. But then after that, it’s like okay, we’re gonna go back to saving more aggressively. How about we also save aggressively for a nice trip, How about we save aggressively for, you know, programs that we want our kids in? So, and we couldn’t do that without being out of debt. I keep going back to getting out of debt. But that’s just so important because it just allows you to be on that platform to just do so many different things with what you want to do with your money.

Tim Ulbrich 34:37

Great stuff. My last question for you, Derek, is you know, for the for the students or new grads that might be listening. They’re saying, Derek, this is great. But dot dot, dot, I’ve got $175,000 of debt. I’m trying to purchase a house in this housing environment where costs are crazy. Interest rates are crazy. And I feel like there’s not a whole lot of margin and sure, maybe I’d like to pursue a FIRE journey. But at a minimum, I’d like to just build a good foundation and make sure that I’ve got a solid plan. What advice would you have for new grads coming out today in 2024? As you look back now 10 years ago, just a different space that we’re in. What are your thoughts for those new grads coming out today?

Derek Schwartz 35:17

Yeah, it’s, you have to realize what goals you want to accomplish first. Some people want to own a home. I’m not going to tell people to not buy a house. Some people want to start a family and never going to tell people to not have a family. When you have a lot of debt, and unfortunately, with a lot of pharmacists, pharmacy students coming out, the grads and some people do residencies, where they’re not making their like full salary yet. It’s hard to say to someone, hey, you know, you got to really get on that debt and get that down. From what I saw, when I started my journey of paying off my debt, I was working with a lot of older pharmacists, that when I was in my like, early 20s, and a lot of them were like, hey, if I was, if I could go back 30 years be in your shoes, I would do exactly what you’re doing. And that’s the affirmation that I needed that I was on the right path, because it wasn’t fun. Paying off debt is not fun. It is it is not glamorous, it is not full of constant rewards, you’re not doing a lot of things, you’re just watching a number go down. And that’s all it’s doing. But once you get out and pass through that, your options just expanded so much. And there are some people that you know, graduate, they already have a family, they already have a house. That requires you know, a sit down with your spouse, your partner, and talking about a budget of hey, you know, how can we get this down? How can we get to where we need to go? Yeah, and the first step that I would encourage is to budget and figure out a number of like, when is the realistic goal we can pay it off? And I think figuring that number out, for some people might be longer than they thought it would. And that’s a really important step is to figure out, look at all of our expenses, maybe you have a mortgage, you have the expense of kids, you’re thinking, hey, you know, we can knock this student loan down in a couple of years. It’s actually like 10. Do you want to wait 10 years to pay that off? Or what can you do now to like, chip that number down to five? What can you do to chip it down to six? And then those you know, four or five years you save of not being you know, chained down with your student loans, it can be really reassuring, kind of a kick to get into gear, to get some stuff done.

Tim Ulbrich 37:49

Great stuff there. This has been a joy to reconnect and hear your story. Hear where you’re at seven years later. Hear how the foundation you built early. You’re seeing the fruit of that now and I think there’s only more fruit to come. So thank you so much for taking time to come on the show and to give us an update where you’re at.

Derek Schwartz 38:06

Great to be back.

Tim Ulbrich 38:07

[DISCLAIMER] As we conclude this week’s podcast and important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding material should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. opinions and analyses expressed herein are solely those of your financial pharmacists unless otherwise noted, and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacist Podcast. Have a great rest of your week.

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How Much You Need to Hang Up Your Coat: All About the Four Percent Rule

Posted on by yfpadmin

How Much You Need to Hang Up Your Coat: All About the Four Percent Rule

The following is a guest post from Dr. Jeffrey Keimer. Dr. Keimer is a 2011 graduate of Albany College of Pharmacy and Health Sciences and pharmacy manager for a regional drugstore chain in Vermont. He and his wife Alex have been pursuing financial independence since 2016. Check out Jeff’s book, FIRE Rx: The Pharmacist’s Guide to Financial Independence to learn how to create an actionable plan so you can retire early as a pharmacist.

By now, you’ve probably heard that it’s possible to retire not just early, but incredibly early; like in your 30s or 40s instead of in your 60s or 70s. As evidenced by the financial independence, retire early (FIRE) movement, many people are doing just that. Now while that sounds awesome, the big question (as with most things) is always “how do you do it?”

In an earlier post, “The FIRE Prescription: How to Retire Early as a Pharmacist,” I gave a really broad overview of some of the basic tenets of the FIRE movement: the four percent rule, reducing expenses, investing, and drawdown of those investments. Having a good understanding of those concepts is crucial if you ever want to reach financial independence, but I didn’t go into much detail on any one of them in particular. Time to remedy that. So for this post, I wanted to take a deeper dive into that first concept: the four percent rule.

Why that one? Because it was the first one I listed. Duh.

On a more serious note though, the four percent rule (and by extension the concept of a safe withdrawal rate) should be the first thing to understand when drawing up a game plan for FIRE as a pharmacist. This is because it can help define the ever-elusive concept of “enough.” After all, what kind of journey do you set out on without a destination?

What is the Four Percent Rule?

When people in the FIRE community talk about the “four percent rule” what they’re referring to is a concept known as a safe withdrawal rate for early retirement. A safe withdrawal rate (SWR) can be defined as the annual amount (as a percentage) you can expect to withdraw from an investment portfolio without having to worry about the portfolio running out of money in the future; even as you adjust the initial amount for inflation year over year. Basically, you can look at your portfolio balance and figure out how much yearly income you can draw from it without worrying about the portfolio going to zero by assuming a safe withdrawal rate.

The “four percent” part comes in when we’re making assumptions about what kind of safe withdrawal rate our portfolio might support and it comes from a very important study published by financial planner, William Bengen, back in the early 1990s. In a nutshell, Bengen found that a diversified portfolio of US stocks and bonds could support at least a 4% safe withdrawal rate for retirees looking to tap their investments for retirement income over 30 years (more on that a little later).

Why it Matters

For those looking to join the FIRE movement, the four percent rule is probably the first major concept you get exposed to. Why? Because the whole idea of early retirement and the four percent rule do something incredibly important: it tells you where the endzone is. If you know how much you spend per year, you can use the four percent rule to define how much you need to save so that you can cover those expenses. Once you reach that number, sometimes called your FI number, you can probably declare yourself financially independent and consider early retirement.

So how do you calculate a FI number? Well, to borrow a phrase, it’s shockingly simple. Just take the inverse of 4% which is 25 and multiply your annual expenses by it.

For example, say your annual expenses (taxes included!) are $80,000. What’s your FI number?

$80,000 x 25 = $2,000,000

By using the four percent rule to help determine the amount you need to reach FI, not only do you set yourself apart from most Americans who frankly have no clue how much they need to retire, you give yourself a real number to work toward. With that in hand, you can measure your progress toward what many consider to be the ultimate goal in personal finance.

Given that, it’s no wonder that the four percent rule has become a chief cornerstone of the FIRE movement. What’s more, not only does it give you a concrete goal to work towards, it also puts that goal more firmly under your control.

Think about this for a second.

Many of us have been exposed to the advice that you need to save some multiple of your income by retirement to retire comfortably. But how much control do you really have over your income? As pharmacists, the answer to that question has to be “less than we’d like.” Many of us are all too aware of how much the market forces of supply and demand affect what we can expect in compensation.

That said, the four percent rule does something pretty spectacular. Instead of basing your retirement number on your income, it bases it off your expenses; something much, much more under your control. Cut out $500 a month from your budget? That translates to $150,000 less you’ll need to retire. The math is simple but incredibly powerful. What the four percent rule does, and I really can’t emphasize this enough, is that it gives you the knowledge to take control of your financial destiny!

Where Did it Come From?

Here’s where we’re going to get a little more technical and go over some of the research the four percent rule was born from, so buckle up. The four percent rule, as it’s come to be known, originally came out of the study “Determining Withdrawal Rates Using Historical Data” published in the Journal of Financial Planning by William Bengen in 1994. Bengen’s goal with the study was to shed some light on what kind of income a retiree could safely live on given a standard portfolio of stocks and bonds where the income produced came from the portfolio’s total return. And what did he find? By using historical return data on US stocks and US treasury notes, Bengen was able to conclude that the worst possible scenario for a retiree using a 50/50 stock and bond portfolio was that their money ran out after 33 years following a consistent 4% initial withdrawal strategy, indexing the withdrawal each year to inflation; a level Bengen referred to as SAFEMAX, and the rest of the world came to know as the four percent rule.

So how did that withdrawal strategy work? Like this. Say you have a $1,000,000 portfolio at the start of retirement. The first year, you’d draw $40,000 from it (4% of the initial balance). Next year, assuming a 3% rate of inflation, you’d increase the previous amount by 3% ($40,000 x 1.03 = $41,200) and that would be the amount withdrawn. In the years that come, just rinse and repeat. Slightly more complicated math than the FI number math, but still not too bad.

Bengen’s study was a watershed moment in the financial planning world. Before his study on withdrawal rates, retirement income planning either followed something akin to a reverse mortgage on the portfolio, reliance on pension income, or the old-school rentier model of only factoring in the income generated by the portfolio (i.e. not touching the principal). With Bengen, now the concept of a safe withdrawal rate could be incorporated into a retiree’s financial plan. His was just the first of many on the subject though.

Another piece of research that gets a lot of traction in the FIRE movement is one conducted by three finance professors from Trinity University dubbed, creatively, “The Trinity Study.” The Trinity Study more or less supported Bengen’s initial findings in that a 4% withdrawal rate tended to coincide with minimal risk of portfolio failure (i.e. going to zero) over a 30 year withdrawal period. The only real difference with the Trinity Study vs. Bengen’s was that the Trinity researchers presented their findings primarily in terms of probability of failure rather than just focusing on the lower bound results as Bengen did.

This was important to the whole safe withdrawal rate discussion because when making forecasts (as you do in the planning process) viewing things through the lens of probability is essential. In this case, the authors of the Trinity study placed the odds of success with a 4% withdrawal rate after 30 years at 95% using a 50/50 mix of stocks and bonds; a conclusion very much in line with Bengen’s and the notion of a 4% safe withdrawal rate.

So What’s the Catch?

So…despite the presence of studies and journals, finance isn’t what you’d call a hard science. Many would dispute the idea that it’s even a science at all. So here’s the tl;dr on how we should view the four percent rule: like the pirate’s code, it’s more of a guideline, not a rule.

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Why is that?

First, let’s talk a bit about the works that gave us the four percent rule. Just like any of the drug studies you get to look at in your professional life, there are limitations; the most obvious of which is the sample size. For the vast majority of studies that look at historical withdrawal rates, sample sizes are quite small. Take, for instance, Bengen’s study where he looked at the experience of retirees from 1926-1976. Now that sounds like a big time period, but it’s really not. Each year studied assumed a January 1st retirement, so that gives us only 50 data sets. Try bringing a blood pressure med to market with a 50 subject phase III trial. Not gonna happen. To add insult to injury, many of the data sets he used included extrapolated (i.e. made up) data to get to their 50-year endpoints.

Now while the Trinity Study suffered from the same problem as well, some subsequent research has tried to increase the sample size to what you’d expect from a large-scale drug trial. For instance, in a 2017 paper titled “Safe Withdrawal Rates: A Guide for Early Retirees” published for the Social Science Research Network, Dr. Karsten Jeske (who runs the incredible blog Early Retirement Now) was able to expand the data set to 6.5 million retiree scenarios going back to 1871 and retirement periods of up to 60 years! To date, I’m pretty sure that his study is the most comprehensive and one that specifically targets a safe withdrawal rate for early retirement. Surely with that in hand, we can settle on some withdrawal rate as law right?

Nope!

Even such an incredible sample size is still too small. This is because Karsten’s study, like much of the popular research surrounding the four percent rule, is somewhat myopic in scope regarding asset allocation. Very few studies look at the impact of including international stocks (a very common diversification recommendation) in the portfolio, let alone alternatives such as real estate or precious metals.

Secondly, the studies in question didn’t consider investment fees and expenses (like taxes) whatsoever when drawing their conclusions. Kind of like the scenarios you find on a Physics 101 exam where you get to ignore friction, the scenarios described by the aforementioned studies may lack real-world applicability.

The third problem, and in my opinion the biggest one, is that, unlike a drug where we can reliably predict an average response given enough past data, markets don’t work that way. The only thing predictable about markets is that they’re unpredictable. The next 140 years may look like the last 140 years, or completely different. Who knows? Past data can certainly give you an idea of how they may behave, but they tell you nothing about how they will behave.

Perhaps a better approach here as suggested by Dr. Wade Pfau, a professor at the American College of Financial Services, would be to take the past data and use Monte Carlo simulations (remember those from stats?) to present the idea of an SWR in a more probabilistic fashion. I find this approach to be more useful as it can help you picture the relative odds of success based on how a portfolio tends to behave.

Should We Still Use the Four Percent Rule?

Absolutely, but not in the absolute sense. As I said earlier, it needs to be viewed more as a guideline instead of a rule. What I like about it in this way is that you don’t need to be precise with your math. If you can ballpark your yearly expenses using the four percent rule you can: set a savings goal for yourself, track your progress as you go, and, if you reach it, you can probably declare yourself financially independent.

Once there, should you quit your job, lock yourself into an automated withdrawal scheme, and move to the beach?

I wouldn’t.

Can you take some serious liberties with your career at that point?

Oh yes!

Despite its shortcomings, the four percent rule is all about giving you that goalpost where you can take those liberties. And the best part is that you don’t even need to get to that magical number to enjoy the perks! Just knowing where you are on the path can be incredibly powerful and open the door to new options in life.

For instance, when our son was born and my wife Alex wanted to stay home to raise him, we knew that we could do that from an income standpoint. But what about our goal of FI, how would the decision affect that? Thanks to the four percent rule, we could safely say that it wouldn’t matter that much. We knew where we were relative to our goal and we could go down to one income without really setting us back.

Or you could use it the way Cory and Cassie Jenks from Episode 134 of the YFP podcast are, in the pursuit of Coast FI. The four percent rule tells them how much they eventually need to be financially independent, but they’re not in a hurry to get there. Instead, they can take a look at their current savings and, using an assumed rate of return, determine the point at which they no longer need to contribute to their retirement savings. Once there, the money that would’ve gone to savings can go elsewhere…or not be needed at all! They can scale back work and not worry about sinking their eventual retirement.

But what if early retirement or stepping back from work isn’t your thing? No worries, the four percent rule has something for you too. Knowledge is power, and that power can present itself in many ways. One of which is knowing whether you’re in a position of financial strength or not when considering a job change, entrepreneurship, or some other calculated risk with your career. If you’ve done the math and you’re nowhere near FI, you may want to take a more defensive posture. But if you’re well on your way to FI or close to it, that calculus can change dramatically. It may even give you the license to pursue work that can better advance the profession even if it doesn’t pay much (yet!).

Conclusion

The four percent rule, despite its flaws, is a tremendously important tool in the FI toolbox. It allows you to create a concrete financial goal to strive for and one that you can track your progress towards. Once you have that, you can start down the path to FI.

On the path to FI, the four percent rule is just one of many concepts that you’ll want to learn to be successful. The four percent rule just tells you the destination, not how to actually get there; or perhaps equally important, what to do when you arrive. If you’d like to learn more about those things, I invite you to check out my new book FIRE Rx: The Pharmacist’s Guide to Financial Independence.

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How to Save Half of Your Income

Posted on by yfpadmin

The following post contains affiliate links through which YFP may receive compensation.

Live on less than you make. The quintessential maxim when it comes to personal finance. It’s incredibly simple advice and touted by just about everyone. But as you know, it’s easier said than done.

Otherwise, couples 34 and younger would have more than $4,727 in savings and those in their 30s would have more than $45,000 in retirement accounts.

While student loans are one of the biggest culprits for these staggering statistics, it’s certainly not the only factor.

You’ve likely heard the rule of thumb to save and invest 10-15% of your income in order to retire at a reasonable age. While that may work for many, it’s way below the typical amount needed for those pursuing FIRE. In fact, it’s not even close!

FIRE stands for Financial Independence, Retire Early where people pursue having enough money so that they are able to, you guessed it, retire early. Those on the path to FIRE usually have the intention of achieving it in their 30s, 40s, or even 50s. You can get a nice overview of FIRE from this post.

To attain FIRE, most people target saving 50-70% of their income and investing it in index funds and or real estate.

Crazy right?

“How is that even possible!?” you may be thinking.

Cue people living in tiny homes, growing their own food and making bicycles their primary means of transportation.

While there are definitely some taking this movement to that extreme, most pharmacists don’t need to do that to make it work. But it may require A LOT of sacrifices depending on how fast you want to achieve FI!

Assuming you’re single and make the median pharmacist salary of $126,000, after an effective tax rate of 30% (federal/state/local/FICA), you are looking at a net income of $88,200.

So in order to save $44,100 a year, you’re looking at $3,675 a month.

Impossible?

No, but certainly not easy!

If you have a non-working spouse or significant other and kids, that can certainly make things even more challenging but there are many people out there who have achieved FIRE making much less than a pharmacist.

So if you’re not quite at the point of saving half your income, here are some key moves to help get you there.

Eliminate credit card debt ASAP

No one ever plans to go into credit card debt. It’s often the result of either overspending or unexpected medical events or emergencies.

Having credit card debt is really a financial emergency in and of itself given the typical ridiculously high-interest rates. If you’re in this situation, you should make it a priority to get rid of it as soon as possible. Remember, you want compound interest working in your favor!.

Pay off student loans or optimize forgiveness

For most pharmacists, this is going to be the biggest barrier to saving at least half of your income. Assuming you were in the 10-year standard repayment plan with an average student loan balance of $170,000 and a 7% average interest rate, your monthly payment would be $1,973.

Talk about a major FIRE hazard!

There’s no single prescription for taking down student loans when pursuing FI but there are some key considerations.

First, if you have a small student loan balance relative to your income and can knock it out fast such as 1-2 years or less, then, by all means, destroy it ASAP.

However, if that’s not the case and assuming you have exhausted the options of any federal, state, or employer tuition reimbursement programs then you have a couple of options.

First, if you’re eligible for the Public Service Loan Forgiveness (PSLF) program that’s great news because it’s very conducive for those on the early retirement path. Since any amount remaining on your loans after 120 monthly payments is forgiven tax-free, your goal should be to pay the least amount as possible in order to maximize the benefit.

Plus, by contributing and maxing out a traditional 401(k), 403(b), or TSP, you can actually lower your adjusted gross income and subsequently your payments since they are income-driven.

If PSLF is off the table, then refinancing can be a great move. The lower the interest rate, then a greater percentage of your payment will go toward principal and can help to accelerate the payoff. And you can do this multiple times if you can continue to get a better rate. Plus, you also get paid to refinance as companies often offer a cash bonus or as an incentive. We have partnered with several companies that have bonuses up to $800.

Even if you refinance student loans and are making extra payments, you are still going to want to be simultaneously contributing to tax-favored retirement accounts if it’s going to take you a number of years to pay off the loans. Remember, time is the most important component when it comes to compound interest and you can’t go back and contribute to the years you missed out on beyond what’s available when you reach 50.

Lastly, if you happen to be in the unfortunate situation where you have a very high debt to income ratio such as 2:1 or greater, then you may actually consider opting for non-PSLF forgiveness. This is where you can have your balance wiped out after making income-driven payments for 20-25 years through the federal loan program.

However, the caveat is that any balance forgiven will be treated as taxable income, therefore you have to prepare for that extra bill along the way. Even with this, it still may make sense financially, especially if it allows you to maximize your retirement accounts.

If you need help figuring out the best student loan strategy for your situation, you can reach out to one of our financial planners for a customized plan.

Work on reducing housing and transportation costs

You’ve probably heard multiple financial experts say you need to stop getting lattes every day because of the significant opportunity cost. While that may be partially true, focusing on bigger wins like reducing the cost of living and transportation can move the needle significantly more and get you closer to your savings goal. That is unless you are frequenting Morton’s Steakhouse.

Beyond downsizing to lower mortgage or rent payments, many people in the FIRE movement have opted to move to places where there is a lower cost of living, sometimes referred to as Geo-Arbitrage. This can be a really tough decision especially if it requires moving away from family and close friends and means leaving a job you really enjoy. However, out of everything you can do save more money, this could be the one that has the greatest impact.

Another thing to consider is refinancing your mortgage. If you are in an adjustable rate mortgage or have a really high fixed rate, getting better terms could save you a couple hundred bucks per month.

Car payments are another big barrier for many to achieve significant savings. Plus, if you’ve got a gas guzzler, your annual operation costs are not going to be cheap. Beyond that cars depreciate and your goal should be to build assets. Many times, it takes a lot of self-reflection about how you view your car. Most people pursuing FIRE think of it as a means from point A to point B and don’t care what anyone else thinks about it.

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You can pay off your cars to eliminate any payment but, depending on your situation, you could also sell or trade in your car and downgrade. If you have more than one vehicle, you could consider eliminating one. Depending on where you live, you may be able to get around on a bicycle, e-scooter, or public transportation.

Review recurring monthly expenses

Are there any subscriptions or monthly services you could nix? Be honest with yourself. Are there some that you don’t use anymore but just haven’t sent the email or made the call to cancel? I’m definitely guilty of that.

While some of these expenses can be pretty small, the sum can add up quickly. These include TV (whether cable or streaming services), internet, gym memberships, Amazon Prime, audio streaming (such as Audible or Spotify), your mobile plan, wholesale club memberships, cloud storage, etc.

I really like the apps Clarity Money and Trim as they can connect to your bank account and identify these expenses and even give you the option to cancel right from the interface.

Eat more at home

Going out to eat can one of the biggest budget busters. One dinner for two could cover a week or more of groceries. Consider meal prepping and packing your lunch.

If my wife and I go out to eat, we try to look for a Groupon or go somewhere during happy hour when the food is cheaper or just get appetizers.

Keep entertainment free or low cost

One of my favorite things to do on the weekends is spearfishing off the beach. It’s an incredible workout, a great way to spend time with friends, and the best part is that it’s free, that is once I bought all the gear. Plus, if I’m successful with harvesting some snapper, my grocery bill goes down.

I also check out free concerts in the area such as the Petty Hearts, which is a Tom Petty and the Heartbreakers cover band. For those of you who don’t know, Tom Petty was a rock icon known for songs such as Freefallin’, The Waiting, and American Girl.

There are a lot of activities you can do for free or that are relatively inexpensive. If you really focus on the things that bring you the most happiness, you’ll probably discover that you don’t have to shell out much cash to do them.

Now if you’re someone who loves to travel you may have to scale back or get creative on how your trips are financed. There is a whole other movement of travel hacking, where people use different credit card points and offers to fund vacations.

Pursue additional income streams

If you’ve made all the moves above and are still struggling to hit your savings goal, you have another lever to pull. Even though your salary may be fixed, your income is not.

Many pharmacists have been featured on our podcast who have one or more side hustles in addition to their full-time position to help fund their financial goals. Some have used their pharmacy skills and knowledge in their side hustles, whereas others have other passions and hobbies they have been able to monetize.

If you need some ideas on how to make additional money, check out the post 19 Ways to Make Extra Money as a Pharmacist in 2020.

Conclusion

Whether or not you’re part of the FIRE movement, you can use many of these tactics to improve your savings rate. While I know there was nothing presented that was particularly profound, hopefully, it made you take a look at your current savings percentage and analyze the actions you need to take.

What I have found after about 5 years of putting 50-60% of my income toward a combination of student loans and savings, it’s all about contentment. Initially, I was concerned that a dramatic shift in my spending would cause my happiness to go down, but in reality, the opposite occurred and made me focus on what’s most important.

What is the one thing you could do that would immediately get you closer to saving half your income?

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The FIRE Prescription: How to Retire Early as a Pharmacist

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The FIRE Prescription: How to Retire Early as a Pharmacist

If you’ve started going down the internet’s personal finance rabbit hole, you’ve no doubt crossed paths with the FIRE movement. FIRE (financial independence, retire early) is a concept that’s been gaining a lot of traction lately. What was once considered a fringe topic, mostly covered by blogs such as Mr. Money Mustache or Early Retirement Extreme, has morphed into a widespread movement with mainstream coverage. Some are even calling it “the ultimate life hack.”

But what is it and why should it matter to us, pharmacists?

What is FIRE?

FIRE is based around the concept that it is possible to retire early (ie. before 65) by living off the income generated passively through investments. This is not a new concept. All throughout history, people have done this. You might think of this crowd as the 1%. So why all the buzz now?

Because it turns out, you don’t have to be a 1%’er to make it happen. Say what?!

How?

Because one of the core tenants of the FIRE movement is that the amount of money you need for retirement is purely a function of your expenses and NOT your income. You can control your expenses.

Should You Join the FIRE Movement?

But what about us? As pharmacists, we’ve sunk a lot of time and effort into getting where we are. So much so, that when people ask you what you do, you don’t respond with “Well, I work for company _____ in the _____ department,” you respond with “I’m a pharmacist.” What we do is embedded in our identities. So, you may ask yourself, why should I get into the FIRE movement? Surely, this whole retire early business is something only a cubicle worker who files TPS reports all day would dream about right?

Maybe, maybe not.

Maybe you feel burned out or you’ve just become disillusioned with our profession. That’s what one pharmacist, Jason Long of Tennessee, felt and decided FIRE was the way to go. In a NY Times article covering the FIRE movement, Jason cited burnout and job dissatisfaction as the primary reasons why he adopted a FIRE mindset and called it quits early.

He’s not alone in his feelings about the profession either. According to a recent article in Drug Topics, job satisfaction in pharmacy overall isn’t great with 29% of respondents to their survey indicating that they’d be looking for a new job in the next 12 months. Reasons cited: increased work volume and less help to do it. Factor in a more saturated job market, lower compensation packages, and the potential for Amazon to disrupt the whole industry with its Pillpack acquisition and there are plenty of reasons for a pharmacist to feel like their profession is on the ropes.

But maybe that’s not you. Maybe you love your job and love being a pharmacist. What then? Well, FIRE has something to offer you, too. In a word: options. Personally, I love being a pharmacist (I even work retail if you can believe it). Financial independence without the retire early angle can give you the flexibility to get more from your career. Mid-career residency? Part-time by choice? Want to start a business? In short, there’s a lot of power in not needing a paycheck.

How to Retire Early as a Pharmacist

Now that I’ve talked it up, it’s time to get down to brass tacks and layout a roadmap for FIRE. There are a few important concepts to understand, but before we get into that, I think it’s important to highlight some of the things that FIRE isn’t:

A get rich quick scheme
Some guru’s course
A set formula
Easy

That last one is the big one. FIRE is not something to go for on a whim or halfheartedly. It will not happen overnight. It will involve sacrifice and, probably, a fundamental change in your relationship to money. You need to have a good reason for pursuing FIRE if you’re going to be successful. In short, you’re going to need one heck of a WHY.

Got it? Great.

So how does it work? Like I said before, there are a few concepts that form the basis of the FIRE movement and here’s a good order to introduce them:

Safe Withdrawal Rates and the “4% Rule”
Reducing Expenses and Increasing Savings Rate
Investing
Drawdown

Safe Withdrawal Rates and the “4% Rule”

As mentioned before, FIRE philosophy focuses on expenses being the main variable in determining how much you need to retire. But the question remains: how much do I need? Luckily, the academics have provided that answer with what’s called a “Safe Withdrawal Rate” or SWR.

So what’s that? First, the long answer.

SWR refers to the rate (expressed as a percentage) that a retiree can realistically take out of their retirement portfolio, adjust for inflation every year, and never run out of money. Based on academic research, notably the Trinity study, this number has been said to be 4% when applied to a portfolio consisting of 50% stocks and 50% bonds. In that study, the authors looked at different mixes of stocks and bonds over different 30 year stretches from 1925-1995 to determine the probability of portfolio failure (ie. running out of money) when different withdrawal rates were applied. In all those scenarios, it was determined that a person who took out 4% of the portfolio and then adjusted their subsequent withdrawals for inflation going forward had a 0% chance of running out of money at the end of the 30-year period. From this, we get what’s known as the “4% rule.”

In short, if you divide your yearly expenses by 0.04 (or multiply by 25!) you come up with a portfolio balance (your FIRE number) that can provide a stream of income to cover your expenses for at least 30 years, if not indefinitely. Now, this is somewhat of an oversimplification, which is why 4% being a “rule” needs to be taken more as a guideline, but you get the gist. In today’s environment, SWRs might be lower, but for now, you can estimate your FIRE number like this.

Yearly Expenses*25 = FIRE Number

For perspective, that means $1,000,000 can provide you with a $40,000/yr (plus inflation) forever.

Reducing Expenses

Since how much you spend is what determines how much you need to save, cutting expenses really accelerates the whole process. Frugality is your friend. Just think, if you’re spending $100/month on cable and decide to cut the cord, that’s an extra $30,000 you DON’T need to save. What about a car lease payment? Or a McMansion? Then we’re talking in the hundreds of thousands to MILLIONS less.

Note too, that by cutting expenses, you also free up money to save. The rate that you save (taken as a percentage of income) is what really determines how long it will take for you to reach financial independence. To illustrate this point, we’ll use an early retirement calculator.

Assume Bob is a 24-year-old new practitioner making $120,000/year gross with no prior savings and a 5% rate of return on investments.
If after taxes and expenses, Bob can save $18,000 per year (15%), he will hit financial independence in about 43 years at the age of 67. This is pretty standard retirement savings advice, by the way.
However, if Bob can jack up his savings rate to 30%, he can now retire in 28 years at the age of 52.
And, if Bob goes all-in on FIRE and gets that rate up to 50%, he can retire in a little under 17 years. Just after he turns 40. Bob wins.

See, math can be fun!

But cutting expenses isn’t just about choosing to go without cable or driving a more sensible car, it’s also about getting out of debt. Debts are expenses just like any other and should be dealt with as part of your FIRE plan.

Unfortunately, this is the stage of the FIRE journey that involves the most pain. In a way, it’s like committing to losing weight. Your budget is your diet and you’re only going to get the results you want by sticking to it. Thankfully, maintaining a budget is easier than ever thanks to apps such as YNAB and Mint.

Speaking of debt, even if you’re not fully sold on FIRE, getting out of debt is transformative and something everyone should strive for. I don’t agree with Dave Ramsey on much, but he is right when he says, “the borrower is a slave to the lender.” Debt such as student loans, car loans, credit cards, etc., chains you to work in a way that’s just unhealthy. You can have the greatest job ever, but if you need your whole paycheck to service your debts, your relationship with your work is going to suffer and you’ll probably start resenting it.

That said, there’s one important caveat to getting out of debt that pharmacists should keep in mind. Bringing the full-on beans and rice diet intensity to your student loans may not be the best course of action if you can qualify for loan forgiveness. With FIRE, optimization is key. You may find it more profitable in the long run to forgo paying off your student loans outright if you qualify for some of these programs. Check out this YFP podcast episode on how to optimize forgiveness.

Another way to reduce your expenses could be refinancing your student loans or mortgage. Lowering your monthly payment on your mortgage or student loans will likely save you a lot of money each month. With these additional savings, you could put even more toward knocking out your debt! While student loan refinancing isn’t for everyone especially if you’re pursuing PSLF or non-PSLF loan forgiveness, you could earn up to $800 in a cash bonus from a reputable company YFP has partnered with!

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Investing

The umbrella of “investing” covers a wide range of topics but in this article, I’m only going to briefly touch on the two major types of investments most pharmacists will encounter on their journey to FIRE: paper assets and real estate.

Paper assets are those such as stocks and bonds that you can invest in using 401(k)s, 403(b)s, 457s, IRAs, and brokerage accounts. These are the types of assets that generate truly passive returns and, with a properly diversified portfolio, can make FIRE possible. That said, there’s no one way to go about investing in these.

Within the FIRE community, index investing strategies (aka. indexing), such as those advocated by JL Collins, are quite popular. Central to indexing is the focus on low-cost index mutual funds. What are those? Without getting too much into the weeds, they’re mutual funds that give investors a diverse basket of stocks or bonds (sometimes all of them) at little or no cost. In general, these strategies call for a gradual decline in the proportion of stocks (high risk, higher return) to bonds (low risk, lower return) over time. And, while this isn’t different from the conventional approach to investing, the emphasis on using funds with low costs can make the whole process more efficient. Is indexing the best way to go about FIRE? Maybe, maybe not. However, it is one of the most accessible and can get you started.

Beyond stocks and bonds, many FIRE devotees choose to invest in real estate. In addition to acting as an asset that isn’t correlated with either the stock or bond markets, real estate investing can provide a level of passive income that can decrease the amount of money you need to save in paper assets. While not necessary to FIRE, many investors find real estate to be a worthwhile pursuit and can accelerate your path.

Drawdown

Finally, after amassing your war chest, you need a way to get at it. Since the primary vehicle most people use is a retirement account, how do you get the money out before regular retirement age? Fortunately, the FIRE community’s good at finding loopholes. Between Roth IRA laddering, 72(t) distributions, or simply taking the money out at a lower tax rate and paying the penalty, there are ways to jailbreak your money in a way that makes sense.

How to Join the FIRE Movement

So how do you get started? First and foremost, make a commitment to taking control of your finances and making them a priority. Second, get your spouse or significant other on board (super important!). Third, take action in a way that makes sense for you. Lastly, join others in the FIRE movement by connecting with groups online. FIRE isn’t just a movement but a community.

So, if this all sounds good, I invite you to take charge and change your life.

Welcome to FIRE!

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Category: Fire

YFP 354: From PharmD to Debt Free to FIRE with Derek Schwartz, PharmD

Episode Summary

Key Points from the Episode

Episode Highlights

Links Mentioned in Today’s Episode

Episode Transcript

How Much You Need to Hang Up Your Coat: All About the Four Percent Rule

How Much You Need to Hang Up Your Coat: All About the Four Percent Rule

What is the Four Percent Rule?

Why it Matters

Where Did it Come From?

So What’s the Catch?

Should We Still Use the Four Percent Rule?

Conclusion

How to Save Half of Your Income

Eliminate credit card debt ASAP

Pay off student loans or optimize forgiveness

Work on reducing housing and transportation costs

Review recurring monthly expenses

Eat more at home

Keep entertainment free or low cost

Pursue additional income streams

Conclusion

The FIRE Prescription: How to Retire Early as a Pharmacist

The FIRE Prescription: How to Retire Early as a Pharmacist

What is FIRE?

Should You Join the FIRE Movement?

How to Retire Early as a Pharmacist

Safe Withdrawal Rates and the “4% Rule”

Reducing Expenses

Investing

Drawdown

How to Join the FIRE Movement

Compliance/Legal

Disclaimer/Privacy Policy

Firm Brochure (ADV Part 2)

Brochure Supplement (ADV Part 2B)

YFP Planning CRS

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