122. Thinking Outside Your Retirement Account | working harder vs creating value

Will you have enough money to retire? What does that even mean? In this pod, our guest physician financial coach, Elisa Chiang, M.D. Ph.D. breaks down 

• Trading time for money and money for time
• Working harder vs creating value
• The FIRE (Financial Independence Retire Early) movement and why it doesn’t always mean living by austerity rules
• The risk of relying solely on retirement accounts to fund your post-career life
• Her biggest financial mistake
• How identity influences spending habits
• Incorporating real estate into an investment portfolio

Guest Bio: Elizabeth ‘Elisa’ Chiang, M.D. Ph.D. is a board-certified ophthalmologist and fellowship-trained oculoplastic surgeon who found her way into personal finance and real estate investing during her MSTP program, aspiring for FIRE long before it became mainstream. Battling burnout from her work in a hospital system, she turned to real estate as her avenue to financial independence, complemented by her newfound passion for life coaching. With active involvement in rental properties and passive investments in syndications and real estate funds, Elisa now helps others achieve financial independence while embracing life’s journey. Learn more at https://www.growyourwealthymindset.com/

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We Discuss:

Why a high income does not equate to wealth

• High physician income after training does not automatically lead to wealth; focusing on what is retained rather than just earned is crucial.
• Working for money continually equates to being “just over broke,” as without active work, there’s no income generation, leading to potential financial instability.
• Turning income into wealth involves making money work for you, ensuring it generates more income even when not actively working.
• Improving relationships with money for physicians often means addressing the separation between money and service, acknowledging that earning more doesn’t necessarily require working harder or longer hours.
• Many physicians face mental blocks around money, associating increased earnings with increased work hours, despite regulations like the 80-hour work week cap for residents.

Working harder vs creating value

• Financial success is not directly tied to the amount of time or energy spent working; it’s about the value one creates.
• Notable self-made billionaires like Jeff Bezos, Warren Buffet, and Bill Gates achieved their wealth by creating significant value rather than merely working longer hours.
• Taylor Swift’s example illustrates that creating value, in her case through music, can lead to substantial earnings without necessarily working more hours than others.
• The notion of value creation is pivotal in understanding wealth accumulation, emphasizing the importance of impact over the quantity of work.
• Individuals seeking financial advice or coaching often need to shift focus from working harder to creating more value.

Once debt is gone, attention to money can dwindle 

• Individuals often begin to accumulate money in their bank accounts without a clear plan once their student loans or other debts are forgiven or paid off.
• The absence of debt can lead to a lack of direction on effectively managing and growing surplus funds.
• The challenge then becomes not just saving money but making informed decisions on investing or utilizing it to create further value.
• Overcoming the inertia and fear associated with investing is vital for financial growth post-debt.

Finding a place to start investing can be overwhelming and lead to inertia

• Uncertainty about investing and the fear of losing money can cause us to hesitate, keeping our savings idle in bank accounts.
• Even those familiar with basic personal finance and index fund investing seek further diversification to accelerate wealth growth, exploring options like real estate, syndications, and private equity.
• The abundance of investment choices can lead to overwhelming feelings and inaction due to not knowing where to begin.

How to navigate a scarcity mindset

• Addressing a scarcity mindset involves understanding individual triggers and patterns in financial decisions, such as hesitance to spend or invest due to fear of loss.
• Reflecting on personal and familial financial backgrounds can provide insights into the origins of one’s scarcity mindset.
• Deliberate decision-making, like choosing to buy organic for health benefits, shows that it’s possible to overcome scarcity thinking in specific areas by prioritizing values and long-term benefits.
• Recognizing and acknowledging areas where one feels comfortable spending can serve as a foundation for challenging and gradually shifting scarcity-based thinking in other financial aspects.

How identity influences spending habits

• Self-identity is essential in shaping behaviors and habits, including financial decisions and lifestyle choices.
• Adopting an identity (e.g., seeing oneself as a runner) can enhance commitment to related activities (like regular running), demonstrating the power of identity in influencing behavior.
• Spending on items or services that align with personal values and identity (such as organic foods or quality bicycles) tends to result in greater satisfaction and less regret, even for higher-cost items.

Money can buy time, but there’s a catch

• The trade of money for services like Calendly to streamline scheduling demonstrates the concept of buying time to free up hours for more valuable activities.
• The high value placed on buying experiences and time reflects a shift in personal investment priorities toward freeing up time for creativity and productivity.
• Initial perceptions of subscription services as too expensive did not consider the potential time-saving benefits and the value of that time.
• When you’ve freed up time, what do you want to do with it? Work more, play more?

Elisa’s biggest financial mistakes

• Trusting other people because they sounded confident and experienced, instead of trusting her instincts, led to financial losses.
• Being swayed by a real estate agent’s assurances about a property being a good investment without conducting thorough personal research was a mistake.
• Selling real estate properties she owned instead of refinancing and renting them out to benefit from appreciation and cash flow was a significant financial error.

How to decide if a real estate investment is a good (or bad) deal

• Evaluating a real estate investment involves assessing the expected return on investment, including all potential upsides and downsides.
• Considering whether the potential downsides of an investment are manageable and if the potential upsides justify taking on those risks
• The decision-making process incorporates the financial returns and the investor’s capacity to handle the investment’s inherent risks and challenges.
• The approach to determining the viability of a real estate deal is part of a broader personal financial mindset and strategy, which encompasses both overarching goals and specific, actionable plans.

Elisa’s big-picture financial strategy

• Maximizes retirement accounts and performs backdoor Roth conversions, allocating these funds primarily into stocks, bonds, and index fund investments.
• Invests most non-tax-advantaged account funds in real estate and some in private equity.
• Started real estate investing early, driven by a desire for independence from traditional employment and micromanagement.
• Contributions to a Roth IRA began immediately after undergraduate studies, following parental advice, with investments in the account actively managed after gaining personal finance knowledge during graduate school.
• The investment and financial planning approach reflects a proactive and diversified strategy to achieve financial independence and resilience.

Real estate investing for positive cash flow

• Inspired by “Rich Dad Poor Dad” by Robert Kiyosaki, began real estate investing by buying, renovating, and then selling houses, later realizing that retaining and refinancing these properties for rental could have led to more significant wealth through positive cash flow and appreciation.
• Initially, handled non-skilled tasks like painting and gardening herself while hiring professionals for skilled labor such as installations and major renovations.
• Transitioned from long-term rental properties due to unfavorable city regulations impacting profitability to focusing on a short-term rental (Airbnb), which is self-managed and generates cash flow.
• Diversified into real estate syndications and private equity investments, indicating a broad and strategic approach to real estate and overall investment.

If you only think about maxing out your retirement account, you probably won’t retain the same lifestyle when you stop working

• Solely maxing out retirement accounts may not suffice for physicians to maintain their lifestyle post-retirement, especially if they start investing only upon becoming attendings, typically in their mid-thirties.
• The delay in saving due to the extended period of education and training, coupled with the need to repay substantial educational loans, impacts the ability to build a sufficient retirement nest egg.
• Assuming a 4% withdrawal rate and a 7% real rate of return, 30 years of maxing out retirement contributions would yield approximately $120,000 a year, which may be inadequate for those accustomed to a higher standard of living.
• Physicians, with an average income of around $330,000, who max out their retirement accounts but fail to invest elsewhere, are likely spending well beyond the sustainable $120,000 annual retirement budget.
• The gap between pre-retirement and projected retirement income highlights the need for a more diversified and aggressive investment strategy beyond traditional retirement accounts.

Beyond real estate investing, what are other areas for investment to produce cash flow?

• Private equity involves owning a stake in companies that are not publicly traded, offering a different investment avenue from traditional stocks and bonds.
• Investing in Real Estate Investment Trusts (REITs) within retirement accounts allows for real estate exposure without directly purchasing property.
• Self-directed IRAs and 401(k)s enable investment in a wide range of assets, including real estate syndications and private equity, providing more control and diversification.
• The constraints of retirement accounts, such as 401(k)s or IRAs, often depend on the financial institutions managing them, which typically limit investments to stocks, bonds, and mutual funds.
• Upon leaving an employer, individuals have the flexibility to transfer their retirement accounts to different institutions, potentially broadening their investment options to include equities, debt, and real estate.

F.I.R.E Financial Independence Retire Early | Survival, Regular, and Fat FIRE

• “Survival FI” is the stage of financial independence where one has enough passive income to cover basic living expenses but with little room for luxury or discretionary spending.
• “Regular FI” presumably offers a more comfortable lifestyle than Survival FI, allowing for some discretionary expenses and a standard of living beyond just the basics.
• “Fat FI” represents a level of financial independence that supports a lavish lifestyle, including luxury items and experiences, funded by substantial passive income.
• The concept of financial independence and retiring early (FIRE) involves calculating the required passive income to support one’s desired lifestyle without the need for active employment.
• Lifestyle creep, the phenomenon where increased income leads to higher spending, affects perceptions of necessary income for financial independence, making personal financial goals flexible and subjective.

How to figure out how much FIRE money you’ll need to stop working

• “Regular FI” involves maintaining your current lifestyle in retirement, requiring an assessment of how much income your assets need to generate.
• Assets, typically stocks and bonds, may need to be partially liquidated to provide cash flow, as dividends from stocks are often low and bonds, while providing higher dividends, appreciate less in value.
• A stock and bond portfolio can provide sustainable cash flow by selling off a small portion while allowing the rest to grow, supporting future financial needs.
• Real estate investments offer a distinct advantage by providing regular cash flow from rental income, which can cover expenses and generate surplus cash without needing to liquidate the asset.
• Real estate provides ongoing income and appreciates over time, offering immediate financial benefits, long-term growth, and tax advantages.

Will my retirement funds actually last? Rate of withdrawal and sequence of returns risk 

• The 4% rule isn’t a rate of return but a withdrawal rate, meaning you withdraw 4% annually from your retirement portfolio.
• Research by financial analyst William Bengen suggests that with a 4% withdrawal rate, portfolios have a high chance of lasting at least 30 years.
• Sequence of returns risk refers to the impact of market fluctuations on your portfolio’s sustainability, where retiring during a market downturn can significantly reduce its longevity.
• The performance of the stock market during the initial years of retirement is important for portfolio longevity, with early crashes posing a greater risk to sustainability.

Fat FIRE | Spending more in retirement than you did while working

• Fat FIRE involves spending and enjoying more during retirement than during the working years, accommodating a luxurious lifestyle.
• Fat FIRE involves a more luxurious retirement lifestyle, requiring a larger portfolio to sustain higher spending levels over an extended period, often beyond 30 years.
• Retiring early allows for indulging in activities like extensive travel or expensive hobbies that were not feasible during the working years.
• To sustain Fat FIRE, meticulous financial planning is necessary to ensure sufficient funds to support the desired lifestyle throughout retirement.
• Fat FIRE contrasts with Survival FIRE, where retirees live frugally, focusing on essential needs with limited luxury or leisure expenses.
• Achieving Financial Independence (FI) doesn’t necessarily mean immediate retirement; it can lead to gradual retirement or pursuing work based on personal interests and preferences after FI attainment.