Why Nurses Should Play With FIRE (Financial Independence / Retire Early)
Congratulations! If you’re here at the last step in the series focused on financial independence, you’ve now made it through thousands of words filled with personal finance jargon, charts, tools, tips, and tricks. Hopefully this series has given you the knowledge, tools, and motivation to take control of your finances. Each piece in this series was meant to prepare your mind for the concepts in this last article.
If you haven’t read Part 1, 2, or 3, it would likely be helpful for you to spend some time and back and read through them for full context as the concepts in this article will build on the topics covered in those posts.
This article is specifically about FIRE: Financial Independence / Retire Early – a state of financial freedom that most or all of us are working towards every day. Most can only dream of retirement in their 60s or later, however nurses are in a position to achieve retirement much earlier.
Part 1 and Part 2 of this series dove into retirement accounts and the requirement of waiting until age 59 ½ until you’re able to start withdrawing funds without penalty. This age was used partly because of the laws and penalties, but also because most of us nurses won’t contribute enough to our accounts to do anything with it before we get to that age anyway. But, in this article, we are going to lay out strategies for cashing out your retirement accounts before age 59 ½, while taking minimal to zero penalties and paying minimal to zero taxes. Sound awesome? It is.
The World of Financial Independence
Disclaimer: I’m not a financial advisor (I’m a nurse!) and don’t pretend to be one online. We suggest consulting your tax and accounting professionals. This post is for informational purposes only.
What does “financial independence” mean?
For the duration of this article, I will refer to financial independence as “FIRE”.
FIRE is a simple concept: build multiple, passive means of income that generate enough money to cover all of your expenses. Once you achieve this, you have true time freedom. This could mean no more alarm clocks, long commutes or jobs leaving you underpaid and under appreciated. FIRE means you are free to spend time doing the things you love, with the people you love.
Here are some advanced strategies for generating more wealth and retiring early.
Early Retirement Account Withdrawal & The Roth IRA Conversion Ladder
This strategy is one of the fundamental pillars of the FIRE plan as it allows you to withdraw money from your retirement accounts before the official retirement age without incurring an early withdrawal penalty.
How it works:
- When you hit your magic number and quit your job, you can immediately roll your 401k/401a into a Traditional IRA without paying any taxes or penalties.
- You then can convert the money from a Traditional IRA to your Roth IRA. You will pay taxes on this conversion, but since you are in retirement and don’t have a regular paycheck, your taxable income will be low, so you will pay minimal taxes on the conversion.
- After 5 years (known as the “seasoning” period), the money you converted from your Traditional IRA to Roth IRA is now considered a contribution!
- If you recall from Part 2, Roth IRA contributions can be withdrawn at any time tax and penalty free, regardless of your age, as long as your Roth IRA has been open for 5 years or more.
You now have access to your retirement funds penalty free!
Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) are tax-advantaged medical savings accounts available to those enrolled in a high-deductible health plan (HDHP). A high-deductible health plan is an insurance plan that typically has higher deductibles and out-of-pocket maximum limits but much lower monthly premiums.
With an HDHP, you’re not consistently spending money on premiums for services that you’re not using. You essentially pay only for what you use – which can be very minimal if you don’t take medication regularly or have a medical condition that may require frequent tests or medical visits. This enables you to save money upfront and then allocate those dollars on a pre-tax basis to an HSA, where they can earn interest or be invested (in the same type of funds as your 401a/k/403b). And the cherry on top is that preventative care doesn’t require you to meet your deductible to be covered.
An additional benefits of HSAs is that the tax-free dollars can be used for an abundance of qualified medical expenses. The money in your HSA is yours forever and doesn’t ‘expire’ at the end of the year. And you can switch off of an HDHP to another type of insurance without losing your HSA*.
If you don’t use the money for healthcare expenses, you can withdraw money from the account for non-medical expenses after age 65, but it will be taxed as income. So you can keep growing that pile of money and have something available in case you get sick when you’re older, at which point you will easily have the funds to cover any procedures or medications.
*The one thing to be particularly mindful of is that if you no longer have an HDHP, you are not eligible to contribute tax-free dollars to your HSA and you may be charged a maintenance fee on the account.
Diversifying Your Assets
Asset allocation is determining what percentage of your total wealth goes toward certain types of assets. It’s the secret sauce of investing. If all of your wealth was invested in the S&P 500 Index Fund, then your asset allocation will be 100% stocks, but is that the best allocation for your needs?
The risk with being 100% in stocks is that if there is a huge market downturn around the time in which you plan to retire, your entire ‘nest egg’ will diminish in the blink of an eye.
For example, in 2008 the S&P 500 Index dropped a whopping (-)37% in one year.
If you were ready to retire in 2008 and were 100% invested in the S&P 500 Index fund, you would see your wealth cut by ⅓ in just a year. This was thus a truly devastating year for retirees (or those who hoped to retire).
Asset Allocation: Your Age in Bonds / The Rest in Stocks
One common strategy that is often shared in personal finance circles like Reddit’s /r/financialindependence is an asset allocation of “Your Age in Bonds”. This strategy recommends that you invest a percentage proportional to your age into bonds while investing the rest in stocks. For example, if you’re 25 years old, then you will have 25% of your net worth invested in bonds, and 75% in stocks.
We haven’t discussed bonds at all in this series because we have been focusing primarily on maximizing the growth. Bonds are known as one of the safest place for your money. They come in many flavors like Government Bonds, Corporate, and Municipal. Basically a bond is a loan to someone to finance projects or operations. For example if your city was building a new airport, they would get the money for the project through a bond and would pay back the lenders plus interest.
Bonds are a safe place to park your money because governments and huge corporations rarely go bankrupt which would lead to them being unable to pay their loans back.
Similar to stocks, there are experts that focus solely on which bonds to purchase at which time which can get very complicated quickly. In the same way we can invest in the S&P 500 Index Fund and get a piece of the top stocks, we can invest in a Total Bond Market Index Fund which gives us a piece of all of the bond market.
Let’s use our earlier example of having 100% in stocks in 2008 where someone with an asset allocation of 100% stocks would have lost 37% of their net worth in one year.
If you were 100% in bonds in 2008, your portfolio would actually have grown by 5%
You may be asking, “If bonds are so safe then why don’t we invest all of our money there?”
The rationale is that bonds don’t offer the same growth opportunity as stocks do. For example, the best year for the S&P 500 Index Fund was 2013 where we enjoyed a 32% return. The best year for Vanguard’s Total Bond Index was in 1995 with a 18% return. Over the last 10 years the return has been much lower at around 3.49%, which barely keeps pace with inflation.
By adopting a “Your Age in Bonds” strategy, you will have the majority of your portfolio in more risky assets like stocks when you are younger and are still able to keep working during a market downturn. As you get older and closer to retirement, you will have more of your portfolio invested in less volatile assets like bonds which reduces the risk of losing a significant amount of your savings when you need the money most.
In practice, the act of adjusting your asset allocation is known as “rebalancing” your portfolio, and most people do it every year.
For example, let’s say you are 25 years old and are using the “Your Age in Bonds” strategy so you have 75% stocks / 25% bonds and your portfolio is worth $100,000. In other words, you have $75,000 worth of stocks and $25,000 worth of bonds. Let’s say your stocks had a particularly good year earning $50,000 in gains and your bonds didn’t gain or lose any money, fantastic! Now you have $125,000 in stocks and $25,000 in bonds, for a total of $150,000.
$125,000 in stocks divided by our $150,000 total net worth will give us an asset allocation of 83% stocks and only 17% bonds. Since we are trying to keep our ratio at 75%/25%, all we have to do is sell some of the stocks and buy some bonds to restore the proper ratio for the next year.
And that’s it! Pretty simple right? If you look at the fine print of many Target Date Funds you’ll see that they are just rebalancing your portfolio for you over time. We are replicating their strategy without paying all their active management fees! Additionally, by choosing simple index funds like the S&P 500 Index and Total Bond Market Index we don’t have to confuse ourselves with all the investment options.
Think this ratio is too simple?
Warren Buffet is the 3rd richest man in the world, and has one of the few actively managed funds (Berkshire Hathaway) that has actually beaten the S&P 500 Index Fund over many decades. Berkshire Hathaway’s Class A shares are worth an incredible $303,300 per share! #Baller.
In a 2013 letter to shareholders, Buffet shared that upon his passing, “the trustee of his wife’s inheritance was instructed to put 90% of her money into a very low-fee stock index fund and 10% into short-term government bonds”.
Buffet has the resources and the knowledge to invest in the most complex and expensive financial instruments known to man, but when it came to the wealth of the most important person in his life, he trusted a simple portfolio of 90% stock index fund / 10% government bonds.
“Knowledge is a process of piling up facts; wisdom lies in their simplification.” – Martin H. Fischer
Real estate investing is a tricky proposition. On one hand it can be a great way of hitting a home-run that changes the trajectory of your finances. For example, the multi-family house that I live in was last sold in the the 80s for $60,000 and is worth well over $1 million now. That’s a big win for my landlord whenever she decides to sell!
Additionally we can qualify for loans such as the FHA Loan where we pay a fraction (3.5%) of the total value of the house up front, and pay the rest off over 15-30 years. As far as I know I can’t get a loan where I put down 3.5% and purchase $350,000 worth of S&P 500 Index Fund Shares!
The downside with real estate is that because you are making such a huge investment with money you don’t have, a mistake can have devastating consequences. We most recently saw this in the Great Recession of 2008 which was driven by an avalanche of over-extended mortgages with predatory interest rates that couldn’t be paid back.
Many index-fund investors will quickly point out that if real estate investing were a better investment than just putting more money into the S&P 500 Index, then you could simply invest in a REIT which is a Real Estate Index Trust. Like Mutual Funds, REITs give you a piece of a collection of real estate properties, however the historical return of REITs is lower than the S&P 500 Index, so it’s typically better to just put more money into an Index Fund.
From a purely mathematical perspective, they are 100% correct. However, there is definitely something to owning real estate, or a home. It’s ‘the American Dream.’
Real Estate can also play a big role in our early retirement goals because housing/lodging is one of the expenses we will always incur. Whether we are renting or owning, we always need a roof over our head.
Earlier when we were talking about withdrawing money from your retirement accounts tax free, one of the important factors is that you need to withdraw a small amount of money in order to withdraw tax-free. Let’s review the capital gains tax rates:
A single filer will pay 0% from $0 – $39,375, whereas a married couple will pay 0% from $0 – $78,750 –
That means if you’re married and you’re able to keep your annual expenses under $78,750, and the money you are bringing in is coming from long-term capital gains, you will pay zero taxes on your withdrawals.
Real estate plays a factor with FIRE because rent or mortgage payments are big expenses which may require you to withdraw more than the $78,750 mark which would result on any additional money getting taxed at a 15% rate. That is still a lower rate than it would be when you were working as a nurse, but it would be ideal if we could avoid paying any taxes at all.
Therefore, if you are able to completely pay off a home before you hit FIRE, then you won’t have to factor a mortgage into your expenses, which will make it much easier to keep your family’s expenses under $78,750.
If you are interested in real estate, I encourage you to check out the following resources:
- BiggerPockets – Everything you need to know about Real Estate Investing
- Book: Rich Dad, Poor Dad by Robert Kiyosaki
When you listen to The BiggerPockets Podcast, at the end of the show they ask every guest what their favorite books are. By far the most common answer is Rich Dad, Poor Dad. If one successful person recommends a book you should take notice. If two recommend the book, it may be a coincidence. If dozens of successful people all recommend the same book, it’s a safe bet that you’ll get something valuable from reading the book.
MrMoneyMustache, or MMM, is one of my idols. His blog has been inspirational and has had a huge impact on my life. He was a software engineer that retired with his wife at age 30 when they started their family. They weren’t born rich, though it’s important to note they both had jobs that paid very well (though not that much more than staff nurses).
Through a combination of extreme frugality, real estate investing, and retirement account investing, Mr and Mrs. Money Mustache were able to achieve FIRE at an incredibly fast rate. His blog opened my eyes to things like:
- Biking to work to save money. Fun fact: I never rode a bike as a kid, so the first time I rode a bike I was age 25. My co-workers at the hospital taught me which was a hilarious and humbling experience.
- Commuting long distances is very expensive. You can justify spending thousands more dollars on housing to be close enough to bike to work.
- FIRE doesn’t mean laying on a beach or wasting away on a golf course somewhere. Instead you can work on projects that you are really passionate about. And it turns out when you aren’t worried about your bills, you can focus on high-quality craftsmanship, which usually leads to even more money getting thrown your way.
- Assuming that you are comfortable with your current lifestyle and your expenses stay consistent, “If you can save 50% of your take-home pay starting at age 20, you’ll be wealthy enough to retire by age 37. If you already have some assets now, you’re even closer than that. If you can save 75%, your working career is only 7 years.”
In addition to being frugal with daily purchases, MMM has made some serious investment gains by extending his frugality to his real estate investments. Specifically, he does all of the work on his properties. Roofing, tiling, drywall, etc. All of the things that are normally contracted out to people that charge thousands of dollars were done by MMM himself and documented on the blog.
Generating Passive Income
Whether you are gearing up for FIRE by increasing your income through a side gig or you are dreaming about retirement when you’ll have time to pursue a passion project…you have probably thought about starting an online business.
It has never been easier for you to build a business with a small team. With tools like WordPress and Squarespace, you don’t need programming knowledge to have a website, and with tools like Kickstarter you can get your business off the ground without breaking your own bank to do so.
Despite the low barrier to entry, building a successful business that generates passive income is incredibly challenging, and you would probably get a better return on your money by just investing more into the S&P 500.
However, sometimes the entrepreneurial bug bites you and you just HAVE to go for it. The following resources were incredibly influential in my entrepreneurial journey and are a great place to start for beginners.
If you decide to build an online business, I encourage you to read, watch, and listen to everything that Pat Flynn has produced. He started his first online business selling architecture exam study guides, and has since created passive income streams that are generating millions of dollars a year for him. When I built NewGradNurseHelp.com I primarily used strategies I learned from Pat’s site.
His story inspired me because most of the people I idolize like Steve Jobs and Elon Musk had terrible home lives. It seemed like part of being successful meant sacrificing relationships with your partner and children. Pat Flynn takes a completely different approach where he built businesses to generate passive income which allowed him to spend more time with his family.
His businesses will never grow to the level of Apple or Tesla, but Flynn shows that you don’t need billions of dollars to have the freedom to walk your kids to school, watch their recitals, buy a house in an expensive market, and have enough extra to donate to your favorite charity. He showed me that you can really have it all. #Lifegoals.
I was finishing nursing school in the middle of The Great Recession and it took me over a year to find a job. It seemed like the economy would never improve, and hospitals would never start hiring again, so I was feeling really down on myself. Then I discovered 4-Hour Work Week and it struck me like a ball of lightning. It taught me that you don’t have to rely on other people for a paycheck, you can make your own.
Despite how the title of the book sounds, the book isn’t about working less than you would normally. Instead the tips in the book are all about efficiency and automation. By outsourcing all of the things that you aren’t good at or don’t enjoy doing, you can achieve in 4 hours what most individuals can do in 40.
In the same way Rich Dad, Poor Dad is constantly recommended on the BiggerPockets real estate podcast, The 4-Hour Work Week is the most frequently recommended book on Pat Flynn’s Smart Passive Income podcast. It’s crazy to think that these two books have inspired an entire generation of entrepreneurs.
Tim Ferriss also has an excellent podcast where he interviews top performers and dissects what makes them great. He has recently started interviewing case study examples from his book of people that turned their online business into multi-million dollar companies.
Fun fact: you can even save money by skipping breakfast!
Become a Trusted Health Ambassador – $1000 referral bonus
You don’t need a ground-breaking business idea to generate thousands of dollars in extra income a month. All you have to do is refer a nurse that’s interested in travel nursing to our website. Once they work just 400 hours (33 12-hour shifts), you get $1,000 for referring them.
If you have a social media following of nurses or even a handful of friends that would be interested in travel nursing, you can boost your income significantly with just a few clicks. Can’t beat that!
Thank you for joining me on this personal finance journey. If any of these topics resonated with you, I highly recommend going down the rabbit hole and reading all the books and blogs I linked to in the post. I promise that reading any one of the resources will fundamentally alter how you view the world and the financial opportunities you have as nurses.
If you read them all, your life will never be the same.
Thank you again for spending so much of your valuable time reading through my posts, and I hope that these tools help you achieve your life goals, whichever direction you decide to go from here.
I wish you the best of luck and I hope to see you running down the path to FIRE!