Millionaire by 40

I’ve been rereading the The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing, the first book by James Dahle of The White Coat Investor fame. This is that book that launched my interest in and understanding of physician personal finance, a sub-specialized niche that is not captured by 99% of the writing out there (especially when the book was published in 2014).

One of the first chapters discusses an early (and somewhat arbitrary) goal of Dr. Dahle’s: “to be able to say I was a millionaire by age forty”. This was achieved somewhat sooner (age 38) and more easily than his initial projections estimated, and largely (I believe) without significant contribution from the empire that WCI was later to become. Instead it was due to diligent saving, paying down debt, and certainly some favorable market conditions.

This got me wondering how realistic this ‘goal’ is for someone in our situation. I got out of training a little later than Dr. Dahle (33 years old instead of 31) and have a significant (if very manageable) debt burden, whereas he came out of the military owing essentially nothing but time. On the other hand, my starting attending salary is multiples of what his was. And inflation has made a million bucks worth somewhat less in real terms than it was ten years ago.

I suspected all this adds up to something very achievable, but I was interested to run the numbers.

One tool I’ve really enjoyed is the Monte Carlo Simulation at Portfolio Visualizer. It’s a free tool that allows you input a number of different assumptions, including initial balance and asset allocation, and it runs 10,000 simulations using historical market conditions to show you how that portfolio may react to sequential withdrawals or contributions. I found this tool through Gasem over at MD on FI/RE who has a number of great posts on sequence of return risk as well as other considerations, and the Monte Carlo simulations are used to great effect there.

In my case, rather than using it to see how a retirement portfolio reacts to withdrawals, I can use it to plot possible futures given ongoing contributions in the accumulation phase.

Data out is only as good as data in, so what assumptions am I using? Based on current trends, it’s very likely that we’ll reach a net worth of zero in the next 4-8 months, in the vicinity of my 34th birthday. That gives me a six year time horizon to age 40 (math!). Portfolio Visualizer doesn’t let you set an initial portfolio value less than $1,000, so I’ll use that as a proxy for zero net worth.

Our current asset allocation is 60% US equities, 20% international equities, 10% bonds, and 10% REITs, all in Vanguard index funds. Portfolio Visualizer gives this allocation a nominal annual return interquartile range (25th-75th percentile) of 5.5% to 12.5% (of course past performance is not an indicator of future performance, but I work with what I have).

The wealth-building goal I set out in my August 2019 check-up post was for 2/3 of my net income to go toward debt or investing, that is, things that increase our net worth. My estimate at that time was that it would come out to $157,920 a year, or $13,160 a month.

Now that I’ve gotten my first paycheck of 2020 and have a little better idea of what our tax situation will look like, I believe I can modify those figures to $174,000 a year or $14,500 a month in wealth-building. That does not include any money from FSA or CME reimbursement, or any annual bonus.

So what does this all look like?

Six years of massive savings and reasonable growth puts us right at $1.5 million in the median scenario by age 40. Even the 10th percentile scenario (with just 2% nominal annual returns) gets us to a million.

Of course, this should not necessarily be surprising, since $174,000 x 6 years = $1,044,000 even with no growth at all. What do things look like if I relax our goals and instead ‘live on half’, saving $130,500 per year?

We still reach $1 million in the majority of cases.

In fact, our planned savings have to drop to about $115,000 per year before the median scenario dips below a million.

All in all, this was a very encouraging exercise. Even with inflation, a million dollars is nothing to sneeze at, especially that early in one’s career. I may not be ready to retire at 43 like Physician on FIRE, but we ought to be in a pretty darn good place.

One caveat to all this is that a portion of our wealth-building will be going to low-interest debt rather than being invested in the above asset allocation, and will therefore realize lower effective returns and not increase our net worth by as much. Other than that, however, I think this was a fairly reasonable analysis, and it looks like I’m well on my way to matching up to one of my biggest doctor role models.

What are your thoughts? Does this analysis make sense? Did I screw up something major? How do you feel about your chances of being a millionaire by age 40?

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