Review of Financial Freedom Rx and some personal finance tips I wish I had known earlier

Here’s another book to add to Howie’s list of favorite books: Financial Freedom Rx. It’s a personal finance book written by two ophthalmologists that’s under 200 pages long and makes a good introductory read for those who are just beginning to learn about personal finances and what the most important points and highlights are.

When I first graduated from residency, I was totally clueless about personal finances. I learned about all this by reading Personal Finance for Dummies by Eric Tyson and using the internet to fill in the rest. I still think this is a terrific and comprehensive starter book, but Financial Freedom Rx is easier and quicker to read. Of course I would recommend both, and use google with online articles from The Balance, Investopedia, and NerdWallet among other sources to fill in any details.

I first learned about Financial Freedom Rx from a retina throwaway journal, and read the intro and first chapter on kindle. At my AAO personal finance talk last year, I recommended it as a book to read to learn more as it fit my philosophy, although I hadn’t read it all.

Last month I was at an ophthalmology conference giving a talk about personal finances, and coincidentally enough, one of the authors of the book, Jay Sridhar, was giving a talk about his retina podcast at the same session. We spoke for a while afterwards, and I also spoke with the other author, Chirag Shah, over the phone.

Dr. Sridhar is well known in the retina community for his podcast, Straight from the Cutter’s mouth. Ophthalmologists can get CME credit for listening. While many episodes pertain specifically to the practice of retina and clinical trials, there are also podcasts that are of interest to comprehensive ophthalmologists and topics about medicine in general. Here’s a link to the episode of his podcast where he and Dr. Shah discuss their book.

The idea for the book originated when Dr. Sridhar interviewed Dr. Shah for the podcast about his work with personal finances. Dr. Shah has been giving a 13 part personal finance course for medical students and residents for many years (you can find some clips on YouTube if interested). Together, they came up with the idea of transcribing the most important highlights into a book that could be read both by those who took the course as well as anyone else. I respect the authors for being are free of conflicts of interest and writing the book to help other physicians, rather than trying to sell something or promote themselves.

The book is excellent. I couldn’t recommend it any more. In fact, if I were to write a personal finance book myself, it would be very similar to Financial Freedom Rx (thanks guys, for saving me the time and bandwidth!). The book subscribes to the Bogleheads philosophy of saving 20% of your income, investing it in low cost passive index funds that track the market (rather than trying to beat the market and pay more in fees), and periodic rebalancing when the market drops, and sticking to a plan.

There are chapters about how why it’s important to get started early, create a budget so you have money to invest, student loans, insurances you need, and your first job. Once you have the money to invest, they discuss the various types of tax advantaged accounts (401K, IRA/ backdoor Roth, HSA and 529 plans). There is a chapter devoted to how to construct your portfolio (which funds to use) as well as estate planning and distributions in retirement. They discuss financial advisors as well as pitfalls to avoid.

The book’s five page Appendix A “Checklist” contains 26 action items to help you get started on your path to financial independence. Beginners or those looking for a place to start will find this to be extremely helpful.

Their philosophy of financial independence mirrors mine. It’s not a rat race to see who can accumulate the most, nor to brag about how much you have or use your net worth as a proxy for “success.” The purpose of financially independent shouldn’t be so you don’t have to work another day.

Rather, the authors believe that financial independence gives you the freedom to structure your professional and personal life the way you want it to be so you can get the most out of your life. This parallels why we wrote this blog about solo practice. I have 100% control over my schedule and time off and which patients and conditions I want (or don’t want) to see.

The authors were kind enough to give me a copy of the book to review (I consider myself friends with them but have no financial relationship). To prove to those who are reading this review that I actually took the time to evaluate the book and am not giving blanket praise, I’m going to discuss some points in the book that I feel can be improved. These are actually mistakes I made as a clueless young attending and are more advanced topics, so if you’re beginning your journey in personal finance don’t be intimidated by my rambling:

They state “Strongly consider investing in a Roth 401K plan if you can afford it and do not expect to be in a lower tax bracket during retirement.” Earning enough in retirement to be in the same tax bracket during retirement as you are during peak earning years as a physician is actually very, very difficult for most doctors to do. This is because the tax rate is progressive. Deductions are taken at your (high) marginal tax bracket, but when you pay taxes later much of it is taxed at the 0, 10 and 12% brackets. This is why Roth contributions usually don’t make sense for high earning doctors in the 32 or 35% marginal bracket.

If you’re married filing jointly, you need to make $366,000 in retirement with the standard deduction to get the first PENNY taxed at 32%. If you follow the 4% withdrawal rule, this means you’d need a portfolio of $9 million to reach the 32% marginal tax bracket.

One of my biggest financial “mistakes” as a young attending was to “tax diversify” my portfolio with Roth rather than traditional 401K contributions at the 35% marginal bracket, but I think I’ll be just fine. (I’m slightly oversimplifying, there are other nuances such as you could have $68,000 of social security income and Medicare premiums go up when your income in retirement goes up, but this would just mean you’d need a portfolio of about $7 million rather than $9 million; this also assumes nothing is taxed at capital gains rates).

Likewise, they suggest “with 33 times your annual expenses, you can pay an effective tax rate of 25% (assuming this is your tax rate in retirement), and still have a net 25 times your annual expenses.”

If you have a $7.5 million portfolio, and take out 4% every year, with a taxable income of $300,000, you’re only paying about $54,000 in taxes married filing jointly- just a 18% overall rate. And if your portfolio is “only” $5 million and you take out 4% a year, with a taxable income of $200,000, then you’re paying $30,000 in taxes, or a 15% overall rate.

Bottom line: there is a HUGE tax advantage to using traditional 401Ks, rather than Roth, unless you plan on having over $10 million or so. Your overall (again, different from marginal) tax rate in retirement isn’t as high as what you think it might be.

There’s a section on “Minimizing debt in medical school.” I would’ve liked them to say that if you are fortunate enough to have some income say by working over the summer, and can get support from a spouse or family, it makes sense to put this income into a Roth IRA so all investment gains will be tax free. As a first year medical student I made $2000 over the summer and had no clue what a Roth IRA was. So I missed out on a Roth IRA with a 0% conversion as my income fell under the standard deduction. At the current capital gains tax rate of 15% and 45 years of compounding, this is a $6000 mistake I made.

If you are a married medical student and have a spouse that works, it’s likely you’ll be in a low tax bracket, and it’s very favorable to use a Roth rather than traditional 401K. In fact, if you worked before medical school and have retirement plan savings, it would make sense to do traditional to Roth conversions of any retirement plan money you have while you’re a poor medical student with no income, if you can afford to do so. Even if you’re single with no income, you can convert $12,600 from traditional to Roth tax free per year due to the standard deduction. The holy grail of tax planning- a Roth conversion at 0%!

They mention 529 plans can be front loaded with five years’ of contributions when your child is born ($160,000 if both parents contribute). But if your state has a tax break for 529 plans, there’s often a annual limit, so it may not make sense if you live in say Colorado where the annual limit for state tax 529 deductions is $30,000. If you live in Oregon, contribute $148,000 the year your kid is born and then $3000 for the next four years to max out the state tax credit.

For HSA accounts, I would’ve liked them to say that that if you can afford to pay your health care expenses with post tax dollars, you can save your health care receipts and reimburse yourself after the money in the account compounds tax free many years later. And because HSA accounts are portable, if your employer’s default account has poor investments with high fees, you can set up a HSA with the custodian of your choice and roll over the money. This was another mistake I made as a young attending, but my balances were pretty low then so I didn’t lose a lot.

In constructing a portfolio, they recommend you start with domestic stocks and bonds, and then “as your portfolio grows.. it may be worth diversifying further with REITs and international stocks.”

Too many times I’ve seen investors hurt their returns by chasing past performance by “diversifying” into small or mid cap funds, or international or emerging market funds, or sector funds. It makes more sense that you establish a written plan on which portfolio to use when you first start investing and then stick to it barring any life changes, such as adding TIPS when getting closer to retirement (choose a portfolio from this link:

Let’s keep in mind complexity does not always beat simplicity, I essentially have a two fund portfolio myself: SP500 and municipal bonds. But let’s not miss the forest for the trees here: your savings rate and discipline to stay with the course matter much, much more than if your domestic to international ratio is 90/10 or 70/30, or if you have 0 or 10% in REITs.

The book doesn’t discuss real estate at all except REITs. My personal philosophy mirrors the authors in that I don’t invest in real estate, but the reality is that many doctors do. It’s a valid way to build wealth, if you’re interested in doing the research and work (not for me). I would’ve liked them to discuss both the pros and cons of real estate.

For instance, the illiquidity of real estate prevents you from selling low if that is what you do every time the stock market dips. If you have trouble saving money, real estate forces you to build equity and save by paying off the mortgage, or save towards a syndication. I personally don’t use REITs due to the high correlation to the overall economy reflected by the total stock market fund.

But there are a lot of myths you hear in the doctors’ lounge about real estate, such as that it usually beats the stock market in returns (not always, ask anyone who bought in 2008), it’s passive income (are you kidding me, it took enough work for me to close on my own personal residence), the huge tax advantages (real estate losses are passive income on and can’t be used to offset physician wage or practice owner earnings; depreciation is recaptured at the time of sale under section 1250 at 25%, although you get the time value of money and tax rate arbitrage when you took the deductions at 35%; section 1031 exchanges involve a fee as well as the time value of money between closing on the sold property and buying a new one and involve the legwork of finding a replacement property), tenant improvements and upkeep cost money directly out of your investment return, syndications can underperform the sponsor’s initial pro forma.

The authors agree with me that you can be fleeced by a financial advisor and give some tips on how to avoid doing so. Because I’ve seen this happen so often to friends and colleagues, I would’ve liked them to have a list of questions to ask a potential advisor, such as the ones in this list by Jason Zweig of the WSJ. I could easily come up with a dozen more questions. Many advisors and accountants don’t know about the backdooor Roth IRA or I bonds (indexed for inflation, currently 9.62% yield) for instance. Ask them if they recommend for their existing clients.

But all of these points are advanced details that a reader can fill in with their own research. They don’t detract from my opinion that this is a terrific book which every newly minted physician, or practicing physician that has blown off learning about personal finance, should make the very first book they should read. I highly recommend Financial Freedom Rx.

Leave a Reply