How doctors think about financial independence is dead wrong [PODCAST]

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“A rough career transition in 2019 followed by the pandemic highlighted how I was still financially tethered to my job — after 10 years of practicing as a subspecialty trained radiologist, saving, maxing out my retirement accounts, and investing in the stock market and in real estate. Looking around, I saw other physicians in a similar predicament. After years dedicated to rigorous training, we were still trapped by “golden handcuffs.” High income was not necessarily translating to high net worth or financial freedom.

It didn’t seem fair or necessary. There had to be a smarter way to financial freedom — without having to live on a shoestring budget or work more shifts. I poured time and money into educating myself — really understood my financial independence numbers, learned the impact of asset allocation and taxes on my retirement nest egg, and put strategies and systems in place to optimize returns.”

Param Baladandapani is a radiologist and can be reached at GenerationalwealthMD.

She shares her story and discusses her KevinMD article, “How doctors think about financial independence is dead wrong.”

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Hosted by Kevin Pho, MD, The Podcast by KevinMD shares the stories of the many who intersect with our health care system but are rarely heard from.

Transcript

Kevin Pho: Hi, and welcome to the show, where we share the stories of the many who intersect with our health care system but are rarely heard from. My name is Kevin Pho, founder and editor of KevinMD. Today on the show, we have Param Baladandapani. She is a radiologist, and she wrote the KevinMD article “How doctors think about financial independence is dead wrong.” Param, welcome to the show.

Param Baladandapani: Thank you, Kevin. Glad to be here.

Kevin Pho: We’ll get into the article in a little bit, but first off, can you share your story and journey to where you are today?

Param Baladandapani: Absolutely. So I am Param. I am a subspecialty-trained radiologist. I specialize in women’s imaging, and I practice out of Bakersfield, California. This month, at the age of 41, I FIREd from medicine. So I’m financially independent, and I chose to retire early, and I’m going to be practicing medicine occasionally to do a few shifts here and there, because I love medicine. But I am financially independent, and I’m scaling back.

But that wasn’t the case, say, two years ago. 2019 was a rough year for me. I had a rough career transition, and it was rough in my family. I lost autonomy in the job where I was. There was a merger, and I decided to move to another employer. It was a rough few months, and by the time we were getting back to being comfortable, at the beginning of 2020, the pandemic hit, and it was another period of great uncertainty for most of us as physicians. So it really got me thinking. There was a lot of anxiety about having to lose my paycheck or having to take a break. I just didn’t think that it was possible at that point.

So I sat down, and I actually started looking at my financial independence numbers, learning about that, learning what that meant, how much I needed annually to cover all expenses for my family, including discretionary spending, and how far I was. In 2019, which was nine years out of practice, looking at those numbers, I realized that I was less than halfway there. But I had the fortune of having invested in the stock market through my 401(k), Roth IRA, and brokerage account, and I also had a mentor who urged me to start investing in real estate early on. So at that point, in 2019, 2020, I had two rentals that I had had for a while.

So I was able to compare both portfolios, and what I realized, which was my aha moment, was that a third of my money was invested in real estate, and it was throwing out twice as much in passive income, mailbox money, compared to my stock portfolio. That’s when I realized that I was doing it all wrong. It was just a whole learning experience for me. I set a goal for myself. I did not want to be in the position that I was in in 2019 ever again. I didn’t want that anxiety associated with losing my paycheck. I don’t want to be tethered to my job.

So I started educating myself, and I scaled my portfolio. I learned strategies. I learned about taxes and how I could optimize returns on my portfolio. I had a three-year goal to get to financial independence, but within a year, I was able to get to that number. So during the pandemic, while working full-time and raising two young kids, I was able to quadruple my real estate portfolio, and I increased the passive income from that portfolio 10 times. That’s essentially my journey.

When I got to that point, I looked back, and I realized that if I had known everything that I know now 10 years ago, when I started out, I could have done it in three years, just taking it easy, because that was also a great time to be investing in real estate. So for me, it was a learning experience. I felt that I had to share this with other physicians. I see a lot of physicians who are struggling. There’s a lot of talk of physician burnout, and it is real. I didn’t want to attach that term to my journey, but it is true that during the pandemic, with kids working from home and raising them with online school, it was crazy, and I think I was burned out.

It’s the case with a lot of physicians. We’re burned out. We don’t have autonomy in our jobs the way we would like to. We’re overworked. Sometimes we’re doing long commutes, because it comes with the territory, and we feel like we have no choice. I feel like in order for physicians to get to the point where they can actually practice medicine and live life on their terms, having that passive income floor is super important. It takes you from “I have to do this” to “I get to do this if I want to.”

So my journey has been to help other physicians accelerate towards financial freedom by building a real estate portfolio that fits their lifestyle, so that you’re not creating another job for yourself. It is my belief that real estate is the fastest way to get there. With that in mind, I started a community, Generational Wealth MD, where there are a lot of free resources for physicians and other high-income professionals, who get together and share ideas. I have a blog. I also have a coaching program, and it’s all geared towards helping physicians get to financial independence much faster.

Kevin Pho: So we’ll get into those strategies in a little bit, but I want to just get into the start of your journey, where you did become financially independent. How did you first hear about the FIRE movement? And for those who don’t know, FIRE stands for financially independent, retire early. I know a lot of physicians were in similar situations like the one that you described. How did you find out about the FIRE movement, and I guess more importantly, did you have any trepidation before leaving your clinical job and becoming financially independent and retiring early?

Param Baladandapani: Yeah, absolutely. So I think the best thing that the pandemic did was that it brought a lot of people together online. I had heard of Physician on FIRE and White Coat Investor before. There are a lot of physicians out there who are talking about financial independence, Dr. Christopher Loo. There are so many physicians talking about financial independence, and once you actually get on the FIRE train, it’s almost like you can’t stop, because you want to learn more, you want to get there.

And it is true that it’s hard to make that shift. So for me, I’m very conservative, and so I had to become financially independent before I chose to leave medicine. People do it, sometimes people leave medicine and then try to increase their income and get to financial independence, but that’s how I chose to do it.

But I think for a lot of physicians, it’s hard because of two things. First, you’re taught that the way to make it is to work hard and save more, and that’s how you get financial independence. I think that’s completely wrong, because you can’t earn or save your way to financial freedom. I know that because there was a time when I had half a million dollars in my bank account, and I’m ashamed to say this, but that would only give me five years of freedom, because if you’re spending $100,000 annually to meet your family’s expenses, that’s only five years. So you can’t save or earn your way to financial freedom.

The thing you need to do is to work smarter. You need to be investing wisely, and asset allocation is the most important thing. You need to be absolutely sure you know where your money is and what the returns are. You need to know how fast that’s getting you to where you need to go. So I feel like that’s one thing that most physicians don’t really get, because a lot of times they’re taking extra shifts, and they’re living on a shoestring budget, and they feel like that’s how they get to where they need to go. But it’s all about asset allocation. That is going to be your biggest determinant in the long haul.

And then the other thing is, you think that you need to be investing in the stock market and build up your retirement deck, and that’s how you get there, 25x. That’s the number. Even when you look at the FIRE movement, Kevin, most people are talking about investing in the stock market, and the number is always 25x your annual expenses. Once you have that in your nest egg, that’s when you FIRE, and that’s when you get the strength to take the next step. But I think real estate is the way to go.

So I think the most important thing is educating yourself. Once you realize that, well, you’re on this bus, and it’s going to get you to that point 15 years from now, but if you get onto this other bus and shift your strategy a little bit, you can get there within five years. What holds people back is not realizing how much independence that’s going to give you, because all that time that you save just means more years where you have complete autonomy. I think that’s the shift that you need to make, and once you make that, that gives you the strength to take the leap and, you know, switch buses, essentially.

Kevin Pho: All right, let’s transition into the KevinMD article that you wrote. It’s titled “How doctors think about financial independence is dead wrong.” Now, for those who didn’t get a chance to read that article, can you just walk my audience through it and share the story of why you decided to write it?

Param Baladandapani: As I mentioned, the first thing that physicians get wrong is that they think they need to earn more and they need to save more to be able to get to financial independence quicker. But that’s not true. You need to be investing wisely. You need to be working smarter, and I think asset allocation is big. That brings us to stock market versus real estate. I chose to focus on that because most of us traditionally, and the chances are most people listening to this podcast, are essentially 100 percent invested in stocks and bonds, because that’s the way they think they need to get to financial independence. I wanted to take a moment to explain what that means during the growth phase, the point where you’re actually feeding that bucket, that retirement nest egg, and in retirement, because it’s very different between stocks and real estate, and I thought that sharing that would help people look at things differently.

So let’s start off with the stock bucket. If you consider it to be a bucket and you’re pouring money into it, we know that traditionally the stock market gives out 10 percent in returns annually. That’s an average over multiple years. So you have that bucket, and you’re feeding it with 10 percent during growth, during the growth phase when you’re growing that retirement nest egg. But in withdrawal, when you’re actually taking money out of it to meet your expenses, say you are taking $100,000, your portfolio needs to be spitting out $100,000 every year and continue to grow during retirement for you to be able to withdraw it and live off of it, for that bucket to last you 30 to 50 years, which is what you need it to do.

What happens in retirement, though, is that for you to have a safe portfolio, you’re going to shift into a less aggressive portfolio, which is essentially going to be maybe 50 percent stocks and 50 percent bonds, or 60/40 is going to be your split. So what happens to the growth of that portfolio, once you factor inflation in, is that it’s only growing at 4 percent, so you can only withdraw 4 percent from that bucket. What that translates to is that in order to take out $100,000 from that annually, you need $2.5 million, and so that’s where that 25x number comes from. That’s your stock bucket during growth and in retirement.

Now, moving on to the real estate bucket, it’s very, very different. The real estate bucket is also being fed by, say, cash flow, which is the money that it spits out every month, just from cash flow if it’s a rental portfolio, and that’s close to 10 percent. So now you’re looking at it and you’re saying, “Well, it’s 10 percent cash flow, which is similar to 10 percent in stock. How is it really different?” And the difference is, and it took me a while to realize this, which is why I didn’t actually scale my portfolio the first few years I was investing, that apart from the 10 percent cash flow that’s flowing into that bucket, you also have property appreciation that happens, which is at 3 percent annually. But because you’re leveraged in your property oftentimes, and you have a mortgage on it, when you put the leverage multiplier into the equation, it translates to, say, 12 percent. If you have 25 percent equity in your property, you’re actually getting a return that’s 12 percent. So now that 12 percent is feeding into that bucket, and then you have 6 percent coming in from your renter paying down your debt, which is also increasing your equity in the property. So you have those three taps feeding that one bucket during growth, so it grows much faster.

And if you are using advanced tax strategies to shelter your clinical income, which you can do with real estate, and you can’t really do that with the stock market, you have another tap that’s feeding into that bucket, which is those post-tax dollars that you’re saving because you’re investing in real estate. So whatever is in your bucket is growing much faster.

And let’s talk about retirement. What happens in retirement is that all of those taps are still feeding that bucket, which means if you want to take $100,000 out of that bucket, you need significantly less money in there to be able to start withdrawing from it safely and have it last your entire lifetime. So while you may need $2.5 million with stocks to get that $100,000 of annual income and be able to withdraw that, with real estate, depending on your strategies, that could be anywhere from a million dollars to significantly less. If you’re optimizing things, $300,000 to a million dollars is all you need in there for it to continue to spit out that money for you, which is why you get the financial freedom that much faster with real estate.

One other point I made in the KevinMD article was sequence of return risk. What that essentially means is that with the stock portfolio, if you decide to retire, which I think is what happened to a lot of people during the ’08 crash, and in the first few years of retirement you see a bear market and your portfolio value drops significantly, that portfolio is not going to last you 30 or 40 years as you expected. It’s going to go down by, say, 10 to 15 years, so it’s going to last you significantly less time, which is another thing to consider, and which is why real estate is just more resilient. Even if you are invested in the stock market, it’s great to be diversified and have that balance over there. That’s what my article is essentially about: Work smarter and invest in real estate, because it’s going to get you there that much faster.

Kevin Pho: So when you say invest in real estate, as you know, there are so many different ways we could invest in real estate, right? You could directly manage a property. You could do a syndication. There’s, of course, crowdfunding. There are mortgage loans. There are so many different types of real estate investment. So when you are talking about real estate, what exactly are you talking about?

Param Baladandapani: I think that the most efficient way to do it, if you’re willing to put a little bit of effort up front, is direct ownership, and that’s what I prefer. That’s my preferred modality. With direct ownership, the way I did it the first seven years was to keep it super passive. I had a property manager. I would literally spend, I mean, less than a couple of minutes a month making sure my rent checks were cashed, that I was paid, and that was about it. So you can keep it super passive.

Or if you want higher returns and you want to scale rapidly, you could do it more actively. I mean, now I’m doing short-term rentals, because there are a lot of tax strategy options in there, and you just scale rapidly. You can pull out all your money, and you can continue to grow. I’m also doing BRRRRs, which is like rehab, renovation, and then you pull out your money. All of those things optimize returns significantly. You can be super active, and that can help you save a lot in taxes, hundreds of thousands of dollars for physicians. Or you can choose to keep it passive and have a steady income coming, which is still three times what you will be getting from your stock portfolio.

So I’m an advocate for picking what fits your lifestyle, and you can always transition, which is what I love about it. I choose to be active right now because I want to shelter my clinical income from taxes. I want to grow rapidly. But in a few years, if I choose to scale back, I could just shift that into passive mode and go back to what I was doing, and I would be completely happy.

Syndications are a great way too, for people who are not willing to invest that little extra time that you need to build your own portfolio, and the returns from them are significantly higher than the stock market. There are tax strategy options that you can take in, but again, all of that is just amplified when you own your own portfolio, or you have a hybrid approach where you have your portfolio and you have a syndication. You still get to take a lot of those tax benefits.

With crowdfunding and REITs, I find that they’re taxed very differently, and the returns are not significantly different from the stock market. So to me, it’s not something that I advocate, just because the returns are typically 8 to 12 percent, which is similar to the stock market, and you get taxed on distributions. So I’m an advocate for active ownership, and you could keep it passive or active, even with direct ownership.

Kevin Pho: Now, when it comes to asset allocation, what proportion of your portfolio should be in real estate in order for it to make an appreciable difference?

Param Baladandapani: That’s a great question, Kevin, and everyone’s going to have a different answer depending on their risk appetite. Now, I call myself a reluctant hybrid investor, because for so many years I was invested in the stock market, and I grew that portfolio to where it is right now, and I chose to leave it there because it keeps me diversified. If I had to go back and do it, I would probably be heavily weighted towards real estate. There are people who are 100 percent in real estate, and there are people who do 50/50. I think it would depend on what your goals are and what your risk appetite is. It’s just going to be different for everyone, but I would say at least start it and see. Within a few years, when you see what that portfolio is actually turning out, you will be able to titrate at that point and find a fit that matches your risk appetite and your goals.

Kevin Pho: We’re talking to Param Baladandapani. She is a radiologist, and she wrote the KevinMD article “How doctors think about financial independence is dead wrong.” Param, you’ve talked so much about the benefits of real estate, but what are some of the downsides that we should consider when investing in real estate?

Param Baladandapani: Like anything, even with the stock market, you need to know what you’re doing, and you need to do it right. I think it’s really important to know how to run your numbers, because I was fortunate. I had guidance, and sometimes I think I was lucky. I did everything right. I ended up in a landlord-friendly state. I picked properties that were at the right price-to-rent ratio, and everything worked out well. But I have seen people who’ve been burned because they didn’t know how to run the numbers, and they actually had a property that they were pouring money into.

So know how to run your numbers. Know how to pick your assets based on your risk appetite. Some real estate is sometimes higher reward, higher return, but I tend to be more conservative, and I like slightly lower returns for less risk. So you need to be able to stratify based on your risk appetite. Real estate is classified under class A to D properties. Class A properties are better properties, nicer properties that have above-average rent and nicer tenants. B is average properties, with average rent, but you still have good tenants in there. Class D properties are properties in really bad neighborhoods, where your tenant population isn’t that great.

You need to be able to risk-stratify. So picking your market, picking the class of property that gives you a good tenant pool, knowing your strategies, and knowing how to actually run your numbers are really important, especially in the current market, just because prices have risen significantly. In the current market, you really need to know how to run your numbers, and you need to pick a strategy that’s still giving you significant returns, or you might find yourself. And you want to find a strategy that’s actually going to be able to weather any market downturns, if there are any. When I coach, this is what I say: Your strategy should fit your goals and your risk appetite, but it should also be able to weather any downturn. So all of those things are really important, especially in the current market.

Kevin Pho: For those physicians who are interested in dipping their toes into real estate, where should they get started?

Param Baladandapani: Generational Wealth MD is my website. I would say at least try to make a small shift. The first thing to do would be to know what your financial independence numbers are, to see if you’re on track to get there. On my site, I have a free worksheet that actually helps you figure out what your numbers are. It helps you find out where you are right now and how long it’s going to take you to get to where you want to be. So go to the website, download the worksheet, and try to fill it up. I also share my numbers, so people can get an idea of what my numbers look like and how I got to where I got.

I also have my coaching program, Creating Generational Freedom. The next cohort starts in the fall, and there’s information about that on the website. So yeah, I think a great idea would be to get onto the website, generationalwealthmd.com, and take a look. There are a lot of free resources out there, including how to run numbers. My blog is on there, and I hope that helps.

Kevin Pho: And my final question: What’s your take-home message that you want to leave with the KevinMD audience?

Param Baladandapani: Just make one tiny shift today. Always remember your why. Think about what having passive income is going to mean for you and your family. It’s really important to stop trading your time for money. So make one little shift today, and I hope that helps you get closer to your dreams.

Kevin Pho: Param, thank you so much for joining me, and thanks for sharing your time and insight.

Param Baladandapani: Thank you, Kevin. It was a pleasure.

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