Pilot Math Treasure Bath

High Tax Bill? It’s Your Own Fault!

We recently discussed one of the situations that gets Poor Old Joe complaining about taxes, but it’s not the only one. I constantly hear high-earning pilots complain about their overall tax burden.

At my airline, those pilots constantly advocate for a variety of programs aimed at reducing that burden. Many want to return to an old style pension. (Thank goodness that’s not going to happen!) Others want a delayed compensation plan. Somewhat common in corporate America, this type of plan allows an employee to elect to receive current-year earnings a few years in the future…after they have retired and have no other active income. Others want annuities (yuck!) or a variety of other deals.

The problem with all of these ideas is that they depend on: 1) someone else setting up the plan for you, and 2) the US government approving that plan. If you are a fan of Pilot Math, I hope you’ve realized that neither of these strategies offers a recipe for success. If you want to reduce your tax bill, it’s up to you to take appropriate action. Thankfully, there are many ways to do it.

We won’t even attempt to cover all the ways to reduce your taxable income. Instead, we’ll focus on one specific type of investment. Thankfully, you can access these investments all on your own, without having to wait for Uncle Sam or your union to hook you up.

Once you realize how accessible these investments are, and how powerfully they can reduce your taxable income, you will never have any reason to complain about your taxable income again.

Pork Barrel Politics and the US Tax Code

News flash: the United States’ tax system is extremely unfair.

Many years ago, the US government had to be a lot more deliberate about taxes. When Uncle Sam finally sold Americans on an income tax, the idea was that it would only take from the rich to feed the poor. Robin Hood is always an easy sell.

Sadly, it didn’t stay that way for long. Over time, the tax code gradually expanded to the point where it would fill volumes of 3-ring binders. The tax burden spread to middle and even lower-class earners.

In the meantime, the rich were the only people with the money to hire lobbyists and connections to advocate for exemptions…loopholes in the tax code. Today, the richest people in our country pay the smallest percentage of their income in taxes.

Leave it to pork barrel politics to alleviate the tax burden for the rich while hanging the rest of the country out to dry. Although major airline pilots enjoy fantastic salaries, most of us have incomes that put us at the tippy-top of the highly-taxed middle class. Many of us pay tens of thousands of dollars a year in taxes, and it hurts!

But…Progress

While some people complain about pork barrel politics, the advocates for these loopholes do a great job justifying their exemptions. The tax breaks they enjoy allow them to build the business and infrastructure that you and I use every day.

Like it or not, tax breaks are a critical part of the US economy.

If you think that taxes exist to get money for the government, you’re (partially…maybe mostly) wrong. Taxes exist to incentivize specific behaviors.

The US government gives tax breaks to rich real estate investors so that they’ll tie up millions of dollars of their money in building houses for people like us to rent and buy. The government gives tax breaks to small business owners, knowing that 80% or more will fail, so that people like us can have restaurants to eat at, tradespeople to build and fix our houses, and entertainment venues to visit. Uncle Sam offers a $7,500 electric car tax credit so that American automakers will thrive, so that we’ll reduce our dependence on foreign oil, and to reduce pollution and the costly health problems that come with it.

I wrote that last paragraph as though pilots were nothing more than consumers. For poor schmucks like Poor Old Joe, this is absolutely the case. However, if you’re willing to put a little effort into education and networking, you can get on the other side of that equation. You can invest in the businesses getting all those sweet tax breaks, and profit from Poor Old Joe’s outrageous spending habits.

What? You haven’t heard about any investment opportunities with amazing tax benefits? Don’t be surprised; remember that many small business ventures fail. Uncle Sam tries to protect the average American from losing their life savings in risky investments. One way he does this is by limiting access to certain types of investments to people who are wealthy enough to lose. The Department of the Treasury refers to these people as Accredited Investors.

Are You an Accredited Investor?

Simply put, an accredited investor is a person (or couple) who meets either of these criteria:

An individual or couple who has a net worth over $1,000,000…or
An income of at least $200,000 per year (single) or $300,000 per year (married)

Most major airline pilots hit #2 pretty quickly. Heck, regional airline pay rates are so high right now that regional captains could realistically hit #2. If you apply the principles I outline in Pilot Math Treasure Bath an airline pilot can’t help but hit #1 in just a few years.

If you meet one (or both) of these criteria, the US government figures you can afford to invest in a slightly more risky venture. If you lose money, you’ll recover. If you make money, you’re just helping our economy run.

Since these investments are so restricted, they aren’t advertised nearly as well as regular stocks, bonds, and mutual funds. In fact, some of them fall under very strict rules that only allow you to find out about them by word of mouth.

The advantage is that if you can get into these investments, they can give you both a great overall return, and enormous tax deductions.

The Power Of Tax-Advantaged Investments

If you read the last post in this series, you saw how much effect tax deductions can have. Let’s consider an example here.

Let’s say you invest $100,000 with a company building low income housing. The US government can’t get enough of this housing, and a few years ago Congress passed a bill allowing builders to accelerate the depreciation of any houses they build.

Normally, the IRS assumes a house will last for about 39 years. So, if a builder puts up a bunch of houses, he or she could deduct 1/39th of the value of those houses from their taxable income each year. That’s not a terrible deal, but it’s a long time to recoup that part of your investment. Frequently, the government uses accelerated depreciation to incentivize pet projects. This means a builder might be able to take several (or even all 39) years of that depreciation as a single deduction in the first year after the home is built.

What a great deal, right? If the investor puts $15M into the project, they might be able to deduct that same $15M from their taxable income. For this example, $100K of that $15M is money you invested. If your effective tax bracket is 15%, being able to deduct $100K this year saves you $15K in taxes! That’s like getting a 15% investment return in the first year of your investment, plus any payments you get from rent paid by your tenants. Good luck getting that kind of return in the stock market this year!

The higher your marginal tax rate, the more money you save on each dollar invested. Most of these investments pay you rent, dividends, or royalties over time, plus return all of your original capital to you at the end of a specific term.

I know, this sounds too good to be true, but they aren’t. I don’t love pork barrel politics, but it’s hard to argue when it benefits me. Here are a couple investments I’ve been involved with myself:

Two Example Investments from My Life

USNRG

Example #1 was presented to me by a Certified Financial Planner (CFP) who manages some of our family’s investments. We had plenty of stocks and bonds, and we had a high family income with an accordingly high tax bill. We asked our CFP to find us some alternative investments to continue making us money while reducing our tax burden.

Our guy, Tom, brought us an offer from the US Energy Corp, a company that mines for oil and gas in the US. Our country has an insatiable demand for fossil fuels. Setting up the equipment to mine a gas field in outrageously expensive. The only way a company can fund those startup costs is with the help of investors, like me.

USNRG offers investors a cut of the proceeds from every cubic meter of gas mined from an oil field when they invest. They hire very skilled geologists to identify those fields that will produce more than enough gas over their lifetime to offer investors (and the company) an excellent return on their investment. On it’s own, investing with USNRG was a good deal, but it got even better.

Since oil has national importance and USNRG is a big, powerful company, they hired lots of fancy lobbyists to get Congress to approve a tax loophole for their investors. For the deal Tom brought me, I would have been able to deduct 69-92% of the money I invested in the first year of my investment, and upwards of 15% per year every year after that. Over the course of the investment, I would have been able to deduct more than 100% of the amount of money I invested in the venture.

In the first year alone, this would have been worth $15-25K in tax savings thanks to these deductions. I’d also expect a significant percentage in royalties on gas sold per year. Over the course of the investment, I’d expect to more than double my capital investment, not even counting the tax advantages.

We ended up passing on this opportunity because we’re not thrilled with the environmental costs of this type of operation. We were finishing up military assignments in West Texas and knew too many private land owners who’d been screwed over by fracking companies who ruined their land and never paid as much as they promised.

If you’re bullish on petroleum production though, this type of opportunity is ripe for your investing.

Real Estate Syndication

I did recently invest in a real estate deal. Some Air Force friends knew that I’m interested in investing and approached me about a deal run by a friend of theirs.

Their friend had just left a big real estate firm to branch out on his own. He found an off-market deal for 3 different apartment complexes all owned by the same person. The owner had enjoyed many years of collecting rent from these apartments before passing away. The owner’s heirs didn’t want to deal with the business and chose to sell all three complexes in one package.

The heirs netted several million dollars, and the investors (including me) got a sweet deal. The main investor has a plan to refurbish all three complexes and group them under a single brand. Eventually, rents will rise (they’ve been well below market for years) and they’ll become more profitable than ever.

Thanks to the unique situation of this purchase, the property will be worth far more than its purchase price the moment it’s improved. We’ll collect a few years of rent before selling it off to a bigger institutional investor like BlackRock.

The deal gets even better though!

Although the investor could have chosen the long road of depreciation, which would have been passed on to us individual investors over the course of many years, they got to use some tax loopholes to accelerate depreciation.

It turns out that IRS rules allow certain parts of building improvements to be depreciated faster than others. A new roof might only last for 15 years. New tile might be good for 10 years, but new carpet is only good for a few years at most. There is a whole litany of depreciation schedules for individual parts of a piece of real estate.

By doing what’s called a “cost segregation study” the main investor will be able to deduct the value of most of the improvements they do right away. In fact, we expect to be able to deduct more than our initial investment in just the first year. Then we’ll get a nice dividend every year from rents collected. Then, when the main investor sells the company to BlackRock, we’ll get a share of the profits proportional to our initial investment. It’s likely to be quite a bit more money than we initially put in.

Big Picture Math

So, let’s say I’m trying to reduce my taxable income by $100,000 this year and I invest it in a similarly tax-advantaged bean farm.

Thanks to government incentives, I’ll be able to deduct more money than I invested ($107,000) from my taxable income in this year alone. That’ll reduce my tax bill by upwards of $25,000, and I still own a share in the bean farm worth $107,000.

Then, every year for the next five years, the farm owners will give me part of the profits they make from selling beans. Their goal is 8% per year, though it could be more or less. At that percentage, I’ll get $8,560 per year, for a total of $42,800 over five years.

Then, expecting the value of the farm to have increased by 20% over that time, the farmer will sell her fields to a big corporate farm. All of us investors will get our initial investment back, plus that 20% for a total of $128,400.

Over the course of the five years, I’ll have received:

$25,000 in tax savings
+ $42,800 in bean royalties
+ $128,400 from selling the appreciated farm, for a total of:

$196,200 on $100,000 invested. That’s a stellar 96% Return on Investment.

This investment accomplished at least three goals. It:

Reduced my taxable income this year, and
Provided an excellent investment return, and
Provided me with a way to delay receiving some of my income, and space income out over time.

Item #3 there is especially attractive for senior airline pilots. As senior widebody captains, they make all kinds of money. However, when they hit age 65, their income will drop to zero. Poor Old Joe has to pay extremely high taxes on his income this year, then will have to immediately start drawing from retirements to fund his living expenses on the day he retires.

A more savvy pilot with this type of investment will have reduced their tax burden this year, and will have set up an income stream that kicks in when they retire, starting 5 years from now.

Yes, ideally a savvy investor will end up with a large chunk of money when this investment returns their capital, with appreciation, a few years from now. However, since you’re already a savvy investor you’ve no doubt identified a new bean field, or mineral deposit, or apartment complex with similar tax advantages to sink your money right back into. You’ll only have to pay taxes on any portion of that money you use to pay for your everyday living expenses (or do important things with like buy airplanes). However, you get 100% control over how much money you want to use for those purposes.

There is no need to wait on your company, your union, or the government to set up a delayed compensation plan, pension, or annuity for you. Investments like this are readily available. You can make them happen for yourself and fill up your own Treasure Bath without relying on anyone else.

Risk

Now, before you rush off looking for bean farmers let’s curb our enthusiasm a little bit. Remember, Uncle Sam restricts these types of opportunities to accredited investors because they’re more risky than boring old stocks and bonds.

It’s possible that a swarm of genetically-modified locusts could appear out of nowhere and eat all of my farm’s beans, eliminating my 8% targeted annual return for a year or more. Or, it could be flooding, war, or just Americans loosing their taste for taste for legumes. If any of these happens, it could reduce the overall value of my land in the long run, while eliminating my annual returns. I might get my tax deductions this year, but still lose money overall!

This leads us to a very important point:

This Investment Comes Last!

Despite my overwhelming optimism, I believe that most pilots should max-out their other tax-advantaged investing opportunities before pursuing riskier investments. (As always, this is only my opinion, NOT tax or investing advice. If you want advice, go pay a pro for it.)

This means that any given pilot should be maximizing contributions to their HSA, IRA, TSP, 401K, MBCBP, emergency savings, and any other tax-advantaged plan every year. You should only pursue fancier investments if you’ve hit the limits on all of those things and still have money left over.

Don’t worry, if you spend far less than you earn while investing the rest, as a major airline pilot you’ll be able to dive into the world of accredited investments before you know it. Be patient. Take care of the basics. You won’t be sorry.

Finding Tax Advantaged Investing Opportunities

If you’re like me, you’re probably still chomping at the bit to get into some of these fancy investments. I have no doubt that some of you already max out all of your other investments and meet my criteria for pursuing this new money making avenue. If so, you may find yourself frustrated at first that the opportunities aren’t just knocking on your door.

Sorry, but you’re going to have to put in at least a little effort.

Don’t worry, it’s not that much effort.

I got into my apartment complex deal through Networking. I’d flown combat missions with the guy who brought me in. I went to school with his wife, and she helped deliver one of our kids. We got access to that deal because of our pre-existing, long-standing relationship.

The most fundamental way to get into deals like this is to start mentioning your interest to people you already know. You’d be surprised at who already has something available. If they don’t, they may know someone who does. Don’t be afraid to ask your friends.

Are all your friends on the path to becoming clones of Old Joe? I guess it’s time to start adding new friends. You probably fly with a different airline pilot every trip. Bringing up personal finances can be a minefield, but you might be able to find ways to broach the subject safely.

If not that, start asking around at your kids’ school, at church, your gym, or at other organizations in town. Most cities have meetups for real estate investors. If you can’t find a meetup, hop on the BiggerPockets forums and ask around. I suspect you can find some venue frequented by like-minded investors.

Worst case, if you suck at networking so much that you can’t find anything, you could always do the rich airline pilot thing and buy a friend…in the form of a CFP. These people specialize in networking to find these types of deals, and since they get a cut of anything you invest, they’ll be happy to do some digging on your behalf.

No Excuses

The bottom line is that if you can’t find access to the types of investments that offer good returns while also reducing your tax burden, it’s your own damn fault.

I firmly believe that with most things in life it’s up to each of us to make our own stars align.

You do not need a union, an airline, or a government to coddle you into financial wellbeing. In fact, I assert that most of those organizations are so terrible with money that relying on them for your financial welfare would be ludicrous.

Next time Poor Old Joe starts whining about his tax burden you need to ask him if he’s pursued any accredited investing opportunities that allow large current-year tax deductions with the potential of good future returns. Ten bucks says he either gives you a blank stare, or starts whining about how that kind of thing has never fallen in his lap. (And that’s so unfair, just like the time the company stole his pension! But I digress….)

When this happens, text him a link to this article. It’s easy to rag on Old Joe, but the whole reason I write about this stuff is to help him rise above his issues, and prevent the rest of us from turning into him in the first place. If this short novel isn’t enough to get Old Joe started, I’d be glad to help point him in the right direction.

Taxes suck. We can convince ourselves we’re helping our country while reducing our tax bills and getting closer to financial independence…all at the same time. We have an amazing career, and it’s a wonderful time to be alive. Put your resources to good use, and enjoy flying while you do.

Thanks for reading.

-Emet

(Feature image by Henry Becerra on Unsplash)

Profit Sharing Tax Withholding (Or: How to Identify the Uneducated)

COVID aside, my airline’s profit sharing (PS) has been nothing short of stellar. In fact, my company has paid more profit sharing over the last decade than any airline in human history.

PS day is always February 14th, and being able to say, “I forgot to get you flowers, so I brought home this check instead,” plays very well with most pilot spouses.

Every year though, we’re subjected to at least a few emotion-laden rants from uninformed pilos like Poor Old Joe who are angry that they have to pay so much more tax on their PS money than on any other part of their pay. They rant and rave, advocating for the abolition of our PS plan altogether, or all kinds of other crazy schemes to address the unfavorable tax situation.

As it turns out, all this drama is based on a simple lack of education, or potentially on a few pilots just failing to comprehend what they read.

Yes, the IRS does require big companies to withhold taxes for some large bonus payments like PS at a 22% rate. That’s a lot. Basically: whatever number the company tells you you’re getting for PS on Valentine’s day, Uncle Sam and his spiked baseball bat are going to snag a quarter of your money without you ever touching it.

If that were the sum total of the situation, it’d certainly be frustrating. Thankfully, it’s not. Most pilots will get a large chunk of that money back in their tax return. Yes, this means each of us unwillingly provides our government with an interest-free loan for more than a year. However, it could be a lot worse.

So, why isn’t this a problem? The key, it turns out, is all in the world “withholding.”

Understanding US Taxes

As an aviator who will likely pay taxes for your entire life, it’s critical that you know some basics about how your taxes work. This is fundamental like knowing the difference between Indicated Airspeed (IAS) and Groundspeed (GS).

The first thing we need to understand is that the USA’s federal income tax brackets are progressive.

Our laws specify several income tax brackets ranging from 10% all the way up to 37%. For 2023, the 10% bracket applies to individuals who have less than $11,000 in taxable income for the year. (For married couples filing jointly, the 10% bracket tops out at $22,000.)

So, any single American with at least $11,000 in taxable income will pay exactly $1,100 in taxes on that income because:

$11,000 x 0.10 = $1,100

Easy enough, right?

What if you made $11,001 though? When talking about this person we say, “Joe falls into the 12% tax bracket.” A shocking number of Americans are somehow left thinking that this means Joe will pay 12% tax on all his money like this:

$11,001 x 0.12 = $1,320.12

Thankfully, these poor, tax-knowledge-challenged souls are wrong!

No matter what “top tax bracket” a taxpayer “falls into,” they only pay 10% on the income in the 10% tax bracket. The only income taxed at 12% is that which lies in the 12% bracket. So, this pilot’s taxes would look like this:

$11,000 x 0.10 = $1,100

$1.00 x 0.12 = $0.12

Total Tax Bill:

$1,100 + $0.12 = $1,100.12

That’s a much better deal, right? (Or maybe a less bad deal, but I digress….)

Let’s look at a slightly more complicated example. Let’s say a pilot has $50,000 in taxable income. What is their tax bill? Remember, we have to account for the bracketed regions of this money individually. We’ll end up doing three separate multiplication problems before adding their answers together. The next key dividing line between the 12% and 22% tax brackets is at the taxable income of $44,725.

$11,000 x 0.10 = $1,100

$44,725 – $11,000 = $33,725 x 0.12 = $4,047

$50,000 – $44,725 = $5,275 x 0.22 = $1,055

Adding those three values together we get a total tax bill of $6,202.

At this point we can calculate what’s called an “effective tax rate” by dividing this tax bill by the pilot’s taxable income:

$6,202 / $50,000 = 0.12404

This means that although our pilot “falls into” the 22% tax bracket, they government only takes 12.4% of this money in taxes.

This idea of effective tax rate is critical to our discussion. You may already see where this is going; however, we have to take a quick detour.

Why We Have Withholding

In lots of old literature, from classic novels to the Bible, the tax collector is frequently the most hated person in town. This traitor sells out his neighbors for a cushy government job and spends his days knocking on doors and demanding people pay the King his due.

While this process probably went smoothly a lot of the time, most of the stories that made it into literature focused on times when citizens didn’t have enough cash on hand to cover their bills and ended up in big trouble.

Sadly, these stories reflect a widespread aspect of human nature. We tend to spend every dime we earn the moment we get it. In fact, modern society even encourages us to spend our money before we’ve earned it.

If Uncle Sam waited until the end of the year to hit up the average American for their taxes, there’s a good chance that American simply wouldn’t have any money to give. It would have all been spent, or spoken-for by creditors, weeks or months ago.

Our government (and others) invented the concept of “withholding” to avoid all this. Instead of trusting dumb citizens to set aside money to pay their taxes, the government simply requires our employers to take taxes out of our paycheck and send it to the Treasury without us ever touching it.

This is a very effective strategy overall. Now the question isn’t whether to pay taxes throughout the year, but how much tax to pay throughout the year.

Although most jobs try to keep pay stable, it’s tough for us to project precisely how much money we’ll have earned at the end of the year. When you add in the United States’ convoluted (and frequently ridiculous) system of tax deductions and credits, it becomes even more difficult to predict an individual citizen’s taxable income.

Enter: Withholding Rates

Remember our last tax example above? Our pilot had $50,000 in taxable income, putting him into the 22% tax bracket, but his overall effective tax rate was just 12.4%.

Knowing this, how much of the pilot’s paycheck should the government withhold in taxes each month? If it looks like that pilot is going to fall into the 22% tax bracket, Uncle Sam could just withhold 22% of each paycheck. However, that’s 10% more than our pilot is obligated to pay.

That’s a lot of money tied up in the US Treasury until tax refunds show up sometime after April 15th. It’s not an effective use of our pilot’s money to let that money sit there losing value to inflation. This amounts to giving the government an interest-free loan for a year or more, and it wouldn’t be fair to our pilot.

On the flip side, if the government doesn’t withhold enough, maybe they only take 5% from each paycheck, we get back to the problem that our pilot will have spent all the rest of his money by the end of the year and won’t have any cash to pay the 7.4% he still owed in taxes.

And so, the modern equivalents of tax collectors, the shoe-clerks who sit in dark closets at the IRS, have done lots of math and come up with some standard tax withholding rates. You probably don’t even remember it, but when you started your job you probably filled out an IRS Form W-4.

This confusing and complicated document tries to figure out how much you think you’ll earn per year, whether you know you’ll have any big tax deductions, if you’ll be filing single or married, and several other parts of your tax picture. It also has a block offering each of us the opportunity to withhold extra money from our paychecks to make sure there’s no shortfall. (What a generous offer from Uncle Sam, huh?)

Most of us know so little about taxes that we put the bare minimum on here. We worry for a moment that we’ve screwed up something and will get arrested. Then, we forget about it and start flipping burgers or slinging gear handles.

Our employers and the IRS use this form to calculate how much of each paycheck to withhold as taxes.

We must realize that this is still only a guess. It’s almost certain that your actual tax bill for the year won’t perfectly match the expectations set forth by your W-4, and that you’ll either get a tax refund or owe the IRS a check on April 15th. This is okay (ish). It’s how the US tax system has worked for years.

Updating a W-4?

In theory, a pilot could submit an updated W-4 if things change in their life. Maybe an airline pilot upgrades to Captain or a military pilot gets promoted, meaning they get a big pay bump that also bumps them into a higher tax bracket. Maybe a family has a new kid, making them eligible for extra child tax credits. Maybe you start a side-hustle that brings in extra pay and/or deductions.

In any of these situations, it might be wise to submit an updated W-4 to ensure your monthly tax withholding more closely reflects your actual tax situation. This should help protect you from having to write a big check at the end of the year, or from wasting Time Value of Money by paying too much in taxes during the year and only getting the excess back as a refund.

Most of us won’t do this, but we could. In a moment, we’ll look at a graduate-level example of why we might want to.

Back to Profit Sharing

Now that we’ve covered a frustrating amount of tax background, we can finally get back to the Profit Sharing tax withholding rates that Poor Old Joe keeps complaining about.

Since big bonuses or PS payments are usually one-time events sent to a large number of employees, they don’t fit well into W-4-based paradigm of monthly tax withholding the IRS likes to use. Instead of trying to get tens of millions of working Americans to put effort into yet another convoluted form (maybe it’d be the IRS Form W-4PS) the IRS just made a rule that all of these bonus payments will be subject to the same tax withholding rate. In the case of pilots at my airline, this rate is 22%.

Is this sloppy and lazy? Absolutely! We’re talking about the US government that allowed Southwest to demand and Boeing to build the B737MAX. Sloppy and lazy shouldn’t surprise us at all.

I believe that most pilots will have an effective tax rate well below 22%. (Many airline pilots can use the MBCBP Calculator that I recently posted to quickly find a decent estimate for their effective tax rate.)

This means pilots at my airline are all but guaranteed to waste a large portion of their PS payment giving the government an interest-free loan. Maybe Poor Old Joe is on to something when he complains about this situation. (Although, when I pay attention to the language he uses in his rants, I frequently conclude that he doesn’t know the difference between withholding and an effective tax rate. Please send him the link to this article, and encourage him to hire a tax pro to convince him to step his New Balance sneakers off his soapbox before he hurts himself.)

Yes, it sucks that the IRS requires our company to withhold 22% of our PS checks for taxes. However, most of us will get that money back at the end of the year. There are more important things in life to think about than this…especially for airline pilots with incomes around or above the top 11% of all people in America.

That said, if you’re bothered by giving the government interest-free loans, and you’re willing to put a little extra effort into educating yourself, there’s a graduate-level option to mitigate the effect of this unfortunate taxation situation.

W-4 as a Strategic Weapon

What we’re about to discuss is 100% legal. However, it’s also advanced-level shit that will cause you problems if you screw it up. Do not take any action based solely on reading this article. Use this information to start a conversation with a tax professional before you make any changes to your W-4.

This entire situation, and indeed the entire US tax system are based on one domineering assumption: that you and I are all idiots.

Contrary to whining you’ll hear from every walk of life and side of the political aisle, it’s no secret that we all have to pay taxes or go to jail. Only an absolute moron would knowingly spend money due as taxes during the year without having a plan to cover their tax bill at the end of the year. The Form W-4 and entire concept of tax withholding exists because the vast majority of us have demonstrated that we are, in fact, great fools.

However, what if you could be the exception to the rule? What if you had the wherewithal, education, and integrity necessary to take responsibility for your own existence? You might be capable of collecting your entire paycheck every month, and setting aside enough money for your future tax bill.

You could sink that money into a savings account and earn a few pennies on the dollar during the year. If you’d built up enough wealth to cover even bigger contingencies, you might even be able to invest your tax savings in more lucrative investments.

Yes, you’d have to write a big check to the government every year on April 15th, but you’d happily do it knowing that it was Uncle Sam who gave you the interest-free loan. In fact, you might be very pleased at all the interest you’d earned on that money throughout the year.

It turns out that you likely have the option to implement this strategy. You absolutely need to consult a tax pro to help you figure out how to implement it, but the basic steps are simple.

You’ll go to your employer and fill out a new W-4. You could use a variety of ways (like having a large quantity of tax deductions) to prompt your employer to only withhold a very small amount of each paycheck for taxes.
Then, you’ll set up some type of savings or investment account for the specific purpose of holding tax dollars that you transfer in yourself every month.

And that’s it.

Yes, the government will still withhold 22% of your profit sharing check (remember: sloppy and lazy), but you’ll have been investing so many of your future tax dollars throughout the rest of the year that you’ll be far better off than Poor Old Joe.

Gotchas

Now, as I hope you’ve already caught on, there are some very important considerations here that you must address with a professional tax advisor if you want to do this. If not, you can get yourself into all kinds of trouble.

First, you need to make sure that the way you fill out your W-4 doesn’t violate any IRS rules. You could, theoretically, fill our a W-4 saying that you expect to get 10 child tax credits at the end of the year. However, if you then only claim a couple (or zero) child tax credits on your return in April, it might raise some red flags.

There are also a lot of convoluted laws about how low you’re allowed to set your withholding rate. Small businesses aren’t allowed to do this at all – they have to pay taxes every quarter based on a percentage of past or expected earnings. If they guess wrong, they pay big penalties.

If you’re subject to state income tax, you should probably move somewhere else. However, until you can make that happen, you’ll need an advisor who knows your state tax laws and can help make sure you aren’t violating any rules there as well.

If you have a family, you also have to ensure that your spouse understands all of this and is onboard with the plan. If your spouse happens to notice a savings account with tens of thousands of dollars just sitting around and decides to spend it all, you might be in trouble.

Also, if your spouse is the kind of person who would stress about managing your own tax savings account and having to get the check to the right place on time at the end of the year, the strain on your marriage might not be worth the relatively small financial gains. (This is why my family does not implement this strategy.)

If you’re really stressed out about the size of your tax bill, check out an upcoming post on how you can easily reduce your tax bill as much as you want, while earning big investment returns.

In the meantime, please stop complaining about how much money gets withheld from your profit sharing check. It doesn’t matter. At the end of the year that money is subject to the same effective tax rate as everything else you earn.

Instead, go enjoy flying and spend some time with people you care about. Spend lots less than you earn, wisely invest the rest, and your money will take care of itself.

MBCPB Calculator for Widget Pilots

As usual, Delta Air Lines is leading the airline industry with an improvement to their pilots’ contract. It’s called a Market Based Cash Balance Plan (MBCBP).

I built a calculator to help a Widget pilot decide when (probably not “if”) they should participate in this plan. I’ve embedded a video explaining the basics of the plan and how to use the calculator here:

Here’s the background:

Years ago, airline pilots could rely on a fat pension that paid 60% FAE (Final Average Earnings) for the rest of their lives. For better or for worse, those are all but gone. And they’re not coming back.

In the wave of airline bankruptcies in the late 2000s, airlines replaced their Defined Benefit (DB) pension plans with Defined Contribution (DC) 401k plans. Instead of contributing funds to fund a DB plan, companies now provide that DC, extra money in addition to a pilot’s regular pay, expressed as a percentage. At lesser companies, this percentage is only a “match” where the company only contributes as much money as the pilot themself contributes, up to a maximum percentage. At the major airlines, the DC is a fixed percentage, regardless of what the pilot themself contributes.

Personally, I believe a 401k has significant advantages. One problem, though, is that the IRS limits how much can be contributed to an individual pilot’s 401k account in a given year. For 2023, this limit is $66,000 for most pilots, or $73,500 for pilots over age 50.

While that seems like a lot of money, it’s actually very common for pilots at the major airlines to hit this limit each year. When that limit is reached the company’s DC can go a few different ways. At some airlines, like United, those funds go into an account called a VEBA. It’s essentially a suped-up HSA. At Delta, the pilots get those extra funds as regular old, taxable cash.

While that excess cash is nice, it also means more taxes. The MBCBP is a way to protect more money from the IRS, after reaching the annual 401k contribution limits.

MBCBPs aren’t new. They’re fairly common, but most people don’t hear about them because it takes a pretty high income to make one useful. The IRS must approve each plan on an individual basis, but as long as you’re willing to hire someone to help you do it, IRS approval can be expected.

For Widget pilots who participate in their MBCBP, all of the company’s excess 401k DC above the annual limit ($66,000-$73,500) will go into the MBCBP. For younger pilots, this wouldn’t be much. For more senior pilots, it’s possible to more than double the funds you can protect from the IRS each year.

There are some disadvantages to the MBCBP. While it will make sense for most pilots to participate in the MBCBP during the last several years of their careers, younger pilots will definitely want to opt-out until the right point in their careers. Rather than spelling out all the details, I’ll just refer you to the instruction video and the calculator itself.

Not a Widget Pilot?

If you’re not a Widget pilot, you probably don’t have a MBCBP. I think it’s still worthwhile for you to watch this video and run some scenarios in the calculator.

This type of plan is a significant benefit for most pilots. You may decide it’s worth asking your own union to pursue negotiating for one at your company. If you’re considering which airlines to apply for, picking the one leading the industry by setting up a MBCBP might be a big advantage for you.

Is Mesa Airlines RTP or E2A Right for Me?

We’ve experienced a wave of recent good news on the regional side of the airline industry. Depending on the sources you listen to, you’re probably noticing a concerted effort to promote some new programs at Mesa Airlines.

While these programs are being spun to sound like a dream come true, you should look a little deeper before you sign up. This post is here to help you make that decision.

The Deal

In the video below, Mesa CEO, Jonathan Ornstein, announced:

A Rotary Transition Program (RTP) that gives military helicopter pilots $40,000 to get their fixed-wing ratings and hours, in exchange for 3 years of future service, and
An Enlisted to Airlines (E2A) program that gives non-aviator military service members $30,000 toward pilot ratings, in exchange for 2 years of future work at Mesa

Before I start splitting hairs, I’ll say that I think these programs are absolutely good deals for the right pilot. The fact that Mesa has committed to these programs is good overall for our industry. However, before you chomp down on that big, juicy worm, you need to take a moment to consider the hook, line, and sinker to which it’s attached.

Disclaimer

I posted this on a blog owned entirely by my business entity. I’ve done a lot of online writing in a lot of other places, but this is not associated with any of those organizations or businesses. This is my personal opinion only. You should not ascribe my opinions to any business, organization, or brand other than mine.

Fair Deal

Some parts of the aviation industry hate the idea of a “training contract.” They feel employers should fund training without protecting themselves from a pilot jumping ship as soon as they get their new rating. I’m not in that camp. I say it’s fair for an employer to ask for a reasonable return on investment.

Yes, it needs to be a voluntary, uncoerced contract. And yes, the terms of repayment really do need to be reasonable. The pilot market, perhaps with the help of organized labor unions, should determine what “reasonable” means. The signal to the company should be the number of people signing up (or not) for a given program. In the absence of other evidence, I think Mesa’s offer is pretty fair.

And yet, it’s important to realize the financial tradeoffs associated with taking one of Mesa’s deals.

Pay Comparison

During the two or three years you spend at Mesa, you won’t make much money. Pay for Mesa’s first officers starts at $36 per hour and only ever climbs to $57 per hour…even with 20+ years of service! (Their B737 category pays higher, but they only have 3 jets. We’ll address that later.) Compared to the rest of our industry, these pay rates are mediocre.

For comparison: Year 2 FO pay at Delta’s wholly-owned subsidiary, Endeavor, is higher than Mesa’s top line FO pay. ($60-62 at Endeavor, vs $57 at Mesa). Even independent airline Skywest hits that Year 20+, $57 per hour mark at Year 3 FO pay.

Captain’s pay at Mesa tops-out at $124 per hour, about on par with the rest of the industry.

Nobody, not even Ornstein at Mesa, expects most pilots to be there long enough to reach that pay rate though. In his video announcement, he highlighted the fact that some of his pilots in United’s flow-through program have spent as little as three years at Mesa. That’s the longest commitment he’s asking in exchange for one of these programs.

The point here is that if you take Mesa’s money for training, you’re committing to spend two or three years as one of the lowest paid Part 121 airline pilots in the country.

Far Bigger News

Despite the hype surrounding Mesa’s announcement, those pay rates aren’t much to write home about. Much more significant is the recent regional airline news that American Airlines’ three wholly-owned subsidiary regionals just raised their pay rates to amazing heights.

PSA Airlines FO pay now starts at $90 per hour and climbs to $108. Captain’s pay starts at $146 per hour and reaches as high as $210. This is unheard of. For comparison, new hires at major airline United only start $91…only a buck higher than new-hire FOs at PSA.

PSA’s top Captain pay rate is a full $50 lower than the most junior United Captain; however, it’s an unbelievable pay rate for pilots flying 76-seat regional jets. It gets better from there too.

Airlines need senior, experienced pilots to train new FOs and new Captains. These Line Check Aviators (LCAs) normally get paid a little extra because their job is a lot of extra work. However, since these are the most experienced pilots at the company, their resumes look the best, and major airlines tend to rapidly snatch them up. I once flew with an FO from a regional that knew LCA was only a 6-month position. The organization realized it was a virtual certainty that any given LCA would get scooped up by a major airline that quickly.

In hopes of leading the current hiring wave, and wanting to maintain their ability to train new pilots, PSA set LCA pay at $425 per hour. For comparison, a 12+ Year A350 Captain at Delta only makes $354 per hour.

American subsidiary regionals Envoy and Piedmont are offering similarly shocking pay rates.

Yes, LCAs at PSA, Piedmont, and Envoy are the highest-paid airline pilots on the planet, at least for the next few years.

If your jaw hasn’t already dropped to the floor, note that PSA has also set premium pay at 200% of your regular pay rate. At that level, even a non-LCA PSA Captain makes more than a Delta A350 Captain on regular pay.

We should also mention that these companies have flow-through programs to American. If you stick it out through their entire pipeline, they’re offering bonuses that total as much as $150,000 for some pilots.

This sets the bar for regional airline pay at more than three times what Mesa is offering. Other regionals will have to start offering higher pay rates if they want any hope of staffing their operations. If you’re competitive for a job at Mesa, you’re competitive for a job at PSA, Piedmont, or Envoy.

First-Glance Questions

Before we really delve into the specifics, let’s note that the differences in these pay rates should astound you. Using the rule of thumb that annual airline pilot compensation is roughly equal to 1000 times their hourly pay rate, pilots at PSA will earn $42,000 more in their first year of employment than peers at Mesa. The total pay difference over the duration of a two- or three-year training contract is over six figures.

Is $30-40K toward pilot ratings now worth giving up that much future compensation?

As with all aviation questions, the answer is a solid: it depends.

Feeling the Need

Prevailing sentiment says the most important goal for your overall airline career is getting on a seniority list at a major airline as quickly as possible because Seniority is Everything.

For an aspiring pilot who delayed their airline career progression with some patriotic military service, the need to hurry feels even more acute. If a quick bundle of cash is all it takes to finish up fixed-wing ratings, get on with a regional, and become competitive for a major, then this could be the right answer. Does it really matter which regional you fly for if you’re only there a few years?

And yet, I think it would be unwise to blindly accept advice from anyone insisting that this is your only (or perhaps even best) option.

Other Sources of Money

Although flight training is expensive, thousands of civilian aviators complete their ratings every year without any assistance from an RTP or E2A program. It’s a big upfront cost, but the overall career earnings more than justify it. (I wrote an entire book detailing those earnings, and they’re impressive.)

So, how do these thousands of civilian aviators get it done? Could one of those other funding models pay for your flight training?

Loans

The most basic and common way to pay for flight training is the modern tradition of debt.

Most intelligent Americans have mixed feelings about debt. However, airline pilot income is high enough and sufficiently predictable that I believe it’s reasonable and moral to take out loans to pay for flight training. Plenty of investors agree with my sentiment and feel secure loaning money to aspiring pilots.

Those investors could include your friends or family. If your parents have enough financial stability, they may be able to get a simple signature loan from their bank to provide even more cash than the $30-40K Mesa is offering. They might also have access to something like a Home Equity Line of Credit (HELOC) to get the cash you need to get started.

Hell, if you served in the military for a few years and had good money habits, USAA or NFCU might even give you a signature loan. If you bought a home at one of your assignments more than a few years ago, you probably have enough equity due to rising home prices that you could do a cash-out refinance and get more than enough money to fund your flying.

As a responsible human being, you should work a real job in the hours you aren’t busy with flight training, and start making payments to your parents or other lenders immediately. However, you should have no trouble showing them how high your earnings will be as an airline pilot and helping them understand that you’ll be able to pay them back quickly. If you go to PSA, Piedmont, or Envoy, you’ll make so much more than a Mesa pilot that you’ll be able to repay any loan, in full, in a year or two.

If you happen to go to a big-name flight school, you’ll find they have their own financing departments. They train hundreds of pilots like you every year. They know exactly what your future earnings will be, and they’ll be happy to loan you whatever you need as well. Again, if you go to a high-paying regional you could potentially use your excess pay to eradicate all those loans in just a couple years.

Loan Yourself Money

For the veterans considering Mesa’s E2A or RTP programs, I hope you had some half-decent mentors in the military who convinced you to contribute as much as possible to your TSP. Did you know you can give yourself a loan from your TSP, up to half the value of your account balance, up to $50,000? The best part of that loan is you pay (very low 3%) interest to yourself as you pay off your loan.

You need to be on some sort of a pay status because they have to at least set up repayment from your military pay account. (There are no early pre-payment penalties. You can just send them a check). However, if you’re finishing active duty or still making money in the reserves, this should be no problem.

I don’t generally think TSP loans are a great idea. However, if you can’t get any of the other types of loans we just mentioned, you may be able to get this one. Like we said, since the top regionals pay much more than Mesa right now, you should be able to pay yourself back very quickly.

Scholarships

Even better than loans are aviation-specific scholarships. There are millions of dollars available to aspiring aviators every year. Many of these opportunities are so poorly publicized that they don’t get many applicants. A combat veteran bootstrapping their way into the aviation industry should be pretty competitive for most of those programs.

BlondsinAviation.com has my favorite list of flying scholarships. It’s structured as a calendar, sorted by due date, so you always know the next deadline you need to meet.

PilotPipeline.com also has a great list of scholarships. Their list sits behind a paywall, but they offer cheap or free subscriptions to veterans.

Government Money

Military veterans, the very aviators targeted by Mesa’s program, have unique access to government money even more accessible than scholarships. Programs like the Post-9/11 GI Bill, Vocational Readiness & Employment (VR&E), The Air Force’s Credentialing Opportunities Online (COOL), and many others can more than cover the costs of flight training for many veterans.

Not all of these programs specifically pay for time-building the way Mesa’s pile of cash might, but combining the benefits of a few different programs has done the trick for many aspiring aviators.

In a moment we’ll discuss a group that has cracked the code on getting access to all this money. They have an article here summarizing their strategies.

Earning Your Way

I recommend you try for whatever scholarships you can get. As I already mentioned, I would not hesitate to take out a loan if necessary.

In the meantime, there are a wealth of strategies you can use to reduce your training costs and/or earn money to fly. These strategies can accelerate your timeline and/or stretch limited funds further. I wrote a series of six articles detailing some options here:

If you use some (or all) of these strategies, you can start getting paid to fly far sooner than your peers. You’ll be able to maximize your non-flying time to earn income for more flight hours. You could potentially accumulate the full 1,500 hours needed for an ATP, in just a couple years, without incurring as much debt as other pilots.

If you honestly consider the benefits of all these options, you’ll find Mesa’s offer of $30-40K to be far less compelling.

Honest Comparison

Although a senior pilot eligible for an RTP program may benefit more from speed than anything else, I’m not convinced either of Mesa’s programs offer major advantages in speed or financing.

Once an RTP pilot gets the fixed-wing hours necessary to meet airline hiring requirements, they will be competitive at every regional airline. Whether your cash comes from Mesa or from loans, scholarships, government programs, and work, the time required to get your ratings and hours is the same.

Entry-level E2A pilots need several months to a year to get their ratings through Commercial (and probably CFI). Then, most need to spend at least a couple years in lower-paying jobs to reach ATP minimums and compete for a regional airline job at Mesa, PSA, or elsewhere.

Taking $30,000 from Mesa before you start that process won’t get you through those first few years any quicker than taking out a loan or winning a scholarship. Taking Mesa’s money will lock you in for two years of low-paying flying with them at some point later in your career. That point could be very inconvenient.

Every regional is hiring right now, and the staggering pay raises at American’s subsidiaries is just the latest development in a bidding war.

Don’t forget that several established and startup Ultra Low Cost Carriers (ULCCs) also need thousands of pilots. A friend of mine recently started at Envoy. Before she’d even finished training, Frontier offered her a job. A ULCC isn’t a forever airline for everyone, but the pay and quality of life are almost always better than flying for a regional. It would have been a shame if my friend had been forced to turn down that job because she still owed time elsewhere.

Show Me the Money

From a financial standpoint, Mesa’s offers are particularly troublesome. Let’s see how.

Based on starting at an hourly rate of $36, getting a guarantee of 76 hours per month, and accounting for the value of your RTP or E2A money here’s what your total compensation at Mesa will look like:

That’s not too shabby, right? Let’s consider PSA pay though:

Personally, I’m not sure the high pay rates will last a full five years at PSA. The agreement granting these raises purportedly confirms that they’ll reduce somewhat after 2025. However, there’s essentially zero chance they’ll drop as far as Mesa’s abysmal $36 per hour.

Does it really matter though? Mesa would only hold you for 2 or 3 years anway. In the next few years of pilot hiring, if you don’t get on with a bigger airline after just 2-3 years at a regional, it’s because you’re guilty of self-sabotage.

Plus, look at how much more you could make in just 2 or 3 years at PSA. In your first year alone, you make so much more money than you would at Mesa that you could completely pay back a $40,000 loan (in place of Mesa’s RTP allowance) and still take home $8,168 more than you would at Mesa. (An E2A pilot could pay back their $30,000 and take home $18,168 more!)

An E2A pilot who spends two full years at PSA instead of Mesa will take home more than $73,000 extra, even after paying back a $30,000 E2A-equivalent loan.

An RTP pilot who owes Mesa three years would be passing up more than $128,000 in total compensation.

Yes, taking Mesa’s money might be easier in some ways. Applying for loans and scholarships will feel like work. However, that “work” would pay you more than $8,000 extra during your first year, and tens of thousands of dollars extra over 2 or 3 years. That’s a damn good pay rate for a few hours filling out applications.

At this point, you need to ask yourself: will Mesa’s RTP or E2A program really benefit me in the long run?

Even if speed is your primary concern, is the paperwork for Mesa’s RTP program really any faster than a loan application?

But…737s!

One potential counter to my assertions here is that Mesa has B737s while none of the other regionals do.

While this is true, it’s important to look at that overall picture. Mesa is flying a grand total of three B737 classic models. They can’t assign very many pilots to those aircraft. The vast majority of Mesa pilots will continue to fly regional jets.

Plus, these B737s are ancient. I fly relatively newer B737NGs and the APUs frequently can’t even cool down the flight deck on a hot summer day. Flying Mesa’s Boeing dinosaurs means you’ll sweat through your shirt…on every leg you fly…on every day…of every trip. You can do better.

Will Mesa get more airplanes? Might they even get some (marginally) nicer B737-800s? Probably. However, in aviation it’s always unwise to plan your life based on the possibility of management’s promises about the future. Don’t count on anything other than what you can see with your own eyes right now.

At Mesa, it’s not realistic to base any assumptions on you getting B737 pay rates, even if you want to sweat it out in those things for two or three years.

It’s also worth noting that just about every other B737 operator in the country has higher hourly rates. If you can get hired at Mesa, there’s a decent chance you can get hired by Avelo, iAero, Sun Country, or a similar carrier operating Airbus narrowbodies. You’ll get paid more money to fly nicer versions of the same jets, and since those companies don’t own any RJs you’re guaranteed to fly the B737, or larger aircraft.

But…Raises at Mesa

If you pursue the airline forums and groups on the internet, you’ll get mixed reviews about Mesa. Many aviators love it there and can’t stop singing the company’s praises. Others aren’t as complimentary.

One common criticism is that Mesa still isn’t paying their pilots a “living wage.” Our definitions of that concept may vary, but there’s no denying the fact that Mesa’s pay rates are at the bottom of our industry.

The Mesa optimists note that their pilot group is in negotiations with the company for a better contract that will include higher pay rates. Ornstein even teased this in his video interview. Do I think Mesa will offer higher pay rates? Absolutely. Do I think they’ll be on par with PSA, Piedmont, and Envoy? Not really.

Do I think it likely those negotiations will conclude quickly? Umm….

United is experiencing untold drama over their contract negotiations. The pilots at Alaska approved a strike vote over delays in their negotiations. All of the majors have been negotiating for years. A three-way fight among ULCCs has dragged on for months. I see no reason to expect negotiations at Mesa, or any other company, to move quickly.

If Mesa surprises us all and agrees to realistically competitive pay rates, you may need to re-run the numbers I posted above. However, unless those rates are so much higher that they represent an extra $73K-$128K in total compensation in your first two or three years, it’s doubtful they’ll do much to improve the case for Mesa’s RTP or E2A programs.

So, Why is Mesa News?

I hope at this point you’re wondering why some people are pushing Mesa’s RTP and E2A programs so hard.

Using these programs could cost you and your family tens of thousands of dollars in overall compensation. This is a tough choice knowing you have so many other ways to get the funding you need to cover your flight training.

I worry that a wave of excited promotion will push the wrong people into Mesa’s programs. To understand why that might happen, we have to take a step back and consider who benefits.

(One way to frame the situation we’re about to consider comes from a Netflix documentary, The Social Dilemma. This fascinating film makes a great point that if you don’t know what a company’s product is, the product may be you.)

Ornstein announced his RTP and E2A programs on the RTAG Nation YouTube channel. RTAG started as the Rotary to Airline Group, but is now just “RTAG, the Veterans Charity.”

RTAG does a lot of good in our world. They provide crucial education, award tens of thousands of dollars in annual scholarships, motivate and inspire future aviators, and they’re even trying to exert pressure on corporate and legislative powers in our industry.

RTAG has absolutely broken the code on a wide variety of government programs offering low- or no-obligation money that veterans can use for flight training. They’ve helped many great people move up in life to better careers after valiantly serving our country. If you haven’t already, you should read their dissertation on these programs here.

Although RTAG focuses their efforts on helping veterans, though they’re happy to let their rising tide lift civilian pilots too. I applaud their good efforts.

RTAG’s frontrunners have made a big deal about the fact that Mesa’s announcement only happened because RTAG suggested and was deeply involved in designing it. I believe they had their hearts in the right place when they did this. If even one person can make these programs into a win I believe they’re worthwhile.

If nothing else, RTAG is right to be proud of their ability to help create such an innovative program in a frustratingly stale airline industry. But knowing the financial realities at play, why are they suddenly pushing these programs so much harder than anything else?

Follow the Money

The next step in answering this questions requires paying attention to the flow of the money Mesa is offering.

You may have missed it in the video, but Ornstein mentioned that the pilots receiving his E2A dollars will train at a flight school called Pray Aviation. If you look at Pray’s own announcement you’ll discover that they’re the exclusive training provider for these programs.

Pray Aviation’s Facebook post highlighting their part in Mesa’s new programs

So, if a pilot uses Mesa’s E2A program, that pilot loses $73,000 of income over two years…but Pray Aviation gets an extra $30,000 in revenue. Remember how sometimes when you think you’re getting something for free it really means that you’re the product being sold?

Now ask yourself: What incentive does Pray Aviation have to point out the financial disadvantages of these programs, or temper their promotion of these new deals?

Further Along the Money Trail

You’d be forgiven for not recognizing the name of any given small flight school in the US. I’ve met Matthew Pray. He seems like a good person, and everything I’ve heard leads me to believe he runs a high-quality flight school. That’s a rarity in this world. There are too many shady operations that skimp on maintenance, treat instructors and students poorly, or run try to make flight training into a mindless assembly line.

Pray seems far better than average. They’re also quite innovative. One of their strongest offerings is that they’ll send aircraft and instructors to train you where you live. This is critical for military members who can’t just take time off to travel somewhere for accelerated flight training. The idea of in-place accelerated flight training isn’t new, but Pray’s professional coordination and focus on providing this service at military bases is.

If our aviation industry is going to survive the current hiring wave and growth demand, we’ll need innovative flight schools like Pray to make it all work.

And yet, if you read Pray’s About Us page, you’ll see that Matthew Pray is a former Army helicopter pilot. It turns out, he’s directly associated with the group of Army aviators who make RTAG go.

Pray Aviation was the Diamond Sponsor at last year’s big RTAG convention, a distinction available for a $50,000 donation. By donating that money to a 501(c)(3) charity, Pray was able to decrease their taxable income. In exchange, they got their name repeatedly highlighted to an audience of thousands for months on end. They got great exposure at the convention itself. No wonder Mesa chose Pray as their exclusive training partner for the RTP and E2A programs RTAG helped set up.

It’s tough to imagine a more effective way to spend $50K on advertising.

RTAG notes that it’s an entirely volunteer-run company. Every dollar they bring in goes to operations or to scholarships. That’s good! You have to wonder, though, how many of those recipients will take their tax-free scholarship money to the flight school they heard about through RTAG. So, a tax-free donation ends up coming right back to the same flight school as a sort of tax-deferred income.

I expect this is all kosher with Uncle Sam, but it’s interesting to see how tightly the interests of companies like this commercial flight school and this tax-exempt charity are intertwined.

Overall, these relationships present strong incentives for these organizations to push you toward Mesa’s RTP and E2A programs, despite significant financial trade-offs.

Why Mention This, Emet?

No doubt at least one person will read this and confront me, asking why I even bothered to discuss any of it. Aren’t pilots getting tens of thousands of dollars? Couldn’t this help financially disadvantaged troops who can’t otherwise afford flight training? Sure. (Though, they can otherwise afford the training through a variety of options I’ve mentioned here.)

On one hand, I lean pretty Libertarian. If a group of friends can set up a network of businesses and convince airlines or other businesses to pay them for providing valuable products and services, why not? If part of that network includes a non-profit corporation that can operate without the burden of taxes, again, why not? Congress is welcome to rewrite tax law if they don’t like it.

These types of partnerships operate throughout the aviation industry from hotels, to crew vans, to catering services, and more. It gets far more convoluted in Hollywood, college and pro sports, defense contractors, and other industries.

And yet, I’m not the guy who can let debatable financial advice slide without suggesting you explore all sides of the equation. It feel responsible for promoting the best Pilot Math practices.

But…Veterans!

Thankfully, the people fighting America’s recent wars have enjoyed almost universal support from our fellow citizens. It wasn’t always that way. One of my high school JROTC instructors was a highly-decorated Green Beret during the Vietnam War. He endured unbelievable hatred and derision every time he returned from combat deployments. I’m so glad that America shaped up and chose to support our veterans in my lifetime!

And yet, it frustrates me to see how some agencies use sentiment toward veterans as a tool for other purposes.

I’m no longer particularly impressed when a pro sports franchise, or a musician, or a politician trots out a veteran and their family right before an event. With some popular music in the background an influencer recites some heartfelt buzzwords, and maybe even presents a gift. In 2001 and 2002 it felt special. The more I see this though, the less it seems about veterans.

For me, their message is very transparent: “You should give us your money, votes, or social support because we support veterans. If you don’t support us, you must be anti-veteran.”

I worry about this happening here. I believe Mesa is honestly trying to be pro-veteran by offering their RTP and E2A programs. They will be a great answer for some people! However, if someone like me suggests that you may be better off taking a different path, there’s a danger that we’ll be attacked for being “anti-veteran.”

Asserting a pro-veteran stance, incorporating as a non-profit corporation under 501(c)(3), or calling an organization a charity does make that organization sacred. None of those characteristics make that organization correct just because it says it is. None of them makes that organization the exclusive champion of the cause it supports. It’s still possible that such an organization might be incentivized to recommend a course of action that benefits itself more than it helps you and your family.

Do I believe that’s the intent behind these RTP and E2A programs? No. However, you need to at least consider all the facts before you sign up.

What is Pro-Veteran?

Just in case anyone plans to attack my position on these programs as anti-veteran, let’s look at some facts.

First off: I’m a veteran. I’ve served in the US Air Force for more than 21 years so far. I’ve deployed 8 times and flown more than 300 combat missions. Much of that flying was real-time, tactical ISR for Special Operations Forces. I’m one of those few Air Force pilots who realizes and takes pride in the fact that we exist largely to take care of people with boots on the ground.

I’ve continued supporting my fellow veterans off-duty. In the past, I’ve published several hundred thousand words (enough to fill a few books) of free advice helping veterans obtain and excel in civilian flying careers. I also published an entire book trying to help veterans (and others) attain financial independence. In the past, I’ve spent hundreds of unpaid hours helping veterans polish their resumes and applications.

There is nothing anti-veteran in me saying that it’s disadvantageous to give up $128,000 over three years in total compensation. Even at a conservative (5%) rate of return, if you invested that money and let it sit for 20 years, it would grow to $339,000. If you let it sit for a full 40 years it could become a staggering $901,000!

The value of Mesa’s E2A program over 40 years, compared to investing the higher income you’d earn at PSA during your two-year commitment.

Do you really want to give up almost a million dollars in exchange for $30-40K worth of flight training when there are so many other ways to fund your training without incurring a commitment to a specific regional airline?

Effective Alternatives

It’s good of Mesa to offer these RTP and E2A programs. It’s good that a charity used their influence to help facilitate those programs. For the right veteran, these programs could be beneficial. And yet, we’ve shown that many aspiring aviators will get greater financial benefits using other options to fund their training.

Knowing this, an organization hoping to do good in our world could potentially use its influence to more effectively help the people it serves. This kind of organization could:

Continue to educate aspiring pilots on all the ways they can pay for flight training
- Provide an honest and upfront cost/benefit analysis of each option
- Be open and transparent in disclosing personal and organizational affiliations that might incentivize promoting one option over another
- Be more transparent in ranking these funding sources in terms of time/effort required, military or corporate service obligations, debt, etc.
Educate aspiring pilots on how and why to save, invest, and pay off loans so these options don’t turn into crippling debt
Work with lenders on behalf of veterans to secure better terms on loans for flight training
Focus on matchmaking for low-time pilots and employers with entry-level flying jobs
- Use their influence to improve pay, work rules, and general conditions at those entry-level flying jobs
Use their influence to evaluate a variety of flight schools and promote every school offering safe, cost-effective training

If Mesa wants to more effectively help veterans, their solution is simple. Mr. Ornstein needs to raise pilot pay and benefits to industry-competitive levels. The higher Mesa raises total compensation, the closer they’ll get to invalidating my entire analysis. I hope they do exactly that!

If Mesa’s RTP or E2A programs are right for you, I’d apply right away. If they aren’t, we’ve reviewed a variety of other options here, and we didn’t even scratch the surface.

Life as a major airline pilot is great. It’s worth the investment of time, money, and effort. Whatever you choose, take action today to advance your career.

Fly safe; I hope to see you on my flight deck or at a layover bar soon!

– Emet

Cover photo by Dan Lohmar on Unsplash

Can You Beat the Market?

I lurk in a lot of online groups related to the Financial Independence (FI) movement. Although many members in that movement advocate investing in low-fee index funds and letting time do the work for reaching FI, I see constant discussion about picking individual stocks.

Is it wrong to pick stocks? Absolutely not. I oppose anyone who tries to dogmatically force a specific path to FI down someone else’s throat. That said, I think there are a lot of strong arguments to be made in favor of the low-fee index fund, fire-and-forget strategy. Let’s look at some of this.

Can the Pros Beat the Market?

My main reason for suggesting that we avoid picking stocks is that the vast majority of the pros fail to beat the performance of individual index funds.

You’re skeptical? I believe it…I was too at first.

I first read this assertion in JL Collins’ fantastic book, The Simple Path to Wealth. (Amazon affiliate link.) You don’t have to buy the book to read his assertion though. He’s published the same content for free in Part III of his excellent Stock Series. He asserts that 80% of actively managed investment funds fail to beat the market average. Over the past few years, the disparity has gotten even worse.

You can clearly see this in colored charts on sites like this one at Index Fund Advisors. A CNBC article from 2019 noted that about 92% of actively managed funds fail to beat their respective index.

Perhaps the most notable recent illustration of this fundamental comes from this headline: How Warren Buffet Won His $1 Million Bet. Mr. Buffett is one of the wealthiest people alive, and perhaps the greatest investor of our time. Even with all of his knowledge, he recommends that the average investor just by low fee index funds and let them sit. When he dies, his instructions for taking care of his family are that 90% of his wealth to be placed into index funds.

We got this recent headline because Mr. Buffett made a bet many years ago. He’d put $1M into index funds, and the other party would put $1M into any combination of actively managed funds. The winner would be the person with a higher account balance at the end of a decade, and would get both pots of money. Mr. Buffett, frequently called The Oracle of Omaha due to his stock-picking prowess won the bet by investing in low fee index funds.

The point you should take from this article is not that Warren Buffett is smart or that we won a $1M bet. The point is that the article about his bet goes on to mention that 93% of actively managed investment funds fail to beat the market. That number skyrockets to 98% for government bond funds! Why in the world would you invest in something that has a 93-98% chance of failing to beat the market when you could just invest in the market itself by purchasing shares of a fund like VTSAX, VTI, FSKAX, etc.?

Fees! Fees!

Having just used The Oracle himself to make my point, I’ll say that there are some valid caveats here. We’ll get into some others, but first we need to look at fees.

Even a somewhat passively-managed index fund like VTSAX needs to pay human beings to manage it. VTSAX is a “total stock market” index fund. The over-simplified idea is that every time Vanguard gets some money, they use it to by shares of stock. Specifically, they buy one share of stock from each company on the market. Once they have one share of each, they go back through the rotation and buy another share of each. This continues for as long as people give them money. It’s a pretty simple process, but it still requires some human action to complete.

Thankfully, the process is simple enough that Vanguard can do this cheaply. Vanguard charges most investors an impressively small 0.04% fee for their services. (This is also referred to as the fund’s “expense ratio.”) This means that for every $100 you invest, Vanguard takes four pennies. That’s downright reasonable for a fund that’s rewarded me with a 35% Return on Investment (ROI) over the past year, and returned 7.92% since inception!

Let’s compare this to actively managed funds where you pay a financial advisor a fee to pick stocks for you. The idea is that he or she sits around all day studying stocks and businesses and can choose winners while leaving out losers. I’ll be upfront and say that there are plenty of people who do this some of the time. Warren Buffet is the leading example, but there are plenty of others. However, most of them fail to consistently out-perform the market. As we’ve noted, the number of failures has risen to 93%.

Part of the reason that these individuals give you lower returns that the market is that they charge you much higher fees. While you can find a variety of fee structures at different investing firms, you’re likely to pay a minimum of 1% Assets Under Management (AUM.) This means that for every $100 you invest with this actively managed fun, they take $1.

A dollar doesn’t seem too bad, until you compare it to the index fund’s expense ratio. That 1% AUM fee is 25 times more than VTSAX’s 0.04% expense ratio! When you compare these two options, the actively managed fund charges you 25 times as much money for a 7% chance of out-performing the alternative. You almost always lose that bet.

Sadly, this isn’t the worst type of actively managed fund either. There’s a company that I consider to be downright predatory, especially toward members of the US military, that charges exorbitant fees upfront to manage their investments.

Another very common fee structure for big hedge funds is “Two and Twenty.” This means 2% AUM (twice what you’ll be charged at many smaller firms) and 20% of your profits when you take money out. If those hedge funds consistently beat the market, it’d be one thing. However, knowing that 93% of these funds fail to perform as well as VTSAX, these fees are belong in Crazytown.

Frustratingly, it’s those fees themselves that account for much of the failure to beat the market average. A 1% AUM advisor has to beat the ROI from VSTAX by a full percent to justify their existence. By picking and choosing, they’re lucky to get above the average at all. But beating the market by a full percentage point (or more!) is even tougher.

The odds are never in your favor.

(If you want some entertaining television, Showtime has a fun series called Billions. It’s part high-stakes finance drama, part director getting to show off a lifestyle of mansions, fancy cars, and crazy hijinks, and part an illustration of what those hedge funds do with your “2 & 20.” If you think they’re giving you a great service and taking care of your best interests, consider the fact that Billions is based in part on decades of real-life examples.)

Unfair Advantages

Hopefully I’ve convinced you that simple past performance show how professional investors are terrible at beating the market, and part of the fact is they charge you outrageous fees. I could leave things there, but it wouldn’t be fair of me. As it turns out, there are lots of individual investors who beat the market. Why? We have what one investor calls “unfair advantages.”

If you haven’t already, go listen to Episode 75 of the ChooseFI Podcast. The guest on this episode, Brian Feroldi, does a great job explaining a variety of factors that make things far more difficult for a big, actively-managed fund than the individual investor. Here are just a few:

Overhead – Big investment firms need to have an office. They need to pay a staff. They need accountants, and payroll, and HR, and more. Of that 1% AUM fee (or worse) much of it is going toward these expenses. If you can choose stocks as well as the people at a big firm, you’ll have a large advantage because you won’t have the same overhead.
Perspective – If you’re investing for yourself, you’re focused on long-term wealth building. Investment firms don’t have that luxury. Three letter agencies like the SEC and the IRS require them to report their performance to investors every quarter. The entire investing industry pays attention to these reports and rewards or punishes these firms based on their quarterly performance. Personally, I believe this is a terrible way to run any business or investment. I believe it’s causing long-term damage to our country and our world. If you want a good read on this subject, I highly recommend The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America. (This is another Amazon affiliate link.)
Rational Self Interest (or Greed) – Like it or not, fund managers are in this business for themselves. Sure, they make money if you make money. However, they can also make a lot of money in ways that hurt you. One common practice is for these funds to do lots of buying and selling over time. Some charge you on a per-trade basis. Others charge you every time you make a profit (up to that 20% number.) This means it’s in their best interest to do as many trades as possible, as often as possible. That is rarely good for you.

I’ll leave it to Mr. Feroldi to give you more details here, but I agree with his assertion that the individual investor has a lot of advantages over most active fund managers. This means that you, as an individual reader, do have some hope of beating the market despite the fact that 93% of the pros can’t. But that’s not the end of the story either.

Expertise

Before you take the points from that last section and run off to start picking stocks, let’s take a moment to consider the concept of expertise.

Is expertise valuable or important to you? Maybe it depends on the context, but overall I value expertise.

The COVID-19 pandemic has made this concept a hot topic. On one hand, you had doctors and scientists saying, “The best ways we know for you to protect yourself are…” (wear masks, stay at home, social distancing, etc.) On the other hand we had randos from politicians to Instagram influencers spouting all manner of nonsense. (One of my favorite examples of this jackassery was when a church not far from me started telling people that drinking bleach could cure the virus, and started selling it!)

My wife is a dentist and sees similar ridiculousity. Science has exhaustively shown that fluoride treatments are both safe for human beings and necessary for healthy teeth. She gets patients all the time who have watched some random conspiracy theory video on YouTube asserting otherwise. She has patients who sit in her chair and refuse fluoride or other scientifically-proven treatments while complaining that their teeth are ugly and painful. She explains that they’re welcome to believe what they want to, but eventually their teeth will get so bad that they’ll need emergency treatment. One way or another, they end up paying a lot of money for their obstinance.

So, what about investing? Do you need to be an expert to make money?

Recent history has proven that no, you truly don’t. However, for every example of the random individual who’s made great returns on the market there’s an example of a naive investor who lost thousands or millions because they didn’t know what they were doing.

One of the things I love about JL Collins book, The Simple Path to Wealth, is the reason he wrote it. He happens to be a finance guy. He made his fortune playing the market and has retired comfortably. When his daughter got old enough to start investing he tried to broach the subject with her. Her response was something to the effect of:

“Dad, I’ve watched you do this for your entire life. You spend countless hours on it. I know you love it and that’s fine, but I don’t want to spend that much of my life thinking about all this. I have other things to do. I just want a simple way to invest my money that will give me a good chance of success without taking up all my time.”

And that is why he wrote about The Simple Path.

The big actively-managed investment funds cost a lot because they hire really smart, talented people to do what JL Collins used to do for a living…they sit around all day and study companies. They look at balance sheets and performance, they read news, they watch for new contracts and trends and deals. Frequently, they travel to those companies to look at the operations themselves and judge whether they think they’re done well or not. These funds have an incredible amount of data, knowledge, and insight about hundreds of companies.

Despite that incredible amount of living insight, 93% of them fail to pick winners while avoiding losers.

So, how does your level of expertise compare to this? How many hours per day do you spend researching companies? How closely do you follow every scrap of news about government regulations, mergers, partnerships, contracts, and other business deals?

If you’re in school, or you have a job, or a hobby, or you have a family (and I hope you have some combination of them all) I bet you don’t have as much time to devote to investing research as an analyst who earns a 6- or 7-figure salary to spend all day every day diving deep into research. If they do worse than average 93% of the time, how can you possibly hope to do better, even with your unfair advantages?

Emet’s Answer

That last point is the main reason I put most of my investments into low fee index funds. Even if I thought I had the expertise to do professional-level analysis, I just don’t have the time. Frankly, I have better things to do with my life. I suspect you do as well.

I believe that the vast majority of us are better off living full, meaningful lives and leaving our investments on autopilot in low-fee index funds. I don’t think it’s worth the time and energy it would take to do the research necessary to beat the market. Your family, your friends, your hobbies, and yes even your job(s) deserve better.

Alternatives

Talking about jobs highlights another critical point. Can you make more money using your time in other ways?

Some jobs pay by the hour. If you make a high wage, I assert you can get a better ROI for your time by spending an extra hour at work as opposed to researching investments. As an airline pilot, this is almost certainly true.

If you aren’t a wage employee, do you get a performance bonus? I bet the commission from making an extra sale is better in many cases than spending an equivalent amount of time researching stocks.

Taking this further, have you considered a side-hustle? Sometimes these aren’t the most lucrative ventures as first, but I know of many side hustles that bring in a lot of money. I do some flight instructing that pays far better than I could possibly do picking stocks. I’ve heard of people who sell digital products on Etsy that make amazing money for very little effort.

As a fan of BiggerPockets, I strongly believe that investing in real estate is a great way to make money. I believe that a hardworking investor who sets up good systems and processes can vastly out-perform the stock market though real estate investing. If you’re out to make a lot of money, I assert that you’re far better off reading books, blog articles, and listening to podcast episodes on BiggerPockets (and then taking action!) than you are researching stock picks.

How I Pick Stocks

Having said all this, I’ll admit that I do some stock picking. Why? Because it’s fun.

There’s something thrilling about the fact that my investment in Virgin Galactic (NYSE:SPCE) is still up 257.12% today even though the rest of the market is way down. Unfortunately, that great pick is being dragged down by my shares in LYFT that have done nothing but sink since I bought them. Because…

…93% of the pros do worse than the market average. I lack their expertise and my picks stand a decent chance of being even worse than theirs, despite my unfair advantages.

And yet, I have shares of few companies that I think will go up over time. Instead of wasting all my time and energy on picking stocks, and risking all of my family’s savings on my inexpert abilities, I’ve chosen to give myself a sandbox to play in. I have a section of my Roth 401K set aside for stock picking. I allow myself to buy and sell whatever I want in there, knowing that I could potentially lose it all.

To mitigate that risk, I only gave myself a small portion of our overall savings to play with. I recommend the average investor like me allows a maximum of 5-10% of your total nest egg for stock picking. This way, if you make a dumb choice and lost it all, the loss isn’t catastrophic. If you pick a home run, it’ll be a nice boost overall.

I’ve found that this little sandbox satisfies my (probably irrational) desire to pick stocks and see if I can outsmart all the big hedge funds and the market at large. Overall, I’m doing about as well as my holdings in FXAIX, plus or minus a few percentage points on any given day.

I’m doing all this trading at Fidelity where they no longer charge a fee for individual trades. I’m doing it specifically in my Roth 401K so that any profits I make don’t increase my tax burden. If your company doesn’t offer a Roth 401K, you could do the same thing with a Roth IRA account.

Do You Have Unique Expertise?

A few moments ago, I blithely assumed that none of us has enough expertise to out-perform a pro at a big investment firm, but I don’t think that’s universally true.

I think most of us probably have quite a bit of expertise in our chosen profession. I’m a pilot, and specifically an airline pilot. I guarantee that I have some very unique insight into my particular company that no bean-counting analyst could ever obtain. I believe that between my network of airline pilot buddies and my first-hand understanding of our industry, I can make some pretty good calls about other companies in our industry too.

Want an example? When two 737 MAXes crashed, killing hundreds of passengers, Southwest Airlines stock tanked. I don’t work for Southwest, but I think they’re a great company and I understand how and why they’re profitable. (I still think my company is better.) I bought some Southwest stock believing that Boeing would get the MAX back into the air (they have) and that Southwest would go back to being the profitable powerhouse it always has been. (That hasn’t happened yet, but when it does, I expect a pretty decent ROI for that little corner of my little sandbox.)

I’m also a tech guy. I have a degree in Computer Engineering and I’ve made real money selling apps on Google and Apple app stores. I’ve been known to buy shares in a few select tech-related companies based on my knowledge. Again, that’s only a small part of what amounts to 5-10% of my overall nest egg. Am I likely to get rich off those picks? No. However, picking those stocks scratches an itch, and keeps me from making bad decisions with the rest of my money. In the meantime, most of my money is making my rich by sitting quietly in low fee index funds.

Final Strategy

If you’re going to pick stocks, limit it to a small part of your portfolio. Invest where you’re strong – where your education and experience give you unique insight. Take advantage of your unfair advantages, and try to invest in places where making a profit from short-term trades won’t cause you tax issues.

However, I recommend you spend the overwhelming majority of your time on something other than researching and picking stocks. At worst, work more at your primary job or scale your side-hustle. Better yet, spend more time doing things that you love – things that bring lasting happiness into your life. Spend time with your friends and family.

I promise that on your death bed you will not say, “I wish I’d bought more shares of TSLA at $240!” Personally, I’d rather be able to look back with contentment and pride knowing that I had love and been loved by people that matter…and that I’d spent my life enjoying time with those people.

Put most of your money into low fee index funds and forget about it until you need it. The Shockingly Simple Math says that this strategy will help you reach FI. Let that be enough and spend the rest of your time and energy on things that really matter.

PMTB on White Coat Investor

I just had the privilege of appearing on Episode 186 of the White Coat Investors podcast. Check out yours truly spreading the message of Pilot Math with someone who’s been helping high income professionals fill their own Treasure Baths for years!

Jim Dahle, the WCI, has a truly impressive ecosystem of content aimed at helping hard-working high-income individuals get a fair shake on Wall Street for a long time. It was great talking to him, and he had a couple questions that I couldn’t answer entirely to my satisfaction. I’m looking forward to following up on those topics to see if I can come up with some improved ideas for aviators, physicians, and others.

Do you have another favorite podcast that would be a great place to talk about Pilot Math? Leave a comment and let me know!

The Unspoken Hypocrisy of FIRE

I’ve tried writing this post more than once, giving up each time. It’s tough to do this subject justice while remaining tactful. I’m not surprised that everyone else seems to have avoided it as well. I’ve been dying to write it though, because I think this is an important discussion for the FIRE community. If my attempt at starting this discussion is imperfect, please look past my meager writing and try to consider the topic at hand.

We’re going to question a lot of beliefs today. Many of our questions don’t have clean, easy answers. I think some of them are beyond our ability to answer. Personally, I’m okay with this. The world isn’t black and white, and it’s okay to do the best we can with what we have. However, we must accept the fact that thinking through all of this is going to make us uncomfortable.

As humans, our natural instinct will be to defend ourselves when we start to hear these questions and feel this discomfort. Your next inclination will be to attack the person asking the questions that cause those feelings. I know because I’ve been the uncomfortable person doing the attacking many, many times.

Please resist that urge though! If you get lost defending yourself or attacking me, you’ll miss out on an important opportunity. I think that every single person pursuing FIRE should at least consider what we’re discussing here today. I believe your life will be better if you do that. I believe you’ll find better, more fulfilling, and more efficient ways to pursue FIRE if you give these ideas due consideration.

And with that, let’s move on.

The idea of FIRE, reaching Financial Independence and choosing to Retire Early, is a great aspiration. (I prefer to focus on the FI part because there’s a lot of unnecessary drama over RE.) I believe our world would be a far better place if more people pursued this idea.

I think the very label of Financial Independence highlights the guiding principle of this movement: the idea that each human being can and should support itself.

The FIRE movement seeks to attain that state by reducing our spending, investing our savings wisely, and finding ways to increase our income for savings…all while trying to maintain a happy, balanced life.

I get a little frustrated when I see people over-focusing on the “reducing our spending” part of that. Many of us go way beyond frugality and dive into deprivation. I think this is the wrong way to do it. FIRE is not a short process – there are no get rich quick schemes. I believe it’s too difficult for most people to intentionally live in deprivation for the amount of time it takes to reach FIRE. I think someone trying too hard on this front will either end up quitting, or cause significant damage in their relationships or other parts of their lives. Mr. Money Mustache wrote a great post about this distinction.

If you’re capable of living a life of deprivation while pursuing FIRE, good on you! I wish you all the best and I hope some of what I write will help you. However, I hope the most extreme frugalists will be careful not to push their ideas on others too energetically. People in our world are increasingly vulnerable to social pressure. While this can make any one person a force for good, I’m afraid most individuals’ progress toward FI is tenuous enough that you’re more likely to scare them off than convince them to be like you.

Speaking of being preachy, if you spend any time around the FIRE movement you’ll hear a lot of rebelling against the rampant consumerism in our world. I think this is great! I believe that many of our world’s financial and social woes come from mindless consumerism. I think the pursuit of FIRE is more than a lot of people are willing to bite off; however, I think we can do a lot of good even if all we do is get them to step back and look at the damage consumerism causes in their lives.

As great as it is for us to preach against consumerism, but we’d better be careful.

It seems to me that most people who discover FI can’t help wanting to spread the message to others. That’s awesome! However, do we need to think about our message and tone?

FIRE only works because our economy allows us to invest our money and earn interest on it. We use The 4% Rule as a rule of thumb. Throughout the history of the stock market, a person who only spends 4% of his or her investment account balance has an extremely high chance of being able to continue spending at that amount for at least 30 years without running out of money. In most cases, that money lasts even longer than 30 years. This does account for inflation, but doesn’t account for an individual choosing to spend less than 4% in tough years or continuing have some type of income after giving up mandatory full-time work.

We’re lucky that 4% is a very conservative number. It leads us to some Shockingly Simple Math that shows how it can be relatively easy for any person to reach FIRE.

However, we need to ask a question: Why can we feel so confident in this 4% number?

Although there are endless ways for us to invest, the most common is buying low-cost index funds. This is definitely the simplest way to invest. It’s so simple, in fact, that JL Collins wrote a book on this subject called The Simple Path to Wealth.

Historically, the stock market has averaged more than 11% Return on Investment (ROI.) This is fantastic! When I wrote Pilot Math Treasure Bath, I dropped that number 3% to account for inflation, and then took another 3% to be conservative. Even at the resulting 5% ROI, I calculated that it’s possible to reach FIRE in a shockingly short amount of time.

But, why does the stock market offer such impressive returns?

Stocks don’t gain value because a company maintains the status quo. Stocks gain value because companies sell more goods or services and make more money as time goes on. In fact, what really drives stock price lately is a number called Earnings per Share, or EPS. Publicly traded companies have to report this number quarterly. If a company’s actual EPS equals or exceeds an EPS estimate selected by analysts, their stock price is likely to rise. If actual EPS fails to meet estimates, that stock price is all but guaranteed to drop.

(If you want a fascinating read on this topic, check out a book called The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America, by Alex Berenson.)

Now, my FIRE friends: What is the only way for a company to make more money quarter after quarter, and year after year?

Sadly, the answer is consumerism. Companies only make more money by convincing the public that they need to buy more stuff. Much of this stuff is nice, but not necessary.

Apple makes good products, right? (I’m typing on a 9-year old MacBook Pro right now.) Nobody needs a new iPhone, iWatch, iPad, and Mac every single year, but Apple does their damndest to convince people to buy them anyway. And with each year’s new release, there are lines of people outside Apple stores and millions of online preorders for Apple’s devices.

Apple is wealthy because of our world’s rampant consumerism. You’re welcome Mr. Cook!

Many of us deride people for their Apple addiction. We buy Android, Windows, or Linux products that do as much as Apple’s, if not more, from a variety of manufacturers at drastically lower prices. However, we still benefit from the ridiculous consumerism that surrounds Apple, don’t we?

How many of us hold shares of AAPL and love the fact that it’s trading at $361 today? Even those of us who prefer the simplicity of index funds benefit from this ridiculous cultural phenomenon. Our very own sacred cow, VTSAX, is a whole-market index fund.

Owning VTSAX is owning Apple.

Owning VTSAX is also owning Amazon, Johnson & Johnson, Coca Cola, Verizon, and all the other companies in our country that only exist and thrive thanks to rampant consumerism.

Do we realize that every time we rail against consumerism, we’re railing against the very goose laying our golden eggs?

Do you see any hypocrisy in that?

How is the FIRE movement’s relationship with the goose laying all it’s golden eggs?

Like I said, I’m not trying to reach a resolution around these questions. This thought should make us uncomfortable, but I don’t think we should feel obligated to completely alleviate that discomfort. I think the discomfort is a good thing. I think we need to realize and acknowledge the fact that our good fortune exists because of others’ consumerism. I wonder if, perhaps, we should consider being a little more thankful for all those consumers. Ideally, I think this discomfort could drive us to set some long-term goals for the FIRE movement.

This brings up a question that I see about once a month in groups like ChooseFI and BiggerPockets Money: What would our world be like if everyone lived by the principles of FIRE?

If every single person on the planet embraced frugality and tried to save 50% or more of their income, our current economy would collapse. There might still be demand for expensive goods, from people who had achieved FI and wanted to spend excess money on nice things. However, without hundreds of millions of people trying to keep up with the Joneses, many companies would just plain go bankrupt.

This would mean lots of job losses and a big stock market crash. Even going forward, without businesses constantly expanding, overall market returns would not be nearly as large as they have been. The 4% Rule might quit working altogether.

Honestly, I don’t think this scenario is realistic. Even if the FIRE community flooded social media with envy-inspiring images of how great life is in FIRE, consumer culture seems so entrenched that I doubt we could convert more than a couple percentage points of humanity, let along the whole world.

Even if it did happen, I think we’d eventually figure out an equilibrium where our economy could function. Mr. Money Mustache wrote a great post about his ideal design for a city. His idea is basically a society where each person spends 10-15 years working hard, then retires to a life of meaningful living. I think this ideal could work. With such a small portion of the population working full-time, I think we could keep them busy and their companies profitable providing for our basic needs (food, clothing, housing, etc.)

Spending needs would be lower in this society, so maybe a Treasure Bath deep enough to work with the 4% Rule in our world of consumerism would work with a 2-3% rule in a Mustachian utopia.

However, we have to admit that the transition from here to there would be brutal. It would result in many years of chaos, and would require a complete redesign of our economy and our society. It could only work if we convinced the vast majority of humanity to live by the FI movement’s principles.

So, although we get to live great lives once we’re freed from financial insecurity and the drudgery of mandatory full-time work, we have to realize that our success is fueled by people who suffer from that same insecurity and drudgery every day. And if we actually wanted to bring all of them into our fold, it would cause worldwide chaos.

For me, this is just the first major hypocrisy of the FIRE movement. Let’s look at another.

One of the Pillars of FI is frugality. From efficient meal planning and shopping, to sniffing out free entertainment, to just redefining what holds meaning in our lives, the people of the FIRE movement have become masters at finding ways to enjoy life without having to spend a lot of money.

Another Pillar of FI is reducing our tax burden. We debate endlessly how to fund our tax-advantaged retirement accounts, and then how to get the money back out of them in time to be useful.

The Mad Fientist wrote one of the most efficient explanations of how to access money in retirement accounts I’ve ever read. He also wrote about how an HSA can be a treasure trove of money, upon which a person never has to pay any taxes. Justin, who writes on Root of Good, has a famous article explaining how he only had to pay $150 of taxes on $150,000 of income. Jeremy, of Go Gurry Cracker, has a famous post about how to never pay taxes again.

On one hand, I think these posts and those like them are brilliant! As long as your laws allow you to pursue strategies like this you absolutely should!

However, this leads to some more uncomfortable truths for us to consdier.

Frequently, when you see a post or comment about how someone effectively (and correctly) reduces his or her tax burden, there’s usually a post or comment nearby about all of the free government services people use.

People in the FIRE movement love the library…for good reason. The average library can potentially provide hundreds of thousands of hours of entertainment and learning for “free.” (In this case, “free” means “the money you pay in taxes.”)

For the average citizen who doesn’t try to optimize anything and pays a lot in taxes, this is a pretty good deal overall. But, isn’t it a much better deal for members of the FIRE movement who pay little or nothing in tax?

The FIRE movement loves parks as “free” entertainment. Those parks are frequently kept up by the government, and funded with tax dollars.

Mr. Money Mustache has identified riding bicycles as a foundational principal in his philosophy. He rides them on city streets, and on city- or state-funded bike paths. Even his ideal Mustachian community would have sidewalks and paths large enough for bicycles. I can only assume that his vision has members of the community contributing to the creation and upkeep of those thoroughfares…with taxes.

This is a pretty nice bike path. I wonder how many tax dollars it takes to build and maintain something like this.

Many of us use real estate investing to help diversify our risks and potentially increase our returns. How many of us consider crime rates and police presence in the area when deciding whether to buy a property? How many of us rest a little easier knowing that we’re protected from the worst possible tenants by police who will enforce an eviction?

How many of our investment properties are insured against catastrophes like fire, in part because the insurance companies know a nearby government-funded fire department will keep fires from spreading out of control?

How many of us sleep easier at night in our own homes knowing that we can call on police or firefighters to protect us?

We generally scoff at the idea of private school. “Why would you pay more than the Root of Good family spends in a year just for elementary school tuition when your kid can attend public school for ‘free’?” If we live beyond walking or biking distance, do we put our kids on publicly-funded school busses in the morning?

College is expensive. Many people within the FIRE movement put great effort into “Hacking the FAFSA” to get government grants and/or cheap loans to help pay for college. The “hacking” aspect of this comes from the fact that most of us make a lot more money than we get taxed on. We’re trying to use every loophole possible to make it look like we’re poor…even though we may be well on the path to FI.

We’re a long way from solving the problem of health care in our country. Many of us benefit from provisions in the ACA that get us coverage despite pre-existing conditions, or reduce our costs. Many members of the FI movement rely on government subsidies to get any health care at all. Personally, I’m okay with this on some level. I believe that we’re better off funding as much preventative care as possible. It costs us far more to have uninsured people show up at the emergency room for conditions that should never have led there. And yet, do any of us honestly think that the ACA subsidies were intended for people in the double comma club?

I could keep this up all day, but maybe I’ve made my point?

It is good that we benefit from all of these “free” services. However, we must admit to ourselves that they aren’t actually free. They’re all funded by tax dollars. For those of us who do everything in our power to legally avoid paying taxes, are we getting more than our “fair share?”

What if these services were all privately owned? Do you know any teachers? They work very hard, doing an incredibly important job, for relatively little pay. I wonder how many members of the FIRE movement have advocated to increase teacher compensation while also doing everything we can to pay less in taxes.

Would you walk into a bookstore and take a bunch of books home without paying for them?

If you wanted to borrow some money from your parents or a friend, would you intentionally make it look like you had less money than you do to convince them to help you?

There are schools of thought, to which you maybe belong, that would label most of these actions dishonest. In some cases, they’d look a lot like stealing.

This makes me very uncomfortable, and I hope it has a similar effect on your. Remember, we’re not defending ourselves right now. Just step back and consider your position on this.

Do you know someone less wealthy than you? Maybe they spend their money stupidly, but maybe they also work hard and live honestly as they try to do their best in this world. How would that person feel if you boasted what a good deal you get on things like libraries, schools, emergency services, roads, etc. without having to pay for any of it in taxes, despite having a higher income and net worth?

I still think it’s okay to pay as little as possible in taxes. As an Air Force officer, I can tell you that the government wastes so many of your tax dollars that it makes me sick. Maybe if we all paid less, they’d have to waste less.

However, I also realize that I get a lot of benefit from the taxes I pay. I’m even unique here. I used to fly the B-1B in the Air Force. We burned roughly 2,600 gallons of fuel per hour at high-altitude cruise. We didn’t spend a lot of time in full afterburner at low altitude. Part of the reason is that we would have broken every speed limit in the book. Another part is that our fuel flow was closer to 44,775 gallons per hour in that configuration!

My old ride. Yes, she’s every bit as fast as she looks.

I also got to teach Air Force pilot training in the T-6A. It is one of the most fun aircraft I have ever flown. I enjoyed every minute of flying I got to do in the Air Force. I realize that my lifetime tax bill probably won’t be enough to cover my use of roads, emergency services, and public education resources…let alone a portion of the flying I enjoyed in the military.

Is it morally good for us to take advantage of so much that we don’t pay for?

Yours truly cruising in a T-6A. I don’t know if I’ve ever had a better office.

Another key principle of the FIRE movement is finding ways to increase our income. Many of us start side-hustles to bring in extra money. Frequently those businesses include writing blogs or books, writing software, creating videos and podcasts, and other intellectual property.

We rely on the income from our creations to help us support our families in the short-term, and hopefully reach FI in the long-term. In general, I feel like we’re proud of those around us for the things they create.

And yet, any time you get a thread of commenters discussing frugality, people start coming out of the woodwork discussing the ways they save a buck on entertainment. We borrow books from the library or get them used. Libraries pay authors for their books, but I can tell you from experience that it’s not very lucrative. Used book sales don’t benefit authors at all.

I’m also a computer programmer. I have never finished a customer-facing project with fewer than a copule hundred hours of work. More involved projects might take thousands of hours of work.

Do we value the time of other human beings so little that we aren’t willing to provide them at least some compensation for putting in all of that work?

If it were your book or your computer program, how would you feel about someone who said, “Thanks for creating that…it was great! I made sure to take full advantage of it in a way that didn’t earn you a dime!”?

To be fair, I feel like most of us who write about FIRE will reach our goals without selling you our book. I feel like most of us are more interested in you benefitting from the ideas than making a buck off you. I haven’t hesitated to give out free copies of my book to aspiring pilots who do no more than ask. I’ve never heard JL Collins complain about people checking out The Simple Path to Wealth from the library.

Still, I think this is something worth thinking about.

During these discussions, I almost always see a few people who comment that they’ve taken all this a step further. They discuss ways that they get access to books, music, movies, or other materials in ways that outright violate terms of use or border on illegal.

They share passwords to streaming video accounts. They find pirated copies of books, songs, movies, and software. If you can find these things legally, then by all means go for it! However, I was taught that taking things that belong to others without paying is called “theft.”

For me, the worst part about these comments is that the things most people brag about “getting for free” are just entertainment. Many parts of the FIRE community deride people who mindlessly consume entertainment. “If they just spent a portion of that time getting control of their finances or starting a side hustle, they’d be out of debt and financially free in no time!”

We have lots of stories justifying theft to provide food that will mean the difference between survival and starvation. Of all things, is entertainment worth sacrificing our principles over?

Is it morally right to use outright theft to reach FI?

Please understand that I’m not perfect here either. I spent years digging for ways to get free stuff. I remember my first time at an open-air market in Russia seeing tables full of CDs for $1 each and thinking I’d hit the jackpot.

I’ve mostly reached FI, and I think it’s a lot easier to take some sort of moral high ground when it’s easier to afford the things you want. Still, I think we owe it to the members of our community who work hard to produce things we value to consider how we obtain copies of their work.

I hope reading this has made you at least a little uncomfortable. I didn’t try to induce that discomfort to just make you feel bad. Instead, my hope is that it will convince you to think through some of your mindsets. This blog doesn’t have many readers yet, but I’ll admit that I hope this post will prompt some open conversations wtihin the FIRE community.

Let’s have this discussion. Over and over again. We don’t have to reach any conclusions as a group. There’s value in just mulling things over.

You may notice that I didn’t provide many answers in this post. That’s because I don’t have them. I’m not sure any of us does. I think it’s very important for us to agree that it’s okay for these issues to continue being unresolved.

I’m a big believer in individual rights and individual decision-making. I don’t think any unified, overarching set of answers to all of this could be effectively enforced on all of us anyway. Like the Oracle always says, each of us just has to “make up your own damn mind.”

And yet, I believe there’s value in having this discussion publicly. I don’t presume to be the smartest person around. I hope to hear opinions of others that both support and oppose my ideas. I believe that each of us can reach a better conclusion by listening to both sides.

So please let me know what you think.

Is it okay to deride consumerism when that is exactly the force that makes FIRE work for us?
- Is there a way to adjust our attitudes toward consumerism to acknowledge our inherent hypocrisy while still pursuing FIRE?
Is it okay to maximize our use of taxpayer-funded services while doing everything we can to avoid paying taxes?
Is our quest for frugality driving us to obtain others’ work through morally questionable sources?

Thank you, sincerely, for reading this today. Thanks in advance for sharing your thoughts.

Image Credits:

I got this post’s feature image from Mahmudul Hasan Shaon on Unsplash. Thanks and fantastic work!

The image of FinCon speakers is from a Teachable course offering videos from past conferences. I haven’t taken the course, and I’m not affiliated with it at all. You can find it here: https://finconuniversity.teachable.com/p/fincon19-virtual-pass.

The golden eggs are from a photo by Sharon McCutcheon on Unsplash.

The FREE concert is a photo by William White on Unsplash.

The image of Tim Cook is from this USA Today article: https://www.usatoday.com/story/tech/2020/02/17/apple-says-iphone-sales-affected-by-coronavirus/4788905002/.

The French bike path is a photo by Grillot edouard on Unsplash.

The B-1B photo in the post is from: https://www.dvidshub.net/image/4107819/patrolling-pacific-b-1b-lancer. You can see it and a bunch of other “free” (taxpayer-funded) military photos on that site.

The fireside discussion is a photo by Tegan Mierle on Unsplash.

Escape Plan FIRE

For all intents and purposes, my family has achieved FIRE. This is why I finally have the time and resources to work four jobs.

Yes, you heard that right…I guess. My wife either jokes, complains, or humble-brags about me having four jobs as it suits her needs.

I know the Internet Retirement Police are probably already on their way. According to them, a person isn’t allowed to be “retired” if he or she still does even a single moment of work. You may have noticed that I’m a pilot, which means that I could care less what the IRP (or anyone else) thinks.

I think the Financial Independence community gets too wrapped up in phraseology, and seeks out dogma in a movement that is as individual as it gets. If having investments equal to [25 x Annual Spending] constitutes FIRE, then what constitutes Lean FIRE or Fat FIRE? I say, who cares?

I also think it’s unfortunate that “Retire Early” makes such an accessible acronym when coupled with “Financial Independence.” If there’s one thing we can learn from the early leaders of the FIRE movement, it’s that society’s idea of retirement is overrated. Nobody can sit around the house all day binging Netflix, or even sipping margaritas on the beach. People need more fulfillment from life.

We’ve seen how the Mad Fientist and his wife abandoned their original plan that involved at least 6 months of travel each year. They realized that they value community and productivity that they can only get at home. The Financial Samurai recently announced that he “failed” at retirement, and planned to return to a regular-ish job. Even the great Mr. Money Mustache has continued pursuing commercial activities that include running a highly-profitable blog and a co-working space so cool I’ve tried to convince my wife she’d love living in Longmont, CO.

None of these people leads a life that society at large would define as retirement. And yet, none of that takes away from the only fact that matters: whether they work or not, their investments will cover their families’ needs forever. (Well, I’m not sure about the FS. He makes it seem like he needs more money. I say he could move almost anywhere else on Earth and be just fine.)

This is all that really matters in the FIRE movement. Does the passive income from your investments cover your family’s needs forever? If so, you’re FIRE. Done.

My wife and I both continue to work because we find fulfillment in our jobs. If I were to describe my ideal retirement (by mainstream standards) it would include owning or having access to a variety of aircraft. I’d wake up in the morning and go fly one for a while. I’d probably land long enough to eat lunch, and then go back up again. I love flying like some people love golf, or knitting, or watching TV. Flying for me is both fulfilling and fun.

I could certainly make sure that my nest egg is large enough to cover the cost of operating an aircraft or two. I guess we’re probably there anyway. However, given the choice of paying tens (or hundreds) of dollars an hour to fly my own airplanes, or letting other people pay me hundreds of dollars an hour to fly their airplanes, why not spend a few hours “working” here and there?

I don’t plan to share the specifics of my family’s finances here, but I’ll admit that we spend far more than the Root of Good family or most of my other favorite FIRE bloggers. We feel comfortable spending at our level because our jobs pay well. However, COVID-19 has recently reminded us that even our fantastic jobs aren’t guaranteed.

I’m an airline pilot, and our industry is getting pounded right now. I’ll almost certainly get “displaced” from my cushy Captain seat and forced to fly as a First Officer again in the next few months. This will entail about a 40% pay cut. I’ll be lucky if that’s as bad as things get. I’m also potentially vulnerable to a furlough that would reduce my pay to zero.

My wife is a pediatric dentist. Her office has been shut down for a couple months. They finally have approval to open back up, but they can’t get their hands on any N95 masks. (Thanks to all the hoarding heroes who have been wearing medical-grade masks to the grocery store and to collect takeout from restaurants.) We hope she’ll be able to work for pay again someday….

What if it didn’t happen though? What if my wife and I lost both of our jobs, and our ability to find equivalent work forever?

It’s extremely unlikely that all four of those things would happen, but I think the thought experiment is worth going through.

First off, we have enough in our investments that we could cover our spending needs through passive income. This probably includes spending more than we strictly need to right now, and owning a fancier home than any self-respecting personal finance writer should. I think we’re both conservative enough that we’d look at ways to cut costs if we both lost our jobs.

We also happen to own a house in Rapid City, SD. It’s an accidental rental property. My wife bought it when she arrived for her first operational Air Force assignment and we couldn’t afford to sell it when we she left two years later. (Note to Active Duty military members: don’t ever buy a house when you PCS, unless it will make sense as a profitable rental property. Ideally, it should work as a house hack while you’re at that assignment.)

It’s a great house. It has 4 bedrooms, 2 1/2 bathrooms, a 2-car garage, and a nice yard on a big corner lot. It’s walking distance to the nicest elementary school in town, biking distance to a grocery store, and 5-15 minutes closer to Ellsworth AFB than most of the houses in town.

Since this house has been a rental for the last 12 years, we have quite a bit of equity in it. In our absolute worst-case scenario we could pay that house off, pack up our whole lives, and move to Rapid City.

This would take a necessarily dire situation. We Florida, sunshine, and warmth. I’d have to convince my family that it’s fun to have our house occasionally look like this:

Note the visible grass. These drifts happened because of wind blowing the snow around, not because it was that deep everywhere.

We’d definitely try to sell our current house in Florida. We have some decent equity in it, and we’ve used our high incomes to increase its value. We’d definitely get enough cash from this sale to pay off our Rapid City house. Optimistically, we’d have enough after that to cover living expenses for a while.

If we got scared and only broke even on selling our Florida house, we could still pay off Rapid City. We started a house payoff fund last year, and it has almost enough to pay off the Rapid City house right now. Worst case, we could sell some of our other investments to come up with the rest of the cash we need.

It’d suck to uproot ourselves and move away from here. Thankfully though, we still have friends in Rapid City and we could fit in there as well as we do in Tampa.

Once we got there, our cost of living would plummet without even trying hard. First and foremost, we would have shed a larger-than-necessary mortgage by selling our Tampa house. By paying off our Rapid City house, we’d eliminate any mortgage payments there. With nothing to worry about but taxes, insurance, maintenance, and utilities, we’d save a lot of money right away.

With neither of us working, there’d be fewer meals out. (I do a lot of restaurant dining as an airline pilot.) Neither of us works more than about 10 days per month, but we’d still save costs on commuting. In fact, we’d have no need for a second car and could slash expenses by selling one.

We’d go further though. I’m close to convincing my wife to cut cable out. Google FI is already cheap, but spending less time at work would mean using more wifi and less cellular data. If we were making a change as drastic as moving across the country, we’d get more diligent about meal planning. I’d also feel compelled to go full Mustachian for transportation and only ride my bicycle to places like the grocery store.

After the initial shock, I think we’d end up pretty happy with the situation. I feel like we have a lot of fluff in our lives that doesn’t need to be there. Moving in this context would naturally get rid of a lot of it. We’d have lots of time to spend together, and lots of time to pursue other interests. It’d be a lot like our daily lives right now, stuck at home not working because of Coronavirus.

With our investments strong enough to support most or all of our spending level in Tampa, we’d be very fat FIRE at our reduced spending levels in Rapid City. If we wanted to we could just enjoy our unemployment: hiking and rock climbing in the Black Hills, running and biking around town, skiing in the winter. It’d be glorious.

The Needles, as seen from the fire observation tower atop Harney Peak, the highest point between the Rockies and the Pyrenees. I could do a lot worse than spend the rest of my life wandering around the Black Hills.

However, I’ve mentioned that I don’t think it’s realistic for anyone to live a life of total leisure forever. My wife and I are both driven enough that I don’t think either of us could last without pursuing some type of meaningful, paying work.

This isn’t a bad thing. My first instinct would be to pursue flight instructing. Losing my job as an airline pilot could be the result of factors that would also prevent me from doing other commercial flying, but let’s ignore that for a moment. I taught and towed gliders at the Black Hills Soaring Club last time I lived there. I’d definitely offer my services. I was also a mission and instructor pilot for the Rushmore Composite Squadron of the Civil Air Patrol. That’s a volunteer gig, but it’s fun and very rewarding. It also involves cheap or free flying and would be a good way to enjoy doing what I love.

Flying BHSC’s LET-13 with my all-time favorite and most attractive passenger.

Beyond those opportunities, I’d look for flight instructor jobs at schools in the area. As a former B-1 pilot, I could potentially get a job as a simulator instructor at Ellsworth AFB. (I could also pursue Air Force Reserve jobs as a B-1B or MQ-9 pilot at Ellsworth. I think they’d be a lot of work, but it’s nice to have options.) I also flew a lot with an FAA Designated Pilot Examiner when I lived there. I have the qualifications to do that job now, and I’d seek his advice on how to do that job. The FAA has a DPE shortage right now, and I figure I could easily make $600-1000 per day in that job.

Those are all nice, local flying opportunities. Assuming we only had to move there because of our current employers going under, I’d eventually be able to search for a fancier flying job with an airline, charter operator, etc.

That’s a lot of flying job opportunities, but I could also pursue paying opportunities outside of flying. I’ve been doing paid writing for a while, and I would definitely look for opportunities to do more. My first book is selling well, and I have no shortage of ideas for more books. In theory, not having a day job would free up time for me to get those projects done.

My wife and I also have several ideas for businesses we could start from anywhere. With the security that comes from having our basic needs met, we’d feel confident trying to make one or more of those ideas work.

I could go into more detail, but I think this gets the point across.

In case of dire catastrophe and total job loss, we’d be okay. We could:

Sell our fancier-than-necessary house in Tampa and move to a home we already own in Rapid City.
We have several different ways to pay off our Rapid City house.
Our Treasure Bath is deep enough to support our current spending. However, between no mortgage, no job-related spending, less commuting, and other cost savings, we’d slash our spending requirements.
We’d have plenty of time to enjoy a simple life together. However, there is no shortage of job prospects if we chose to pursue fun and meaningful employment.

Don’t get caught up in someone else’s definition of Financial Independence, or worry about whether or not you meet some arbitrary criteria associated with an acronym like FIRE. The labels and checklists don’t matter. All you need to care about is whether your streams of passive income can cover your family’s spending needs.

If they can’t, follow the well-established steps to reduce your spending, increase your income, and save everything in between. Your choice to do this is entirely in your power. Once you start, it is only a matter of time before you reach FI. As far as I’m concerned, it’s a shockingly simple mathematical certainty.

When you reach the milestone of FI, you can celebrate. However, that doesn’t mean you need to make any changes in your life. If your investments covered your spending yesterday, then as long as you don’t increase your spending tomorrow you’re still good. At that point, every dollar you earn is just gravy on top of everything…extra Treasure spilling over the edge of your Bathtub. If you enjoy that work, keep doing it until you don’t! If not, you have the freedom to make a change.

If you choose to keep working, you’ll have the option of increasing your spending. We have, but we still aren’t going crazy. We certainly aren’t committing ourselves to any long-term spending burdens. We’ve thought through our options in case this income goes away…and ended up with this FIRE Escape Plan.

Now it’s your turn. Is your Treasure Bath full, or close to it? If so, what’s next for you? If you choose to keep working and/or increase spending, whats your Escape Plan?

My High-Yield Savings Account

In following the Choose FI group on Facebook, I feel like it’s almost a daily event for someone to ask some form of this question:

“I want a place to save money and earn interest, but I want less volatility than the stock market. What are my options?”

The overwhelming number of responses recommend so-called “high-yield” savings accounts with online or physical banks. In the heydays of 2019, the best of these accounts paid upwards of 3% interest. In my mind, 3% is downright respectable. Most paid less than that, and thanks to COVID-19 many of those rates have dropped well below 2%.

The ensuing comment threads pit one bank’s interest rate against the other and people end up splitting hairs over tenths of a percentage point.

“I’m getting 1.7% right now.”

“Oh yeah? I’m getting 1.8%. That’s way better.”

Honestly, this debate frustrates me a little. Inflation averages around 2.5% – 3.0%. Debating over 1.7% vs 1.8% is just a debate over how much money you’re losing every month.

I feel like people are failing to consider better options in part because they don’t realize how modern investing works. I also think debating tenths of a percent is a waste of time. I want to look at both those things here.

Let’s start with debating minutia. We’re going to use a flying analogy because, well, I’m a pilot and you’re here anyway.

I used to fly the B-1B Lancer, more commonly known as The Bone.

A U.S. Air Force B-1B Lancer, assigned to the 37th Expeditionary Bomb Squadron, Ellsworth Air Force Base, S.D., flies over the East China Sea, Jan. 9, 2018. The Lancer serves as premier platform for America’s long-range bomber force, carrying the largest conventional payload of guided and unguided weapons in the Air Force inventory. (U.S. Air Force photo by Staff Sgt. Peter Reft)

The Bone is quite possibly the sexiest looking war machine of all time. It looks far too sleek for its hulking 477,000 pound maximum gross weight that includes 48,000 pounds of bombs and 205,000 pounds of internally-stored fuel.

As good stewards of your tax dollars, we always put a great detail of time and effort into planning every part of a mission in this magnificent aircraft. We would plan Time on Target (TOT) down to the second, weapon impact angles down to the degree, and fuel consumption down to the hundreds of pounds. (The Bone is a thirsty baby. 100 pounds is good for about 20 seconds at cruise.) We would spend an entire day putting that plan together before the Aircraft Commander and/or Flight Lead spend 3-4 hours formally briefing the plan for the mission.

Unfortunately, it is a universal truth of war that: “No battle plan ever survives contact with the enemy.” Between weather, Air Traffic Control delays, maintenance issues, and more, our plan usually started changing before we even stepped to the jet. We got very good at re-planning things in the air.

After you’ve been through this cycle enough, you dread the slog of mission planning day because you know everything is going to change, no matter how diligently you plan. We cynically referred to this process as: “Measure with a micrometer, cut with a battle axe.”

This is how I feel when people debate tenths of a percent in a “high-yield” savings account. You’d be better off closing Facebook and taking a fare as an Uber driver or a delivery with Instacart than spending more time dithering over which savings account will earn you more interest.

I’m shocked at how people get so locked in to wanting a savings account because most of us have read The Simple Path to Wealth by JL Collins. He barely even mentions savings accounts, instead advising his own daughter (for whom the book was written) to put most of her money in low-fee whole-market index funds, like Vanguard’s VTSAX. For those who are afraid of volatility, he recommends putting a portion of your savings into a low-fee whole bond market index fund, like Vanguard’s VBTLX.

Having otherwise filled our Treasure Bath to a very comfortable level, my wife and I have recently decided to start building up a house payoff fund. This is another hotly-debated topic in communities like Choose FI:

“Should I make extra payments to principal to pay off my house sooner?”

“No! You can do far better in the stock market!”

“No way. That ties up capital that you could be using in other ways.”

“But if it gives you peace of mind and you don’t mind passing up good money, then there are worse ways to spend your income.”

My wife and I decided: why not do both?

We opened a regular old brokerage account on Vanguard and started pouring money into it. Alert to the height of the market and forecasts of a correction, my wife wisely insisted that we not put everything 100% into stocks. We settled on putting 50% of our money into VTSAX and 50% into VBTLX. Our plan is to keep putting money in here and letting it accrue interest. When the value of our account (minus taxes) equals the balance on our mortgage, we’ll pay it off in one fell swoop.

Throughout 2019, we were thrilled with this account. Our shares of VTSAX were up 20-something percent for the year. We figured we’d be able to pay off our house a lot sooner than expected. Then COVID-19 hit and the market crashed.

Were we ruined? Are we in the depths of despair right now? Are we kicking ourselves for not going with a high-yield savings account instead? Hell no!

When we opened this account, we bought VTSAX at $74.25 and VBTLX at $11.05, respectively, per share. At its worst, VTSAX was down to $54.49 per share…a 26.4% drop. Ouch! However, our shares of VBTLX have been as high as $11.63, a 5.1% gain, and are sitting at $11.43 (still up about 3.4% overall) today.

I actually “rebalanced” this account by selling some of my VBTLX shares when they were up to buy VTSAX shares while they were down. I plan to continue dollar cost averaging my way through this pandemic to keep our portfolio balanced.

Overall, our account is up 0.4% from when we started it last September. That’s not great, but it’s also not bad for a market that has been this low overall. In fact, we’re only about 1% below what the best savings accounts around would have yielded during this time.

The important thing, though, is that the upside of those savings accounts is very limited. Even if someone announced a cure for coronavirus today and the economy skyrocketed, those accounts will never pay much more than 2.5-3%.

Before we go on, let’s take a moment to consider the one major downside of this strategy: capital gains tax. The IRS couldn’t just let us save money and put it to use taking care of our families without taking their cut. If I make money by selling any of the holdings in our house payoff fund, I have to pay taxes on the profits.

Many people pursuing FIRE have taxable incomes low enough that the long-term capital gain tax rate is 0%. Worst case, I’d have to pay 20% of my profits. Right now, with my shares fo VBTLX up 3.4%, a worst-case 20% capital gains tax would reduce my VBTLX profits from 3.4% to about 2.7%. That drop sucks, but 2.7% is still a lot better than high-yield savings accounts are doing right now.

With that in mind, let’s note that VTSAX is all the way back up to $71.17 per share today (May 12, 2020.) I have full confidence that a combination of ingenuity and greed will keep the stock market climbing, and that my shares of VTSAX will end up far exceeding the value they had when I bought them. A 3% return is laughable compared to what the overall stock market will do in the future.

Let’s look at the real kicker though. Most savings account holders choose that vehicle because they’re worried about market volatility. What if I need the money on a day when the market is down 20%? I’m screwed, right?

That’s the beauty of having a portfolio balanced between stocks and bonds. Although there are occasions when both stocks and bonds drop at the same time, they usually go in opposite directions. That’s what’s happened now with bonds performing better than they have in years while the stock market has been down.

None of the “losses” that people worry about have actually happened because I haven’t sold a single share of VTSAX. The fact that our account is only up 0.4% overall right now is meaningless because we don’t have to sell from both sides equally. If I desperately needed some cash, I would have sold some shares of VBTLX…at a 3-5% gain over 10 months. That’s far better than the best savings account.

Since half of our savings is in that bond fund, we could do a lot of spending before we ran out of shares to sell. We haven’t needed to sell any, except to exchange it for cheap shares of VTSAX, so we’re even better off. Eventually, those shares of the stock market fund will go back up and we’ll have the ability to sell them for a gain as well.

I think part of the reason people don’t think of doing this is we have a very antiquated understanding of how the stock market works. I illustrated this in my book, Pilot Math Treasure Bath. I’m going to use an excerpt from Chapter 6, Nuts & Bolts – Getting Started, to provide that illustration here:

Another reason that people keep too much money in savings accounts is that they don’t understand how our financial system works. They think that if a sudden expense pops up, they must have money to cover it that instant. For someone living paycheck-to-paycheck, this is terrifying and problematic. Again, we’re not those people.

If your car breaks down and you have to pay $1,800 for a new transmission, you do not have to shell out all that money that instant. Worst case, you’ll have to pay part of it up front, and cover the balance after the repairs are done. Chances are the shop doesn’t stock transmissions for every make and model of vehicle on the road. They’re going to have to order one and it’ll take a few days to arrive. Then, it’ll take at least a day to swap it out. This gives you several days to come up with the cash.

As long as you’re disciplined and you have a plan, there’s nothing wrong with using a credit card to cover this expense. As an added bonus, you’ll get at least 1,800 hotel points or frequent flier miles by paying this way. When you use a credit card to pay for something, you have 30 days to pay off that expense without having to pay any interest to your credit card company.

If you have a full month’s worth of expenses sitting in a checking or savings account, you can quickly use an app on your phone to transfer some cash to pay off your credit card bill the same day. Easy peasy! If not, either of these cases still gives you enough time to tap into your brokerage account. Instead of having your emergency fund lying around as cash in a savings account, you can be storing it as shares of VTSAX. You just sell a few shares of your mutual fund and use the proceeds to pay off your credit card.

Years ago, converting those shares back into to cash would have been a chore. You would have had to pick up a telephone (attached to the wall by a cord,) dial a 10-digit number by hand, and call your stock broker. He (probably not a she back then) would have had to call someone else and sell your shares. Then, he would write you a check and mail it to you. You would have to then drive to your bank, and wait in line, sign the check, and hand it to a person called a bank teller. Your bank would write some information in their ledger, bundle your check with thousands of others, and drive it to the local airport. From there, a small army of snot-nosed 20-year-old pilots would use a fleet of Piper Navajos to fly your check back to your stock broker’s bank…probably in the town from which he sent it. Once the stock broker’s bank got the signed check, they’d finally transfer the funds to your bank.

The Piper PA 31 Navajo. Mainstay of fly-by-night cargo companies the world over.

You should bow your head right now and thank Our Loving God in Heaven that those days are over!

Instead, you’ll be able to access your brokerage account from any computer in the world (including your phone) by going to Vanguard, Schwab, Fidelity, or your company of choice. With a few clicks, you’ll be able to sell as many shares of VTSAX as you need, all by yourself. Worst case, you’ll have to wait until the end of the day before you see cash show up in your brokerage account. You will have your regular bank account linked to your brokerage account and you’ll be able to immediately set up an electronic transfer from your brokerage account to checking.

This gives you more than enough time to have the money ready by the time the repairs are completed later this week, or to pay off your credit card by the end of the month. Thanks to modern technology, money stored as shares of VTSAX is as good as liquid for anyone disciplined enough to properly use a credit card.

Holding savings in a Vanguard brokerage account is neither difficult or volatile. If the stock market is down, I can get money by selling bonds. And when the stock market is up, my money works far more effectively on my behalf than it ever could in a savings account.

Vanguard let me link the checking account from my regular bank to their website. If I want to invest new money, they can pull the funds directly from my account at my bank. If I want to sell some shares, I can tell Vanguard to send the money to send the funds directly to my checking account the moment my shares get sold. In most cases, the money is in my checking account the same day I make the request.

Is it still a good idea to have a cash emergency fund for unexpected expenses? Sure. My wife and I keep enough cash on hand to cover 1-2 months spending at all times. However, even that is probably overkill. If we really needed money on short notice, we could use a credit card to pay. With credit card billing cycles running 30 days, we’d have plenty of time to get money from our Vanguard account and pay off that bill. (In the meantime, we’d earn travel rewards points for using the credit card.)

In my opinion, this is no less accessible than a traditional savings account. By splitting our savings between stocks and bonds, we give ourselves two different pools of money to draw from. The bond market generally performs at least as well as any “high-yield” savings account, and it does even better when the stock market is down.

Coronavirus has hammered stocks lately, but I have no doubt they’ll continue their inevitable climb. When they do, our overall return will be far better than any savings account could possibly manage.

We have plenty of time to wait on using our house payoff fund until that happens. In the meantime, the bond side of our account provides a great, volatility-resistant emergency fund. However, one day our account balance will be large enough to wipe out our entire mortgage all at once. We’ll be able to say, “To hell with the battle axe. Let’s hit that mortgage with a 24 tons of bombs!”

Are you dithering and arguing over tenths of a percentage point in a savings account? Are you debating whether to pay your house off early or not? Just stop. Take a look at starting a regular brokerage account. Balance it between low-fee stock and bond index funds and just start pouring money in. Draw from the money that’s up in case of emergency. Otherwise, just keep filling it up until you can do this with your dollars:

Yes, we can carry 84 of those. That’s a lot of steel and fire raining down from the sky.

(Thanks to Patrick123456 at English Wikipedia fo the PA 31 photo.)

Full Text – Chapter 8, Dead Zoners

What follows here is the full text of Chapter 8 from Pilot Math Treasure Bath. Having just read back through it, I feel more disappointed than vindicated that I was correct to include this chapter in my book. I’m giving it to the world for free here because I’m afraid COVID-19 is going to turn far too many of us into the equivalent of Dead Zoners before the end of the year.

I want you and your friends learn from the mistakes of the past. I want your family to make it through this time with less stress in the near-term, and certainty of a bright future. I firmly believe that if you pay attention to and follow my advice, your family will make it through these tough times better off than most.

If you find any of this useful, I think you’d benefit from reading the rest of my book. It’s available as a paperback or Kindle eBook on Amazon, and on Kobo. Now, without further ado…

This book exists because the state of our industry fills me with optimism. US airlines are expanding, retirements are looming, pilot supply is insufficient to meet demand, and our world is addicted to air travel. All of that is good news for someone starting out a career as an airline pilot.

Sadly, history shows that I need to spend at least a few moments trying to temper my unrelenting enthusiasm. All it takes is one bad day to go from what we have now to a really terrible decade in this industry. Whether we are talking about health scares, a financial crisis, or a major terrorist attack, there are numerous threats to the good life that we enjoy.

Should something cause the music to stop, we could all find ourselves in a very different environment. If (or perhaps more likely when) this happens, it will affect the way we employ Pilot Math. I’m going to start illustrating this by using the current generation of “deadzoners” as an example. Here’s today’s history lesson:

At the end of the 20th century, the US economy was booming. The dot com bubble was still inflating, deregulation meant that airlines were free to figure out how to actually make money, and airline pilots were still treated with deference. Times were fantastic!

Pay rates for a senior widebody captain were sky-high. In today’s dollars, they were in the ballpark of $600,000 per year, or more. In addition, every major airline had a pension fund that promised to pay 60% of a pilot’s Final Average Earnings (FAE) for the rest of his or her life. During their working years, pilots spent money like it was going out of style, knowing that they’d still be pulling in more than six figures every year in retirement. Nobody saved for the future because there was no need…60% FAE is a lot of money!

Tragically, a lot of bad things happened in relatively rapid succession.

The first problem was Uncle Sam’s fault. Congress wrote tax law to allow pension plans like those the airlines used to offer. The IRS allows companies to contribute pre-tax money into these funds. That tax treatment is supposed to incentivize companies to do the right thing for their people. Make no mistake though, neither IRS nor Congress wants to give up a single dollar of tax income if they don’t have to. They can’t afford it. (Someone needs to explain Pilot Math to the US Government.)

In theory, a company like an airline should contribute more money into a pension fund than is required to meet their payout obligations. This would protect against a market crash. It would be the morally correct thing to do.

Companies don’t want to tie up a bunch of money in a pension fund, but I think many of them would have chosen to fund their plans a little better if they could have. The problem is that he IRS won’t let this happen. They only allow a company to put enough capital into the fund to meet payout requirements, after accounting for accrued interest. It’s a very count-your-chickens-before-they-hatch situation. There are specialists called actuaries who do the chicken counting. They gaze into mathematical models equivalent to crystal balls, decide what kinds of investment gains a pension plan can expect, and tell a company how much cash it’s allowed to put into the pension fund each year.

The IRS watches this process very closely and only allows a pension to be “over-funded” to a certain level. If the company were to over-fund to an even higher level, perhaps expecting bad times ahead, the IRS would accuse the company of tax evasion and start arresting people.

As we just mentioned, the stock market was on a tear through mid-2000. It was called the “Dotcom boom” until it became the “Dotcom bubble” then the “Dotcom bust.” Over several months, the stock market experienced one of the largest drops in history. Companies went bankrupt, investors lost billions.

Suddenly, all the pension plans that had been anywhere from healthy to legally over-funded were in trouble. The value of the assets in which they were invested wasn’t even enough to pay out their obligations. The retirees drawing on the pension fund continued to decrease the principle available, exacerbating the situation.

As companies looked toward the future, it was mathematically impossible to fulfill all their pension obligations without huge cash infusions into those funds. The problem was that in the crashed economy, spending on air travel had dropped and the airlines weren’t making enough money to do that. It didn’t help that they were still trying to figure out how to make money in the first place, with deregulation not that far in the past.

Then things got worse.

Some evil men corrupted the minds of some religious zealots and used them to crash airplanes into the Twin Towers and the Pentagon…and the world panicked.

Commercial airlines resumed operations fairly quickly after 9/11, but it took a long time for the American public to feel comfortable flying again. The problems that the Dotcom Bust was causing for the airlines only got worse.

Many deadzoners will tell you that airline executives jumped with joy when this happened. There was simply no way they could continue to meet their pension fund obligations in this environment. The cynics say that the airlines used this situation as an excuse for getting rid of the pension plans altogether. I have no way to know if this was the case, but it doesn’t matter. It doesn’t take a math genius to realize that the economics of this situation left companies with no choice.

A series of bankruptcies preceded a series of mergers that left us with three major airlines (Delta, American, and United) and Southwest as the fourth major domestic player. As part of those bankruptcies, the US Government allowed these companies to simply give up on trying to fund their pension plans.

Some companies got to “freeze” the plans. The funds would remain invested and each pilot would get a payout when he or she retired; however, the company didn’t have to contribute any more money to the plan.

Other companies had to fall back on the Pension Benefit Guarantee Corporation. The PBGC is a government-run insurance agency just for pensions. Airlines (and other companies) had been paying premiums to the PBGC, and it had in effect insured their pension plan. The problem here is that, as with most insurance policies, the benefits the insurance company paid out weren’t anywhere near what had been promised. Most pilots who will receive PBGC money in place of their expected pension will receive pennies on the dollar for what they were promised. Many will receive even less.

This was a rough time for the entire industry. The mergers and bankruptcies continued for the better part of a decade. It didn’t help that SARS, bird flu, swine flu, and the 2008 financial crisis continued to…uh…challenge…the airlines throughout this time.

Another part of the bankruptcy process involves cost-cutting measures mandated by bankruptcy court. At my company, management told the pilots that they had to take a large pay cut if the company was to survive. The pledge was that they were only going to cut pay once. It’d be a huge amount, but it do the trick. The pilot group accepted reality and voted to approve the cuts.

Shortly thereafter, management came back and said that the pilots would have to take another pay cut if they wanted the pension plan to remain solvent. In the end, the pilots accepted nearly a 50% pay cut…and lost the pension anyway.

Naturally, with times this tough, everything scaled back and many pilots were furloughed. The ones that survived furloughs were stuck with almost zero progression for years. Every pilot at Delta Air Lines knows the name of the guy who was at the bottom of the seniority list during these years because he was stuck there for a decade!

Before the pension finally died, the company offered early retirement to many pilots. Take a lump-sum or a reduced payment now and you still get your pension, or you can stick around for a few more years and roll the dice. Many pilots took the early out, for better or for worse.

However, most pilots weren’t eligible for that golden parachute, and had no choice but to stick things out. These are the deadzoners – the pilots who were employed at a major airline the day it went bankrupt. They lost their pension, but unlike us, they have less time to use new 401K plans to build up retirement savings. They were immediately behind the retirement savings power curve because they’d lived the last decade (or two or three) thinking that they didn’t need to save. They’d always had a pension to look forward to.

Today’s deadzoners will tell you that their companies could have preserved their pension funds. Some of them accuse their companies of intentionally pushing things toward bankruptcy. We’ll never know if those accusations are true or not, but we do know that the current generation of deadzoners will never be “made whole.”

I feel bad for them. I wish there was more we could do for them. I would even support policies that paid them a little extra at my expense because I realize that I would not have the great job I do today if not for their sacrifice. We’ll see if our companies and our pilot groups have the creativity and moral backbone to make that happen.

When I look at our industry today, I can’t help but perceive a shadow of doom looming over my sea of optimism. Pay and benefits are high. The economy is booming. People are happy. All it will take is one bad day and we could find ourselves hurting, much like the deadzoners.

Thankfully, few airlines still have a pension, so none of us has been deceived into thinking that someone else will take care of retirement for us. Anyone starting at a major airline these days has plenty of time to take advantage of 401K plans and other savings to put away enough to enjoy a comfortable retirement. However, if things were to go bad and we saw another round of 50% pay cuts, the Pilot Math equations would get out of balance very quickly.

I hope that this doesn’t happen. I hope things will stay good for a very long time. However, we need to be realistic about the fact that things could go wrong. If they did, we’d each have to take some significant action.

One of the reasons the term “deadzoners” even exists is that they can’t help telling everyone they meet about how badly they got screwed. In their defense, they did get screwed. Unfortunately, as many of them approach retirement, they’re starting to worry that they’ll run out of money before they die.

I feel terrible for that generation of deadzoners. I hope they’re taking advantage of these good times to make up as much of their shortfall as they can, within reason. Unfortunately, some of them spent too long clinging to hope of a restored pension and failed to take the action necessary to protect their families financially.

Poor Old Joe falls into this group. When his company went bankrupt and he took his massive pay cut, he had just closed on a gorgeous “captain’s house.” This house had it all…4,500 square feet, 5 bedrooms, a home theater, a pool, new furniture to fill it all up, with tennis courts and a golf course just down the street (and a $500/month Homeowners Association fee to cover their upkeep.) He’d treated himself to a brand-new Corvette to park in the driveway. He’d raised some smart kids and they all got into top private schools. His daughters had been taught that they deserved to dream big for their weddings and had spent accordingly.

Having taken a 50% pay cut, Joe couldn’t afford any of this, but he refused to give it up. He told himself: “My family is accustomed to a certain standard of living. I refuse to deny them that. It’s not their fault we’re in this situation. It’s the damned airline’s fault!”

Sadly, Old Joe never realized that it doesn’t matter who was at fault. The money was gone and it’s still not coming back.

Joe attempted to fund all this with two bad choices. First, he took on debt. Second, he chose not to maximize his contributions to his new 401K plan because he needed the cash elsewhere.

You’ve seen the spreadsheets. You know that Pilot Math doesn’t work if you are spending like crazy and/or not saving. Poor Joe was immediately doomed.

Eventually, he realized the dire straits he was in. He pared back his expenses slightly, and started increasing his savings. However, he still didn’t want to give up his house or his toys. He felt at least a little bit entitled and had a tough time facing reality. (Funny, I thought those were exclusively the traits of young whippersnappers who don’t know how hard we old graybeards used to have it….) Although the government, or the market, or the company, or…someone…screwed him, Poor Old Joe also played a role in his current financial emergency.

I’m not telling you about Joe’s generation to pick on him. He was a victim on many fronts: severe macroeconomic turbulence, a lifetime of consumerist brainwashing, and a company that had to declare bankruptcy because it had no mathematical way to honor the promises it had made. I hope my generation of airline pilots can figure out a way to help Joe as he enters retirement. However, we need to understand the severity of his situation so we don’t make the same mistakes.

If (or when) our industry again hits hard times, we cannot afford to ignore reality like Poor Old Joe. In the event of a bankruptcy or other catastrophe that cuts our pay or benefits, we need to adjust our Pilot Math to protect our families’ future.

What follows here is essentially an emergency procedures checklist. None of this is fun, or desirable. I imagine I’d be very angry and feel wronged at finding myself in this situation.

Unfortunately, like some emergencies in aviation, my feelings about the situation don’t matter. If my aircraft catches on fire, my choice is to try to put the fire out and land ASAP…or burn up. If I lose all my engines, my options are to find a suitable runway…or crash.

If I suddenly become a deadzoner, my options are to follow this checklist…or crash financially. So, here goes. In case of economic tragedy, do this:

Cut housing costs

Houses are expensive. There’s mortgage, interest, taxes, utilities, maintenance, furnishings, and more. If I’m living in a house that I can barely afford on my current salary, it would be simply illogical to continue living in that house after taking a massive pay cut. Even a house that may have been “sensible” in the past might end up being too much to handle in a severe downturn.

As a new deadzoner, I would consider moving to a new part of town, or even a completely different part of the country. If I was previously commuting to my airline job, I’d consider moving to my airline base to make myself available for the extra pay opportunities that will eventually arise when things recover. If I lived in a state I loved with high taxes, I’d consider moving to one I don’t love as much to pay less tax. This move doesn’t have to be forever. If times improve, I could move back to a place I like more. However, the fire marshal has to agree that the emergency is over before I get to taxi back to parking, right?

I’ve mentioned BiggerPockets.com repeatedly throughout this book. Their community is truly a wealth of ideas for minimizing housing costs. Before I moved, I would start spending a lot of time there reading about ways to help make ends meet.

One of the reasons I love including real estate as part of my Treasure Bath is that it opens up some great opportunities if things go bad. If I’d been studying real estate for years on the day of a market crash, I’d already have an education that would equip me to move quickly and find a better housing situation. If I already own some smart rental properties, I’ll have a recession-proof stream of income to help support my family while my wages are low. One of those properties could even be a fallback plan. This is exactly how I view one home that my family owns.

My wife bought a house when she got assigned to Ellsworth AFB, SD, in 2006. We were only there a few years and didn’t have enough equity to justify selling it when we moved away. It’s a nice 4/2 with a big yard, located within walking distance of one of the best elementary schools in Rapid City. It’s an ideal rental, and we’ve had tenants in it ever since.

We don’t owe that much money on the house. Though we’re waiting to pay that mortgage off for the tax benefits, we have a pot of money earmarked for just that purpose if it became necessary. If everything went to hell, we could have that house paid off in a matter of days and move our family there. We love the area and the cost of living there is very low, as long as you’re not a tourist. I’d have to commute for work, but our family could survive there very happily, even if I took a giant pay cut.

This is the power of having a Treasure Bath. It gives you options to stand in the worst possible storms and brush the water off your jacket like it’s just a trickle.

Cut car costs

We don’t realize it because many of the costs are easy to overlook, but owning a car is extremely expensive. If you don’t believe me, there’s a free calculator on Edmund’s that you can use to prove me right.

If economic disaster strikes, there is no excuse to be making payments on and driving expensive cars. If I suddenly got hit with a 50% pay cut, I’d sell at least one of my cars. If we were making payments on two new cars, I might consider selling both and buying a used Toyota Corolla or Nissan Leaf. My wife and I can share a car. When our kids get old enough, they can become the family taxi service.

If you’ve already figured out Pilot Math, you’ll be way ahead of the game here too. Worst case, you’re only making payments on one car at a time. You realize that tying your ego to your car will only drown you in a flood of economic disaster. You have affordable, efficient cars that minimize (optimize) the costs of car ownership as much as possible. These cars have high resale value and become increasingly desirable in bad economies. You’ll have no trouble getting your money’s worth if you decide to sell one. If you have more than one car, and they’re all efficient and paid off, you may be able to keep them anyway.

Get rid of toys

I own an airplane – a 1950 C-170A. It’s a lot of fun, but it’s a frivolous expense. You could describe a boat, jet skis, RVs, pickup trucks, and many other toys the same way. In the face of an economic disaster, my toy would go immediately. Worst case, it’d get parked in a hangar and I’d stop insuring it for flying operations until I could afford to fly it again.

There is simply no excuse for drowning in the depths of financial disaster with your hands holding white-knuckled to your toys.

Have “The Talk” with your family

History and literature are replete with stories of families reaching financial ruin because the a spouse or parents were ashamed to explain their hard times to their families. They tried to ignore the truth and let their families live (and spend) as if nothing had changed. Willfully avoiding this truth will never help you.

In this situation, you absolutely must sit down with your entire family and explain your new financial reality. This could have some severe lasting impacts. Elective shopping trips will be cancelled. Kids may have to give up spots on expensive traveling sports teams. Our society seems stuck on the idea that a child is entitled to attend any college that will admit him or her. This won’t be the case for your kids, and they must understand that. (If you’re having trouble coming to terms with this, you need to read Malcolm Gladwell’s fantastic book, David and Goliath. He argues very convincingly that going to a big name school isn’t all it’s cracked up to be.)

Your kids will need to pursue scholarships. They may need to start at a local community college. They may need to work to fund some part of their education. There is no unlimited free ride. You’ll have to adopt a similar mindset for school trips, home remodeling, and weddings. (You just read the chapter on Baby Pilot Math, so you’ve hopefully started brainwashing your kids to favor these strategies anyway.)

As a guy and a cheap-ass pilot, I’m scandalized by all the wedding-themed TV shows around today. One show features girls who walk into stores planning to spend thousands of dollars on wedding dresses…and they almost all end up going over budget. Others highlight a stream of increasingly over-the-top weddings that cost more that most American families spend on college. The hosts of these shows gush over how wonderful everything is and always assure the bride that she has “earned” her special day.

If a child’s parents are paying for the wedding, or if the wedding is being funded with debt, then almost by definition, the child hasn’t earned anything. If your family is in financial chaos, you cannot afford to spend an unlimited amount of money on a single party.

That said, the existence of these TV shows, and the rest of the wedding “industry,” show that our society still values the institution of marriage. Weddings are important ways for us to celebrate a milestone in our kids’ lives, and gather families together. In discussing this section, my wife informed me that simply refusing to pay anything here probably isn’t an option. The cheap and unsentimental pilot in me resists this notion, but I’ll defer to her superior judgement in this case, like I do in most cases.

If you’re going to help pay for a child’s wedding, and I won’t fault you if you do, the important thing is to have a plan. When you decide it’s time to have kids, you and your spouse will need to start having a series of conversations. When can you kid get a smartphone and will he or she have to pay for it? Will you provide a car for him or her to drive? Will you pay for college, and if so, then how much? Do you plan to provide money toward your kid’s eventual wedding.

As long as you’re thinking about these things early, you can use Pilot Math to designate a mini-Treasure Bath set aside for each of these purposes. If you want to pay toward an eventual wedding, then start putting a few dollars each month into a specifically designated investment account early in that kid’s life, just like you should have done with a 529 plan for his or her education. This wedding investment account will be subject to taxes, but at least it’ll be earning interest for a couple decades first.

We’re talking about this situation based on the assumption that we’ve fallen on hard times and money is suddenly tight. One of the most beautiful, enduring principles of Pilot Math is that if you save as much as you can while times are good, your family will be okay when times aren’t. If you suddenly have to come up with a bunch of money on short notice, it’s an emergency. If the money has been sitting in an investment account for a decade or more, a furlough or other catastrophe doesn’t change anything. The money is still in that account. If the economy tanks, the balance in this account might decrease, but it would take a very bad recession to wipe out a decade or more of investment gains.

When the time comes, don’t simply ask your kid, “What do you want for your wedding?” This open-ended question runs the danger of suggesting that there are no cost limits. Instead, I’m hoping to go with something along the lines of, “We love you, we’re proud of you, and we’re happy that you’ve found someone to marry. We want to help you celebrate. Here’s the amount of money we’ve saved up to contribute. How can we help you make this enough?”

Hopefully, you’ve been teaching your kid about Pilot Math for his or her entire life. He or she should at least understand how to look at this little Bath full of Treasure and budget it out. With my kids, I’m hoping that if his or her desires exceed the amount we’ve offered, he or she will work to fund things in other (debt-free) ways. If they’re going to ask me for money, they’d better be willing to ask the in-laws. I hope I’ll also be able to inspire enough of a work ethic in my kids that they’d take pride in going out and earning some of the money they need themselves. (I have, thus far, failed miserably at my goal. Thankfully, I still have some time.)

I also plan to suggest that my kids get creative about how they do things. The blogosphere has a seemingly infinite number of writers who talk about how to do a wedding on a budget. I won’t insist that a child uses all of the ideas out there, but there’s nothing wrong with considering some of them. My wife and her friends made centerpieces for the tables at our wedding. We hired the spouse of a friend from my squadron to take pictures. She did a fantastic job for a very reasonable price. These are just a couple ways we saved a little money while still enjoying a fantastic experience with our friends and family.

I feel that between planning and saving ahead, encouraging your kids to find at least some of their own funding, and encouraging them to be creative, it’s possible to help your son or daughter have a wonderful wedding experience, without having to simply say “No!” to everything or bankrupt yourself.

For better or for worse, things like weekend entertainment and family vacations will need to get a lot cheaper in this situation too. It turns out that human beings knew how to have fun long before the advent of theme parks and international airline travel. You’ll need to work with your family to find ways to have fun without spending a lot of money. I’d expect to spend a lot of time enjoying the mountains or beaches near my house.

Side Hustle

I made side hustles part of Pilot Math (next chapter) more because they enrich our lives, than because we airline pilots need the cash. In the face of economic disaster, that changes. A pay cut or furlough at a major airline is the perfect excuse to start or expand on a lucrative side hustle.

If you’ve been enjoying something as just a hobby or doing low-volume business, you should look for ways to start monetizing your efforts more effectively. If you’ve already adopted this Pilot Math principle, you might have something profitable already in place. In a best-case scenario, you might be able to increase your profitability enough to make up for your lost airline pay.

Although I’m pretty hard on deadzoners like Poor Old Joe, not every pilot in his position made such bad decisions. I’ve flown with more than one senior captain who started or already had a side-hustle when our company went bankrupt. Many of them now have an overflowing Treasure Bath thanks to these businesses, and in spite of the same economic challenges that still give Joe fits. There was no functional difference between these deadzoners other than the fact that the ones who are currently solvent went out and did something to improve their situation instead of avoiding the truth and complaining.

For some deadzoners, the military was this side hustle. Whether they went back onto active duty to fight the war in 2001, or they were just able to pick up full-time orders in the Guard or Reserves, the military saved their families. I’ve heard that Southwest even worked with the Air Force to help make sure that some of their pilots got activated, precluding the need to furlough them. Having military service as a fallback in case of economic crisis is one of the many reasons I believe the ultimate career path for a military pilot includes joining the airlines ASAP while keeping a foot in the Guard or Reserves.

Continue Saving!

A market crash is the worst possible time to panic and stop saving. (It’s also the worst possible time to sell!) When the market is down, it means that stocks are on sale. Over the very long-term, the stock market always goes up. No matter how hard it falls, it will beat all previous record highs in the future. One of the reasons to cut so many costs in hard times is to protect your ability to continue investing while assets are cheap.

If you take a 50% pay cut, you must realize that it will take a very long time for your pay to get back to where it was. (Adjusting for inflation, today’s wonderful pay rates are still only starting to approach the levels they were at before 9/11 and the waves of bankruptcies.) You will spend many years not making as much money and you won’t be able to pump as much into your retirement accounts as you’d like. This means that the power of compounding interest is even more important. You need to do everything you can to get money into your accounts ASAP to give it the maximum amount of time to grow before you need to start drawing on it.

You also need that money to be in the market when the recovery starts to happen. You’ll spend the rest of your life kicking yourself if you miss out on that opportunity. Ask anyone who panicked in 2009, sold everything, then waited until 2012 to start investing again.

[End of Checklist]

This certainly isn’t an exhaustive list. There are many other useful things your family may be able to adjust if (or when) our industry has another bad day. I feel that it’s important to have frank and open discussions about finances with your spouse. He or she needs to understand Pilot Math, and you two need to know exactly what your financial plans are. I believe that you should also discuss your emergency plan for a worst-case scenario. This list should be taken as a starting place from which you build a plan specific to your family’s situation.

While another black swan event would really put a damper on the fun of our career, this discussion only continues to prove the power of Pilot Math. If you’ve worked hard to fill up your Treasure Bath as quickly as possible, you can potentially make yourself invulnerable to a bad day.

If your Treasure Bath is so full that a 4% withdrawal rate can cover all of your family’s needs, then who cares if you take a pay cut? We’ve already discussed the idea that you could declare FIRE and quit mandatory full-time work once the volume of your treasure bath equals 25x your annual spending.

Take a moment to think about how powerful you’d feel in that situation.

(Yes, if the market just tanked, 4% of your current account balance probably won’t cover your spending like it would have the day before. If you’re already drawing from your Treasure Bath you’ll need to adjust your spending for a while. If you have a side hustle, or even reduced pay at a full-time airline pilot job, you should still be able to make ends meet. Times will get better, and your portfolio will end up worth more than it has on the day the market crashed. You’ll be able to raise your spending again at that point.

It’s also important to note that it would take terrible timing on a really, really bad day to affect your Treasure Bath catastrophically. People a lot better with money than you or me have examined the entire history of the stock market. There are only a few 30-year periods where a Treasure Bath containing 25x annual spending would not survive even the worst collapses in US history…even when those periods included the Great Depression. In most of those cases, the balance of those savings doubled by the end of the 30-year period. Michael Kitces has studied this extensively and you can read his research if you want a second opinion.)

Imagine that Joe is your neighbor. On the day that disaster strikes he’ll be shell-shocked, walking around on the verge of tears. He and his family will be overwhelmed with fear and uncertainty. Everyone will be angry, but there will be nowhere to turn for help. From that day forward, Joe will be at work all the time. He’ll have to be because of all the expenses he has to cover. He’ll miss out on important family events, his health will suffer, and his job will become an obligation instead of a passion. Poor Old Joe.

In contrast, you have a Treasure Bath full enough to support all of your family’s needs, you won’t have to worry about anything. You may have to forego some luxuries, but you won’t be facing deprivation or the embarrassment of having any of your property repossessed. Whether you get to keep your major airline job, you end up furloughed at a regional airline, or you end up elsewhere, you won’t have to be frustrated about your pay cut. You won’t have to work extra hours…all because you won’t need the money. Sure, you won’t turn down the drastically reduced paychecks, but they’ll only add to the comfortable depths of your Treasure Bath. You’ll even have the option to work less than full-time, allowing Joe to pick up all your extra flying, and continue enjoying time with your family.

We’ll discuss later how to present the ideas behind Pilot Math to your non-pilot spouse. If you’re finding it difficult to get him or her onboard, illustrating this type of financial security in the face of an economic crisis should help. Your spouse might not understand the potential benefits of turning your full-time airline job into a side hustle, but he or she will absolutely support a plan that means your kids don’t go hungry if you lose your job.

You may have no intention of abandoning mandatory full-time work now while times are good. However, if things suddenly change, having that Treasure Bath ready to go gives you all the options. It’s like having an extra hour of fuel in the tanks when you get to your destination to find that a thunderstorm has popped up, or having an extra 5000’ of altitude between you and the mountains when an engine failure forces you to drift down. I cannot overstate the sense of power and security that comes from maximizing your application of Pilot Math as early as possible in your career. Having a Bath full of Treasure makes you invulnerable to many threats that keep most pilots up at night.

I hope we get to ride these high times for decades, but if something happens, Pilot Math can make sure you weather the storm in comfort.

Like I said, if you found this chapter helpful, I think you’d appreciate the rest of Pilot Math Treasure Bath too. Please consider ordering your copy on Amazon or Kobo today!

Pork Barrel Politics and the US Tax Code

But…Progress

Are You an Accredited Investor?

The Power Of Tax-Advantaged Investments

Two Example Investments from My Life

USNRG

Real Estate Syndication

Big Picture Math

Risk

This Investment Comes Last!

Finding Tax Advantaged Investing Opportunities

No Excuses

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Understanding US Taxes

Why We Have Withholding

Enter: Withholding Rates

Updating a W-4?

Back to Profit Sharing

W-4 as a Strategic Weapon

Gotchas

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Here’s the background:

Not a Widget Pilot?

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The Deal

Disclaimer

Fair Deal

Pay Comparison

Far Bigger News

First-Glance Questions

Feeling the Need

Other Sources of Money

Loans

Loan Yourself Money

Scholarships

Government Money

Earning Your Way

Honest Comparison

Show Me the Money

But…737s!

But…Raises at Mesa

So, Why is Mesa News?

Follow the Money

Further Along the Money Trail

Why Mention This, Emet?

But…Veterans!

What is Pro-Veteran?

Effective Alternatives

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Can the Pros Beat the Market?

Fees! Fees!

Unfair Advantages

Expertise

Emet’s Answer

Alternatives

How I Pick Stocks

Do You Have Unique Expertise?

Final Strategy

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