Early Retirement Now with Dr. Karsten - Podcast #246 | White Coat Investor (2024)

Transcription – WCI – 246
Intro:
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahle.

Dr. Jim Dahle:
This is White Coat Investor podcast number 246 – Early Retirement Now.

Dr. Jim Dahle:

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Dr. Jim Dahle:
Thanks for what you do out there. Here we are in January. Flu season, RSV season, still COVID season. Your work's not easy. If nobody has said thank you today, let me be the first.

Dr. Jim Dahle:
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Dr. Jim Dahle:
In a lot of ways, paying off your student loans quickly is like a trial run for financial independence. If you can get them paid off in just two to five years then you can certainly become financially independent in 15 to 20.

Dr. Jim Dahle:
All right, we've got a special guest today that I've been looking forward to speaking with ever since we scheduled this. Let’s get him on the line.

Dr. Jim Dahle:
Today's guest is Big ERN a.k.a. Karsten. I should call him Dr. Karsten. He's the mind behind in the Early Retirement Now blog. He's called Big ERN because he's a pretty tall dude at 6'6, which was pretty clear when we were both standing hunched over on the plane next to each other on the flight back from FinCon this year. He was hunched much more than I was.

Dr. Jim Dahle:
He's from Germany originally, but came to the US for school at Purdue and then Minnesota, where he completed a PhD in economics. He worked for the Federal Reserve for a while and taught economics. Then he joined the research department of investment manager and got a CFA designation.

Dr. Jim Dahle:
He spent 10 years there before punching out to live the FIRE lifestyle a few years ago. He spent the first few months out on a world tour, visiting 20 plus countries to settle down in the Northwest with his wife and daughter.

Dr. Jim Dahle:
Early Retirement Now is a popular FI blog primarily because of Karsten's rigorous academic approach. Today, we're going to explore some of his favorite topics to blog about and get his take on a lot of controversial areas of personal finance and investing. Karsten, welcome to the podcast.

Karsten:
Oh, thank you for having me. Thank you.

Dr. Jim Dahle:
Now, how did you end up in economics to start with?

Karsten:
I've always been interested in math, but then as I graduated from high school, I was looking for something a little bit more applied than just pure math. So, I enrolled in business and economics in college, back in Germany. And then I found business a little bit too lightweight, sorry to say that, economics was more fun. I transferred to economics.

Karsten:
And I also had the opportunity to come to the US for PhD studies in economics. And so, there was at the University of Minnesota where it says fun fact, I actually overlapped with the Physician on FIRE. Of course, I didn't know him back then, but we spent, I think, three years apparently together at the University of Minnesota. He was in med school and I was over on the west bank in the econ department.

Dr. Jim Dahle:
Well, you guys were there at the same time, but it's interesting as you both ended up getting bitten by the FIRE bug later. When did you get bit by the FIRE bug?

Karsten:
Yeah, pretty early on. I generally liked all the jobs that I did, but I realized that I'm not going to do this until I'm 67. And it became very obvious then in 2008. I had just left the Federal Reserve. It's a very safe job obviously. And I went to work for Bank of New York Mellon Asset Management. And during my first week on the job Bear Stearns failed and then six months later, Lehman Brothers failed.

Karsten:
In fact, in 2017, I had interviewed for Lehman Brothers and for AIG and out of the three job opportunities I actually picked the right one, and I stayed with BNY Mellon, but it's definitely shook you up a little bit. You realize I'm not going to do this job really until I'm 67.

Karsten:
And basically, what I did is I didn't even have to change much. I saved about 50% to 60% of my net income, which was very easy to do because it was a highly compensated job. I basically kept my lifestyle that I had from the FED and just lived the same lifestyle. It was a comfortable lifestyle. It was not like I was overly frugal or anything. And I thought, “Well, if I do this job for 10 years, I should have enough money to retire.” And then sure enough, in 2018, I finally pulled the plug.

Dr. Jim Dahle:
Around here, we call that “Live Like a Resident.” And if you keep doing it for 10 years after you get out of residency, you can basically retire right then.

Karsten:
That's right.

Dr. Jim Dahle:
With no special investments. No particularly complicated thing. You just got to keep living the same lifestyle while you're making more.

Karsten:
Yeah. It's a lot of parallels.

Dr. Jim Dahle:
2018 was your early retirement day, right?

Karsten:
That's right.

Dr. Jim Dahle:
What surprised you about early retirement? Both for good and bad and what hasn't surprised you?

Karsten:
We planned this very well. I don't think that we had any major surprises. I was obviously surprised in a very positive way, how well the stock market has performed. We are now three and a half years almost to the day into early retirement. And our net worth has grown by 70%. That's obviously something that I hadn't taken into account, so it was not in my wildest dreams. So that's the good surprise.

Karsten:
I'm also surprised that I'm still quite busy. Between household chores, blogging, I picked up a consulting gig, and teach an online class at UC Berkeley extension. I've never felt bored. That’s the good news. I was a little bit worried about how I am going to fill my week. And it never been an issue.

Karsten:
I think it's still a very good balance. I have the flexibility to do something for fun, even during the week. And any Tuesday morning, if the weather looks good, I can go skiing or hiking, or do some other fun stuff. We can still travel extensively and we have the flexibility to do that without the constraints of a corporate job. By and large, everything has worked out as expected. And there are no major surprises there.

Dr. Jim Dahle:
Yeah. The tagline on your blog is you can't afford not to retire early. Do you think most people should retire early if they can?

Karsten:
Yeah. Funny thing is, that blog has been in business for five years and I haven't changed the tagline. And I think it's still a pretty good tagline. Obviously, most people shouldn't retire early, right? Because we need people to work as business leaders, as innovators, medical professionals too.

Karsten:
Many of them take a lot of time to become proficient in what they're doing. The age 40 to 60, that's the most productive time of their earnings years. And they probably shouldn't retire too early. The economy needs you, so not everybody should retire early.

Karsten:
But the reason why I use this quote goes back to my background in economics, and think about it as opportunity cost. The way we teach opportunity cost to college kids is this example.

Karsten:
Imagine you want to go out on Friday night and party, and the opportunity costs are that you could have instead picked up a shift at your waitering job. And the opportunity cost is that lost income. I think that's a really beautiful example of opportunity cost.

Karsten:
But then in mid-career, I realized that it switches. I had enough money and I realized that every day I go to work, it creates this opportunity cost that I can't spend time with my loved ones. I can't travel as much as I want. I don't have enough time for hiking and skiing and snowshoeing in the winter.

Karsten:
It actually turns out there's also an opportunity cost in terms of making too much money and not having enough fun. There's this beautiful quote by Dietrich Bonhoeffer, “Time is our most precious resource for it is the most irrevocable.” Think about that. Whether you can afford to keep working when considering that limited time you have on the planet. This is why I still like this tagline.

Dr. Jim Dahle:
Well, I guess we'll stop the podcast right there. I'm off to the ski resort. See you later. All right. No, but I certainly feel that these days. I reached financial independence, you and Leif for about the same time when you guys left your main work there. That's about the same time I reached financial independence as well and continued to work since then, but I think a lot about that opportunity cost. So far, I've looked at it as long as I can do everything I want to do and still keep working. I've kept working, but the more stuff I find to do out there, the more I feel that opportunity cost.

Karsten:
Yes, exactly.

Dr. Jim Dahle:
For sure. All right. Well, one of your favorite topics on your blog is to write about safe withdrawal rates, withdrawal strategies. In fact, you have a series of blog posts on the topic, that's almost up to 50 posts. And you get into lots of weeds in those posts, but I wanted to ask you just a few higher-level questions on the topic. And the first one is what do people get wrong most frequently when talking about safe withdrawal rates?

Karsten:
Where do I even start? Because there are so many issues with the 4% rule, but the major issues are, the first one is not understanding how much of a difference your personal idiosyncratic parameters make on your withdrawal rate.

Karsten:
You take a 30-year-old with a short work history, long retirement horizon, decades until you can get social security or pensions. And probably you don't even have a pension in this day and age. And that person will probably want to do a safe withdrawal rate, much less than 4%.

Karsten:
And then on the other hand, on the other side of the spectrum, you take a 50-year-old who's not too far away from pensions and social security. Probably has much higher pension accruals and social security benefits. Has a paid-off house. You should probably target much more than 4%.

Karsten:
My number one beef with the 4% rule is not so much the 4% parts, it's more of the rule part. And the 4%, again, I don't want to look like that I'm the overly conservative and the Grinch of the FIRE community. Actually, I gave more advice to people that should have done a higher than 4% withdrawal because they fell into that latter category. They're a little bit older. They have a professional career, they have some very generous benefits, and they could have easily done a 5% or 6% initial withdrawal. If they had just relied on that Trinity Study result, they probably would still be working, instead of retiring early. That's the one dimension, that's the idiosyncratic dimension.

Karsten:
The other dimension is market valuation, as people are not factoring in asset valuation. A lot of people point to the Trinity Study, and then they say, “Well, the 4% rule is very safe. It has a 98% success rate.” And that's true, but the question is, how would this rate change if we look at not all of the prior historical simulations, but we look at only the prior retirement cohorts that faced conditions that are similar to what we faced today. Very expensive equity multiples, or CAPE ratios in the 30s and above, and very low interest rates.

Karsten:
And then when you slice the prior retirement cohorts, and you take out all the irrelevant cohorts that might have retired at the bottom of the bear market, well, then of course you can do a much higher, safe withdrawal rate/

Karsten:
And if you look at only the cohorts that retired during conditions that were similar to today's conditions, you have a much higher conditional failure rate and a much lower conditional success rate. Look at not just these unconditional Trinity Study results, but also do some conditioning to factor in that we have very expensive equity valuations.

Karsten:
And then also, this is one of my favorite pet peeves, is not understanding percentage calculations. Because you hear a lot of people say, “Well, 3%, 4%, 5% withdrawal, what does it really matter? It's just a percent difference.” And of course, that's wrong because imagine you have a $2 million nest egg, and then going from a 3% or 4%, means you go from $60,000 a year to $80,000 a year annual budget. And that's not a 1%, that's a 33% difference.

Karsten:
When I do some of my simulations, and people roll their eyes and say, “Oh my God, how can you do the percentage of the safe withdrawal rate? How can you go down to 3.3% or 3.35%? Isn't that overkill in terms of precision?” Well, it's overkill in terms of precision if you just look at the headline number, but if you look at how much that actually means in terms of your annual withdrawals, it could be very substantial amounts.

Karsten:
If you go from a 3.5% to a 3.75% safe withdrawal rate, it is a meaningful dollar amount. And then also if you look at some of the back tests that I'm doing, sometimes it's just a 0.25% difference in the withdrawal rate. And you go from something that is super safe to something that's already really, really shaky in the historical simulation.

Karsten:
So don't get too offended by somebody doing some more careful and robust and mathematically sound analysis. This is actually one of the places where you want to have a little bit more precision. And then again, if in the end you calculate your safe withdrawal rate and it comes out as 3.81%, nobody's going to blame you if you go from 3.81% to 3.8% or 3.9%. That's okay. But maybe you can do some rounding in the end.

Karsten:
But on the way to get your safe withdrawal rate, you probably want to cross all the T's and dot all the I’s and be a little bit careful. The rounding should be done at the end, because you don't want to compound any kind of rounding or estimation errors.

Dr. Jim Dahle:
Now, along your second point about valuations, we had Bill Bernstein on here a couple of weeks ago. And he likes to make the point, if you don't like expected returns going forward today with bond yields being so low, with expected returns on stocks being so low, consider the alternative, which is having a lot less money. That you haven't actually had this run up in asset prices, and yes, you've got higher expected returns going forward, but you might only have it on two-thirds of the money.

Dr. Jim Dahle:
And so, I think that comes into play as well when thinking about this is, yes, maybe you have to take a little bit smaller withdrawal rate, but you're also taking on a lot more money than you would be taking it on otherwise.

Karsten:
Right. In that sense, I'm a little bit worried about the people who just barely, barely scrape by with the recent run-up in equities. They just barely make it to the 25X or barely make it to the 4%. That's the danger part. But you're right. Obviously, most people should now look at their portfolio. Hey, this is a lot more than I expected and I can afford to do a little bit less of a safe withdrawal rate. And you don't have to do a lot.

Karsten:
When I first did this whole safe withdrawal rate analysis, I thought, “Oh my God, maybe if you have something like a repeat of the great depression, maybe no withdrawal rate is safe. Maybe we have to go down to 1% or below 1%”. But that's not true. I mean, all you have to do is you go from 4% to 3.3%, and you're fine, even in the worst possible scenario like the Great Depression. So, it doesn't take a lot of reduction. With the recent run-up, I think a lot of people will be in good shape.

Dr. Jim Dahle:
So you think the people saying use a 2% safe withdrawal rate are just as crazy as I think they are?

Karsten:
Yes. Yes.

Dr. Jim Dahle:
All right, let's get into the specifics. You are now an early retiree. What strategy are you using to spend your nest egg?

Karsten:
Right. Back in 2018, we looked at our net worth, and how much we expect in future cash flows. Pension. I have a small pension, social security for my wife and me. I looked at how much we can withdraw so that even in the historically worst-case scenario, we wouldn't run out of money. Not only not run out of money, but hopefully, have a little bit left that we can use to give to our daughter and to charities.

Karsten:
I think I calculated something like a 3.5% safe withdrawal rate. And then now, as I said in the beginning, our portfolio has grown by 70%. I don't see a reason for raising our budget by 70%. My personal retirement planning has now shifted from managing the risk of running out of money to almost managing the risk of over accumulation. Should we raise our consumption? Should we build in more fudge factors and more fun factors in the future?

Karsten:
In that sense, probably right now, I'm my worst customer because I don't even need all these safe withdrawal rate mechanics anymore because I'm probably pretty safe now. But again, I'm a little bit worried about the people that just because of the recent run-up, they just make it to something that looks like a reasonable retirement and how are they going to manage the next 10, 20, 30 years.

Dr. Jim Dahle:
You just spend what you want and look every now and then at what you're spending and make sure it's less than your calculator-safe withdrawal rate, that's it? That's your whole strategy?

Karsten:
Yeah, that's it. And again, we don't have too much of an issue in terms of asset location, and we have enough money in taxable accounts that we can tap without having to tap any of the retirement accounts where we have to worry about penalties or some of these other ways that you can tap these accounts penalty-free. We don't even have to worry about that. So, yeah, as right now, our retirement strategy is pretty easy. It's just pretty much coasting.

Dr. Jim Dahle:
And you're only spending from your taxable account at this point.

Karsten:
Right.

Dr. Jim Dahle:
Yeah. Do you think your strategy is right for most people and if not, what should they do differently than what you're doing?

Karsten:
Well, my specific strategy, obviously it works only for me. As I said before, I've done case studies for people that can probably pull out as much as 5%, 6%. I think that my general approach is very attractive. In the sense that you look at your horizon, how much money do you want to leave to your kids and charities, what are your supplemental cash flows?

Karsten:
And then you look at the historical fail safe. That gives you the certainty that even if things are as bad as another great depression, you're still going to make it through it. For example, I got a lot of podcast requests in the fourth quarter of 2018 and the second quarter of 2020. That's when people panicked, “Oh my God, is this the end of FIRE?”

Karsten:
And I slept pretty well through that because I looked at my simulation and I said, “Well, my portfolio is robust to a repeat of the Great Depression or a repeat of the 1970s. The only thing I have to worry about is, is there a possibility that the future will be even worse than what we saw in the past?” I can't gauge what the probability for that is, but that's my little bit of that final residual failure probability that I have.

Karsten:
And obviously what you can do is if you have some flexibility, you can say, “Well, I withdraw a little bit more, and then if the market goes to hell, then I'm just going to reduce my withdrawals.” If you have that flexibility, that would obviously be something that you could do.

Karsten:
I think a lot of people should have that flexibility. Some people can pick up another job, can maybe reduce their consumption. The warning that I always issue is that people always believe that you have to be flexible only as long as the bear market lasts. And of course, that's not true. Because your portfolio not only has to go through the trough, it has to recover again. And it has to catch up with inflation again. That flexibility valve that people might use might be a lot more painful and a lot longer lasting than a lot of people realize. So, withdraw more, if you want to be flexible, but don't be surprised if that flexibility valve has to last a lot longer than you realize.

Dr. Jim Dahle:
Good tip. You have a small pension. A lot of people don't have a pension anymore and consider buying one from an insurance company using a SPIA. What do you think about that strategy of annuitizing part of the nest egg with the single premium immediate annuity?

Karsten:
Yes. I recently looked at the annuity yields and they look atrocious. For me, a 47-year-old male, I think if I handed over $100,000 to that SPIA, I would get $347 per month. That's about 4.2% annualized. At first glance, it looks great. It's a more than 4% withdrawal rate.

Karsten:
The problem is that you have to factor in that that's a nominal pay-out. This is going to be eroded through inflation. The only way to really compare that to a safe withdrawal rate is that you have to then still set aside some money that you transform into annuities later to make up for that lost income, because of inflation eroding your annuity payment.

Karsten:
And then with that annuity, you will also be well below 4%. That makes this whole annuity proposition a really bad deal. It's just because interest rates are so low right now. Even in the worst-case scenario, which would be something like a 1970s repeat, you could do better than with an annuity with just a regular portfolio.

Karsten:
The analogy I always use is that it is like, imagine you're on this “Deal or No Deal” show, and the last two briefcases have $100,000 and $200,000 in them. And then to buy me out of that gamble, you'll probably have to offer me $130,000, maybe $140,000. Maybe a little bit less than the expected value, but if they offer me only $100,000 and I'm saying, well, that's the worst-case scenario, then I'm just going to take the gamble. And if it goes well, I'm going to get the $200,000.

Karsten:
And it's the same with the annuity. The annuity is probably only as good as the worst-case scenario we've had during the 1970s. And if it's not the worst-case scenario, then not handing over money to an annuity company, to an insurance company and doing an annuity, I would still have my portfolio. And then I'd have something that I can give to my daughter or to charity.

Karsten:
In that sense, I'm not very positive on annuities. And until late 2020, I could have at least said that the one redeeming factor of annuities is that, well, at least inflation has been very contained. But then 2021 came around and we have the most recent number which was 6.2% inflation year over year. Yeah, that's going to erode your annuity very quickly if we don't get that under control. Now even that inflation stability is out the window. So that makes the annuity even less attractive.

Karsten:
But I always repeat that point that you have made on your blog often, that social security, obviously that is the one annuity that's actually a pretty good deal. Make sure you maximize that. There's some spousal claiming benefits and the way you time claiming benefits that you can use to maximize your lifetime benefits. And then social security is also inflation-adjusted. That's probably the one annuity that's still pretty good.

Karsten:
And again, I will also have the option to pay out my pension at age 55. And yeah, I'll also take a very sharp pencil and check out what are the pros and cons of taking the benefits right away versus taking the annuity. I think that these corporate pensions tend to be a little bit better than the SPIAs you can get in the free market. It might not be such a no-brainer. I might actually take that annuity and not pay it out as a lump sum. But I'll fight that battle in a number of years.

Dr. Jim Dahle:
Yeah. I think part of that might be selection bias for the single premium immediate annuities. Healthy people tend to buy them. You're clearly not a fan for an early retiree to buy one. What about somebody that's 70? Has your opinion changed at all? Or do you still think it's a lousy deal?

Karsten:
Obviously, you don't have quite the long-life expectancy, because again, you have this inflation uncertainty. How do I even gauge the inflation uncertainty? I'm 47 now. My wife is 39. That annuity, I don't even know how much is going to pay out in real terms. Maybe at age 70. If you get a decent yield on it and you are scared about sky high stocks, it would be more defensible, but again, you have to look at the exact numbers.

Karsten:
And again, sometimes these are annuity salesmen. They just quote you the yield. And they say, “Well, that's a much better yield than the bond market or even the stock market return.” But again, if you hand over the asset the asset is gone. You'll never get that back. You can't really compare that to a bond yield. You can't compare it to an equity, certainly not the dividend yield and not even the equity expected return. Yes, I agree that if you're a little bit older, you might consider the annuity. But again, I'm almost sure that might not be a very good deal either even for a 70-year-old.

Dr. Jim Dahle:
Now let's turn the page a little bit. You've written before about how you're not a fan of emergency funds. I've always seen an emergency fund as a bit of a Catch-22. In the beginning, when you really need one, it's hard to get one, and there's a lot of opportunity cost to save one up. And by the time it's easy for you to have one, you no longer really need it. Certainly, someone that's already FI or even anywhere close has no need for an emergency fund. Their entire nest egg function is an emergency fund. What do you think people should think about emergency funds?

Karsten:
Yeah. The way you put it is a lot more eloquent than my ramblings on the blog, but that's probably 90% of what I wrote in a whole sequence of emergency funds. Actually, that post was my first claim to fame back in 2016. And that was featured in a Physician on Fire's Sunday's best. And that was the first time ever anybody had reposted something I wrote. It's still a post that's very near and dear to my heart.

Karsten:
And again, you're completely right. Young investors face this opportunity cost often missing out on stock market returns. Because you still have your entire career ahead of you and you're more able to suffer that equity volatility.

Karsten:
And then I also think there's a bit of a behavioral component. If you don't keep your money in a money market account, but instead you put it in an equity index fund and that's already potentially, hopefully, it has grown a little bit and you have some capital gains. There is this additional mental burden of spending that emergency fund on something frivolous. Like an emergency flat-screen TV or an emergency trip to Las Vegas. Something like that.

Karsten:
But then again, if you really do need the emergency fund, the roof caved in and something needs to get fixed right away. Again, I can get money out of an equity index fund just as quickly as I can get it out of a Fidelity money market fund. It's still accessible, but I like this little bit of this additional burden that you're not going to a tap emergency fund as quickly as you might touch a money market fund. But again, I agree with everything you said.

Dr. Jim Dahle:
The downside of course with that approach is it might be worth 40% less than you thought it was going to be worth when it comes time to have the emergency.

Karsten:
Right. Right. Yes, yes. And again, if you have only one single emergency in your entire life, maybe you could argue that way, but then again, you potentially have several emergencies throughout your entire lifetime, and sometimes all your equity holdings they're underwater. Sometimes they're wildly better than your money market fund.

Karsten:
Of course, if you have an emergency every six months, then that's probably not an issue with the emergency, but that's probably incorrect budgeting. If you average these pros and cons emergency fund in the money market versus the stock market, and you average this over say a 30-year horizon and every three years you have a major emergency where you have to fix the boiler or the roof, or the AC unit, yeah, sometimes you are underwater with the stock market, but you would think that maybe 60% or 70% of the time you are way ahead of the money market account with your equity index fund.

Dr. Jim Dahle:
Yeah. Fair enough. You're also not a big fan of robo-advisors. Why not?

Karsten:
They charge an additional fee. Usually, it's something like 25 basis points, AUM. And for that fee, you get two services. The first is the asset allocation recommendation and the second one is tax-loss harvesting.

Karsten:
And the funny thing is, why should I pay 25 basis points? Again, this is not a one-time fee, right? This is an annual fee. Why should I pay 25 basis points? Actually, just the other day I went to a robo-advisor webpage and they told you they recommended asset allocation. There's a sliding bar. You can enter your risk tolerance and it gives you the asset allocation. Why should I pay for something that they're already telling me for free on the website?

Karsten:
Or they can go to your website. I think you had a post the other day. It's actually an older post, but you have added to this. The 150 Different Portfolio Allocations that People Have Recommended. You get so much input and free advice on the internet. It's actually more of an issue of weeding out the bad advice and landing at something that is reasonable.

Karsten:
But in the worst possible case, you just take that robo-advisor recommended allocation, and you can implement that yourself again. You can implement that with the Vanguard funds, with the Fidelity funds. There's a lot of free information out there on how to do that.

Karsten:
The second service they give you is tax loss harvesting. In your taxable account, you can harvest taxable losses, and then you can write them off against your other taxable gains. And then even up to a certain upper limit of $3,000 a year, you can even write it off against your ordinary income. That's very useful, but it's also something that you can do yourself.

Karsten:
And I also want to point out that there are at least two tax pitfalls that I think the robo-advisors are not taking into account very seriously. I'm actually amazed that nobody has complained about this or even filed a lawsuit or something.

Karsten:
For example, the first thing is that unless you move your entire net worth, all of your financial assets, I should say, to the robo-advisor, where the robo-advisor can then make sure there are no wash sales. Because this tax-loss harvesting claiming tax losses only works if you don't have any offsetting transaction within plus or minus 30 days of that tax-loss harvesting transaction.

Karsten:
Obviously, the robo-advisors, if you hold say your taxable account and an IRA and a Roth IRA, if you hold that all with the robo-advisor, obviously the robo-advisor makes sure that when you harvest the loss in one account, you don't invalidate the tax-loss harvesting in your retirement account. But what if you hold the retirement account somewhere else?

Karsten:
And by the way, the robo-advisor also wants the fee for your retirement account. They might do the tax-loss harvesting, and it might be worth it on a standalone basis where the AUM fee compensates you. Yeah, you can make up the AUM fee through the tax-loss harvesting. But what if you have to keep all of your other assets too, where you cant do tax-loss harvesting? Say in a Roth IRA or in a traditional IRA.

Karsten:
The problem is what if you claimed your tax losses from your robo-advisor? But say in your 401(k) account, you made transactions that would invalidate your tax losses. That could be a very expensive tax liability.

Karsten:
The other tax liability is that it doesn't apply to people who say they start an account with a robo-advisor, and then they put new money and say, they put cash in there, and then that's invested in their ETFs. What some people might do is they take an existing portfolio of ETFs and mutual funds and then move it over to the robo-advisor.

Karsten:
Well, what does the robo-advisor do? They liquidate all the assets that don't fit into their mold. That are not on their list of ETFs that they are trading in their program, and that they rebalance the whole portfolio and potentially, realize such a large chunk of capital gains that even with all the robo-advising and tax loss harvesting that they might be doing over the rest of your lifetime, you will never recover that initial loss, the initial tax hit that they generated when they did the initial rebalance.

Karsten:
Be careful about that. If you want to do a robo-advisor route and you invest directly with them, make sure that you don't have any offsetting trades in your other accounts that are not with the robo-advisor. And never ever transfer any existing accounts with built in capital gains to the robo-advisor.

Dr. Jim Dahle:
Yeah. That's a real problem anytime you change advisors of any kind. If that advisor isn't good about working around the portfolio you've got, you may end up taking a hit every time you change advisors.

Karsten:
Exactly. And it's actually a reason to DIY. Because you can move your account from one broker to another broker and do it in kind without liquidating the assets. But it's exactly, as I said. You imagine going from one advisor to another advisor and that other advisor is “All of these funds, they are kind of junk and I'm going to move them to the funds that I like.” There would be a huge tax head ache because of that.

Dr. Jim Dahle:
Yeah. Speaking of DIY, do you feel the same way about target-date funds, target retirement, life cycle funds? Whatever you want to call them. Should investors use those or should they roll their own?

Karsten:
I wrote a blog post titled, “What's Wrong with Target-Date Funds?” First of all, to be sure, I think there's a lot of things that are right with target-date funds. If you're a hands-off investor, maybe you lack a little bit of discipline or organization. I think it's not a bad deal. It's certainly better than not contributing to the 401(k) at all, or putting your 401(k) contributions into a money market account.

Karsten:
But personally, I don't particularly like target-date funds. First of all, you can just implement them yourself and save the additional layer of fees. In that blog post, I showed that both Fidelity and Vanguard have the funds. You can just invest yourself in the underlying funds and there's no need to do the target-date funds. I think it's up to 10 basis points or so per year. It's not trivial.

Karsten:
And then on top of that, target-date funds are calibrated and optimized for very generic retirement savers. It would be somebody who starts working at the age between 20 and 25 with zero initial assets. And then this person accumulates assets very regularly, consistently over time, probably 40 to 45 years.

Karsten:
But not everybody will fit into that mold. What if you find yourself as a 45-year-old and you start from scratch? Maybe you never saved for retirement. Should you then use a target-date fund for a 45-year-old? Well, maybe you should be more aggressive because the 45-year-old target-date fund, say 20 years away from retirement might already be too conservative. At 45 with zero assets, you should be a lot more aggressive.

Karsten:
And then likewise, imagine you're 25 and you receive a big gift or an inheritance. You might already shift to a little bit more conservative asset allocation. Maybe that target-date fund that says we are 40 years away from retirement, that might be too aggressive for you.

Karsten:
Because my little niche in the finance community is you want to personalize stuff. Just as you personalize your safe withdrawal rate analysis, you potentially have to do a little bit of hacking here too. Maybe make some adjustments. If you want to retire at age 45, you might have to be a little bit more risk-averse than the average 45-year-old working person who still has 20 years to retirement. It's very hard to fit that all into one more because there's so many idiosyncratic differences among people.

Dr. Jim Dahle:
I've got some more investing questions, but let's step away from investing for a minute. Something I saw when I went to your website was that you use a health sharing ministry plan – Medishare, like a lot of early retirees. Tell us what your experience has been like there, particularly when it comes to claims or need for shares?

Karsten:
Yeah. When I retired in 2018, I had five more months of corporate health insurance until December 2018, but then I had to pick a health plan. We had, and we still have relatively high income. Especially taxable income so that we don't qualify for any generous ACA subsidies.

Karsten:
Now there's been a little bit of a relaxation of some of the rules, but I did the math. It's still not really cost-effective for us to do the Obamacare plan, but then also to be sure we haven't had any claims. We only do our annual health check-ups. And so, I don't have any experience about how the claims would work.

Karsten:
What I like about Medishare is that it's a PPO. It has negotiated rates. It has a network of providers. You call up the provider ahead of time, and they tell you, “Yes, we are in their network and we have negotiated competitive rates.” So far so good. If anything changes, I would probably write about it on my blog. But so far we like it because the premium is only about half of what a halfway decent plan would've cost us over the exchange here in Washington state.

Karsten:
And then, of course, it's a high deductible plan. We paid the first $10,000 out of pocket, which we never even got close to. I think right now we pay something like $2,000 or so out of pocket. But we would've paid the $2,000 out of pocket anyways, even with the bronze or silver plan that I was looking at and we save half or even more than half of the cost of that plan. So far, we're happy.

Dr. Jim Dahle:
Speaking of Washington state, what did you decide to do about their new long-term care insurance law?

Karsten:
I don't have any W2 income from Washington state. I get W income from the state of California. And then all the other income we have is dividends, interest and capital gains. As far as I know, I don't have to pay any premium for long-term care. I think long-term care insurance is essentially a payroll tax for just regular W2 income. And so, we are not impacted by that.

Dr. Jim Dahle:
Basically, just ignore it. That's helpful. All right, let's get back into some investing topics. It's pretty clear that you're not a big fan of bonds. And I'm curious whether that's a long-held belief or simply a reflection of our very low current interest rate environment.

Karsten:
Right. Correct. It's mostly because of low-interest rates and for the most part I used 100% equities or other risky assets, like real estate and trading equity options while I accumulated. And with low or high bond rates, I think it's actually sensible to be 100% or close to 100% until maybe a few years before retirement.

Karsten:
And then of course in retirement, it's no longer prudent to stay 100% stocks. It's way too risky. If we have a repeat of say 1930s or 1970s, that would not support the kind of safe withdrawal rate that people normally recommend. So, yes. In retirement, you need a little bit more in safe assets.

Karsten:
And right now, what we do is I have about a 30% allocation to an option trading account because I'm trading derivatives there. I keep the principle of this account. I actually keep that in bonds. These are muni bonds. And I have some preferred shares too, which are a hybrid between stocks and bonds as they are definitely a lot more risky than the average US treasury.

Karsten:
But yes, I definitely want to hold something like 30% of my assets in something that is significantly less volatile than the S&P 500. Yes, I've definitely shifted. And even with low bond yields, there's really almost no way around the idea that you want to shift down your risk budget a little bit in retirement.

Dr. Jim Dahle:
Yeah, even though yields are low. We'll get into options here in a minute because I want to hear more about what you're doing there. But before we do that, let's just talk about stocks and stock market expected returns. What should investors expect from stocks going forward for the next decade or two? What range of outcomes do you think is most likely and what should investors do with that information, if anything?

Karsten:
Right. We're recording this on December 2nd, 2021. The current situation is very high price-earnings ratios. I think the cape ratio today I calculated as something like 38, which is historically outrageously high. It's almost as high as before the dot-com crisis, it's higher than before in 1929 or in the 1960s.

Karsten:
I definitely think that we have to curb our expectations and then all expected returns are lower across the board. As bonds have very low yields and with the potential of rate hikes. That's going to be a little bit of a drag at least short-term on bond returns. Of course, in exchange for longer-term then you have higher bond yields. Then you make a little bit more again, but the path going there is a little bit painful.

Karsten:
And then by the way, I'm not trying to give any doomsday forecast. Personally, I'm still very aggressively invested in stocks. I'm not forecasting negative returns. But I would say that real equity returns are probably going to be somewhere 3.5% to 4% over the next decade.

Karsten:
And then hopefully by that time corporate profits, if they keep growing the way they have been growing over the last decade, and then equity returns have done a little bit of a smaller, only single-digit run instead of double-digit run, that valuations catch up to more sustainable long-term ratios. And I think after that, we could probably go back again to something like 6%, 7% real equity returns.

Karsten:
I'm not saying that the high valuation causes me to be too worried, but obviously historically has been correlated with some stock market crashes. Now, the problem is that equity valuations, even though they are highly correlated with say the next 10, 15-year returns, they are notoriously unreliable in forecasting when is the next crash and how bad is the next crash?

Karsten:
It is very hard to gauge that, but, yeah, obviously I think that high valuations then uncertainty about how inflation is going to work out over the next few years, high deficits, potentially looming tax hikes, especially hikes on corporate taxes, is all going to be a drag on the stock market.

Karsten:
What some people are going to point to, and I could be convinced of that, is that we're right at the beginning of another technological revolution. All of this machine learning and artificial intelligence, that's all going to create a big productivity boost and we're just going to grow ourselves out of this problem. It would be nice if we could. That would be the one thing that I'm holding up there that might actually cause the whole situation to look much better than anybody forecast these days.

Dr. Jim Dahle:
Wouldn't that be wonderful? All right, let's talk about options now. You're a fan of using options in a portfolio. There's lots of ways to invest with options. What strategies do you prefer?

Karsten:
All right. There are a million different options strategies, and then what I'm doing specifically, involves selling put options on the S&P 500 index. I'm selling downside insurance on the index, and I still have to be moderately bullish on stocks, obviously. I bet on the market going either sideways or up, and it can even go slightly down, and I'll still make money. Only if the market drops dramatically and then over a very short time span, I would lose money.

Karsten:
And I've been doing this for over 10 years now. It has been very profitable. We have about 30% of our net worth in that option strategy. And so far, knock on wood, the cash flow from this strategy alone has been enough to finance our retirement. I don't need to tap into any of the other investments. And we've been writing the whole equitable market without ever having to make any withdrawals from the taxable equity holdings. And then with all of our retirement accounts, they're also pretty much100% equities. And so, we left them untouched too. It has been working out very well so far.

Dr. Jim Dahle:
Yeah. Well, we've also had a pretty bullish market for the last decade. My biggest problem with options has always been that the expected return is zero before costs, negative after costs, similar to insurance that way really. And unless you're better at it than the average trader, unless you can add alpha, you're going to come out behind. Do you agree with that? And if not, why not?

Karsten:
I agree with that. I disagree with that central assumption that options have zero expected return. But I really like that insurance analogy because that's exactly how I define my business model. And it's the reason why I believe I make money. It's the reason why I make money consistently and reliably.

Karsten:
Again, this incorrect assumption is that zero return assumption for all options. And there's a very quick way to demonstrate that can't be true. Imagine you buy a call option on the S&P 500, and you sell a put option with the same strike and the same expiration date. You've now created an elementary option theory, so that's a synthetic forward contract. And because that forward contract pays you the expected equity risk premium, which is positive, it means that the option contracts, they can't both have a zero expected return.

Karsten:
Or you could even go further. And then you do a bond that pays off at that same expiration date, and then the two options. That would be a synthetic equity index fund. And you don't do the index fund through Fidelity or Vanguard, but you have synthetically created this through a bond plus two options.

Karsten:
Because these two options make this an equity risk premium and the equity risk premium is positive on average, equities should pay a lot more than the bond, there has to be some positive expected returns. Some are inherent in these two option positions.

Karsten:
And it gets even better. I would make the case that the downside protection demands the higher premium. In fact, the upside risk premium that you are buying there, that has the same risk profile as a casino gamble or a lottery ticket. You put a small wager in, and then you have a very high or even unlimited upside potential. I don't think there's a very large risk premium that somebody pays you to take on that risk. In fact, it might be the opposite way. That might actually be that sucker option bet.

Karsten:
And I totally agree. I think a lot of option trades are like that, sucker bets where people then will get less than an expected zero return, or maybe a zero return and then through fees and taxes and everything, they're going to be dragged below the zero line. But it's the downside risk that's very highly compensated.

Karsten:
This is just like any other insurance contract. I buy homeowners insurance, and it costs me say a thousand dollars a year. And my expected money that I get out of that contract is a lot less than a thousand dollars. I'd be lucky if I even get $500 out of that in expected returns, but I still buy it because I have such an aversion against my house burning down. I still buy the homeowner's insurance.

Karsten:
And it's a little bit the same with the short put. These are not even unsophisticated investors, sometimes very sophisticated investors like pension funds and endowments, they can't afford to take on the full equity premium. They sometimes do something like an equity collar where they buy a put option to hedge the downside, and then they sell a call option to sell off a little bit of that unlimited upside potential.

Karsten:
And because there's such a strong aversion against that negatively skewed payoff, from a big enough equity draw, there's not that many people that are willing to take on this risk. I'm one of them and I think I get paid pretty well for that because it is exactly like an insurance contract.

Karsten:
Now, unfortunately, I can't really do what a car insurance or homeowner's insurance can do. You diversify simultaneously over a lot of drivers and a lot of homeowners. And then some people, they have a damage, you pay that out. But the overwhelming majority of contracts you just pay in and then never get anything back.

Karsten:
I try to do that same thing with my short put options. I sell them a little bit out of the money so that maybe 98% of the time I keep the premium. And then 2% of the time I have to sometimes pay quite substantial amounts. Unfortunately, I have to do this throughout the year. I can't do this simultaneously. Unfortunately, I can't sell put options on say 200 different indices. And then some of them, I pay out something. And for most of them, I keep the premiums. I have to do this over time, which complicates things a little bit.

Karsten:
But I think the general idea of the insurance premium that I'm making is still valid. And I do have very short expiration times. There are three expiration times for the major option contracts, Monday, Wednesday, Friday. And on Mondays, I sell the Wednesday options. On Wednesdays, I sell the Friday options. And on Fridays, I sell the Monday options. So, I have basically 52 weeks, 156 independent bets throughout the year. Yes, of course, occasionally I pay out quite substantially, but so far this strategy has made very good money.

Karsten:
And again, it's because I'm actually using the richer and the purer equity risk premium and get compensated for that. And the premium that everybody else is chasing after. The upside potential was no downside potential, it’s what everybody wants. If you want to put a small wager and get rich from that, that's really the sucker bet. I'm staying away from that. I'm doing the pure downside bet and I make the insurance income on that. This is my little option strategy and so far, it has been going very well. Even back in 2020, I did quite well, even in March 2020.

Dr. Jim Dahle:
I think if you went to a gold rush, you'd be the guy selling the shovels.

Karsten:
That's right. That's right. And it's dirty work. It's not very pleasant work because you are taking on the downside risk and everybody else wants to tell people at the co*cktail party what smart investors they are and they invested in this stock and they made a thousand percent on this. And well, unfortunately, I'm only making really very small amounts, making them regularly. Every once in a while, I lose maybe a month or two months’ worth of premium. As long as I have only one or two events like that every year, I'm still fine. It's not a very glamorous kind of job in the financial market, but it's almost like cleaning the sewers. That's what I do in the financial system.

Dr. Jim Dahle:
Now you have a PhD in economics and worked for a big investment firm for a decade. Do you think the average investor should do what you're doing with options?

Karsten:
Well, it depends on how you define get into options. Getting into the weeds and trading options yourself would be tough for the average retail investor because you're selling naked put options with leverage. You want to know the option math, which I don't think is really that complicated. I think the bigger obstacle might be do you really have the bandwidth to do this yourself? And again, I want to make sure, it's not like I'm sitting the entire day in front of the trading screen. I have to do three trades a week. I can sometimes do each trade in just a few minutes. I always tell people if I'm on the ski slope on a Wednesday, and I have to do my option trades, I can do all of my option trades that day on my phone on one ski lift.

Karsten:
It doesn't take a lot of time, but you probably want to have a little bit of focus on what's going on in the market. I might do the one trade in the lift right. But on all the other rides, I'm still on my phone and checking the option quotes and checking the S&P 500 quotes.

Karsten:
Imagine if you're an emergency room doctor, you can't do that. Because you have to work during that time. You can't just leave the patient there on the stretcher and say, “Okay, everybody, take a break. I have to check my option calls.” Or imagine you're a lawyer or a police officer. And then on top of that, I don't think there are any mutual funds or ETFs that would do this for you. You have to do it yourself, or you have to hire somebody.

Karsten:
A lot of people have approached me and they asked me, “Hey, can you do this for me?” Right now, I'm not set up to do this, but if I ever change my mind and I offer this as a service, I'll probably announce this on my blog. But right now, I think the only way to do that is to do it yourself. And you have to have the bandwidth and a little bit of the knowledge in terms of risk management and stuff, before you want to do this yourself.

Karsten:
99% of the people shouldn't do this themselves. As I said, I really like this risk premium because that's the purer and better-compensated equity risk premium. And so, I like the asset class in general. If more people could do it without doing it themselves, just like I am. I'm investing in real estate through real estate funds. I don't want to manage a multifamily student housing in San Luis Obispo, but if I find people who do this for me, I would be very interested in that asset class.

Dr. Jim Dahle:
Let's talk about another controversial area. You're not afraid of using leverage. Well, what do you think are the best opportunities to use leverage to lower risk and boost returns?

Karsten:
Just to be sure, leverage can be dangerous, every 10 years or so, stock market crashes, and we're reminded of that. But I think there are a few occasions and a few applications of leverage if it's used correctly and cautiously, we can even reduce risk.

Karsten:
Think about an investor, say a young investor. Imagine Karsten 10 years ago, imagine I have 100% equities and I want to diversify some of that equity risk. And by the way, it might already be internationally diversified. I've already done all of those levers, but how do I diversify that equity risk if I'm already maxed out?

Karsten:
In traditional finance, somebody will say, “Well, you have to sell some of your equities and put that into bonds. You look at this efficient frontier diagram, on the one end you have bonds, and on the other hand you have stocks. Then you draw your efficient frontier. And then if you want to reduce your risk, you have to move along this efficient frontier line. And unfortunately, you face this opportunity cost. If you want to invest more in bonds, you're also going to lose some of your expected return from your equity market portfolio.

Karsten:
In that sense to overcome this, what I have suggested is why don't you just buy the diversifying asset on margin. Don't buy more equities on margin. That is the dangerous leverage. You don't want to do that. That could wipe out your portfolio if the drop is big enough.

Karsten:
But if you use the leverage to buy the diversifying asset on leverage, and at least over the last 40 years, bonds have been more or less either uncorrelated with stocks or have been even negatively correlated with stocks. In that sense, you can buy the diversifying asset on leverage. And what you can show is you could actually expand this range of the efficient frontier, if you allow for a little bit of leverage.

Karsten:
This is one point I once made in a blog post. And there's some additional finance theory. What you could do, which is even better, you look at this efficient frontier diagram and you look at where the tendency point is. Where is the point where you have the highest chart ratio where you get the highest return per unit of risk you're taking on, and then you take that tangency portfolio and you start levering up that tangency portfolio. And whereas the efficient frontier line bends to the side, to the unattractive area, this tangent line at the highest chart ratio portfolio, it just moves up linearly.

Karsten:
There are actually points in this risk versus return trade-off that are attainable with leverage that you wouldn't have been able to attain without leverage. There was a point that I made and it's actually more than just a purely theoretical point I raised there. I don't think that any one of my readers has ever implemented it that way.

Karsten:
At the place where I worked, we had a product like that, where we said, “Our target return was a 100% equity portfolio, but what if we are allowed to use some leverage between stocks, bonds, and cash?” We had a product like that. And I think by the time I left it had a 29-year long track record. And it had an average outperformance over the equity index by three percentage points.

Karsten:
And it had about the same risk level as the equity. It had an extremely high correlation with the equity index, but by playing around with equity weight and the bond weight, and sometimes you take more leverage, sometimes you take less leverage, you could squeeze out a little bit extra return by doing this smart allocation between stocks and bonds.

Karsten:
And of course, this was run by a large institutional asset manager. This would be something that I probably wouldn't want to touch myself because there's a lot of computer code that was involved with that. But maybe without all the bells and whistles, you can still outperform the index by maybe 1.5% to 2%. And then that additional 3% outperformance, that's why you have to pay a professional asset manager.

Karsten:
This is not just a theoretical little gizmo. This is something that people have used in real-world financial applications. That's actually one of the longest-running and one of the most successful products that we were selling to big institutional investors. This is not just an idea. This is something that people actually use.

Karsten:
But then again, it sounds easy in theory. You still have to have some gauge on expected returns and you have to have a gauge on what is the expected correlation between stocks and bonds. It takes a little bit of time and effort to monitor that relationship and how high or how low that correlation is.

Karsten:
It is an active strategy. This is not something that the average passive retail investor would want to touch. But just as a discussion starter, I wrote that blog post. And I'm glad you found this, you looked through my blog.

Dr. Jim Dahle:
Now, there's a book out called “The Value of Debt”. I don't know if you've ever read it, but the basic idea behind it is for those who can handle it and can get relatively favorable terms on the debt, that an amount of 15% to 35% of the value of your investable assets in debt is an ideal amount of leverage. Not too much risk, but enough to boost returns significantly. What do you think about that amount of leverage in a portfolio?

Karsten:
Yeah. I don't think that there is any fixed amount. For example, I know a lot of real estate investors and they did just find during the global financial crisis. And obviously they didn't go overboard with their leverage. I guess it depends on the asset class. I wouldn't be opposed to a little bit of leverage.

Karsten:
It goes back to this question of what is the optimal asset allocation over the life cycle? Imagine you start as a 20 or 25-year-old with zero assets and you're saving for retirement. You can actually show that in your first year of contributions, you could be as high as maybe 10 times leveraged. If you were to do this as a mathematical optimizer, and you had no leverage constraint, you might even get much higher than 15% leverage. But you will reach a point in your life where you probably want to have no leverage and less than 100% equities.

Karsten:
It depends on the personal situation. 15% to 30% leverage, probably you can go much more than that if you are a very young investor. And if you're close to retirement, you probably don't want to be 15% to 30% leverage again. So, it depends on where you are.

Dr. Jim Dahle:
That's interesting you mentioned that. Theoretically, it all looks great. I don't know if you're familiar with the tail of a Boglehead by the name of “market timer” who was a grad student in 2008 in finance or economics or something, and decided to put this to the test. And the idea was, “Well, I don't want to have all this sequence of returns risk. I don't want all this money in equity just as I'm on the eve of retirement, I should spread that out throughout my life.”

Dr. Jim Dahle:
And so, he leveraged himself up in grad school, essentially, with all this debt. And then of course he did it right before the whole 2008 meltdown. And you can follow it in real time on this thread on the Bogleheads forum. He basically ended up melting down completely and lost it all. Eventually he climbed back out of it through saving and working and investing. But it's really an eye-opening caution to applying things that sound really great in theory and then in practice don't always work out so well.

Karsten:
Right. And again, there's probably a more measured approach that would have been okay. What would've been his income as a grad student? If he had already leveraged his first-year salary as an assistant professor in economics or an assistant professor in finance, that's a big chunk of money. But if he had just levered up two X, the contributions to say a Roth IRA, and I think in a Roth IRA you probably don't want to lever anyways. If he had just levered up his then income and contributions, he might have been fine, but I think he went a little bit overboard with the leverage and that's what killed him.

Karsten:
And the other thing, I'm pretty sure what killed him is that once it started moving a little bit against him, he became too aggressive and probably even doubled down. And that's also a really big danger. You think, “Well, the market is wrong and I'm right.” And of course, the market can stay wrong longer than you can stay liquid. And especially if you're a grad student.

Dr. Jim Dahle:
And that's exactly what happened to him.

Karsten:
Yeah. It's a cautionary tale. Be careful with leverage.

Dr. Jim Dahle:
Yeah. Anyway, we need to wrap up, we're over an hour at this point. But you've got the ear of 30,000 to 40,000 high income professionals, mostly doctors who are going to listen to this podcast eventually. What do you want to say to them that we haven't already talked about?

Karsten:
Yeah. We covered a lot of material and a lot of the technical issues. And one thing that I always want to make sure that people take away from these kinds of conversations is that the people in the FIRE community tend to get a bad rep. There was this New York Times article, where they featured a lawyer who lives like real penny-pinch. She buys only brown bananas. And then she borrows the Netflix account logins from friends and relatives. Don't be distracted by that because then people get the wrong impression that the only way you can retire early is by being a penny pincher like that.

Karsten:
And then also sadly, if you look at some of the FIRE blogs, there's a bit of a selection bias. The people that retire the earliest were the ones that were the most extreme. But the overwhelming majority, 99% of the people that you're going to encounter in the FIRE community are people just like me.

Karsten:
We were not overly frugal and we were not overly frivolous with our spending. We lived very lavishly while accumulating assets over 10 years while I was at BNY Mellon. And nobody had any idea that we were particularly frugal. Nobody noticed that we were particularly frugal. So, you can actually reach FIRE in say 10 years without depriving yourself of any fun.

Karsten:
By the way, I probably could have reached early retirement, maybe two or three years earlier than that if I had deprived myself, but I didn't want to. Smell the roses, have some fun along the way. And then in your retirement also make sure you don't have too tight of a budget, because you have more time. More time means you have more opportunities to spend money potentially.

Karsten:
Anyways, I just wanted to leave people with that thought, especially in our community. Because as we mentioned at the beginning, there are so many parallels. My first few years at the Federal Reserve, it was okay pay. I was not very richly paid. It's almost like an intern, and then I hit it big, and worked for Wall Street. And then I had basically a doctor's salary.

Karsten:
So, live like an intern at least for a few years, or maybe slowly slide it up. It makes it much easier to reach early retirement, as anybody can do it. Especially our community and your community.

Dr. Jim Dahle:
Yeah. Awesome. That's great advice. Well, Karsten, Big ERN, Dr. Jeski, whatever we're going to call you. Thank you so much for coming on the White Coat Investor podcast today.

Karsten:
Thank you so much for having me.

Dr. Jim Dahle:
All right. That was great to talk with him. I hope that didn't go over the heads of too many of you. That was a little more in-depth discussion I think on finance than we've had with a lot of our podcast guests. But I like to get in the weeds every now and then, I hope you do too. If nothing else, it shows you that there's a lot out there to learn and always will be.

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Dr. Jim Dahle:
Most importantly, you'll get answers to all of your student loan questions, gain some clarity about your financial future and start down the right path towards financial independence. If you need advice on what to do with your student loans, go to studentloanadvice.com.

Dr. Jim Dahle:
If it is just time to refinance them go to whitecoatinvestor.com under our recommended tab or our recommended student loan refinancing companies. If you go through them before the end of the month, you'll get not only cash back, as long as you're refinancing at least $60,000 in student loans, you're also going to get our Fire Year Financial Advisor online course absolutely free. That's an $800 value plus the cash back, which varies by company. Great reason to go through those links rather than directly to the companies, aside from the fact that it helps to support the White Coat Investor.

Dr. Jim Dahle:
Thanks to those who leave us five-star reviews and are telling your friends about the podcast. The most recent review is from Heather Bow who says, “Awesome content, great mix of topics and engaging guests. This podcast presents actionable tips that can easily be implemented. Five stars.” Thank you so much for that, Heather.

Dr. Jim Dahle:
For the rest of you, keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney, or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.