What an amazing time to be a professional pilot! You have literally won the lottery!
I’ll never forget hearing this statement on my first day of new-hire training at my previous airline. In fact, it’s truer now than it has ever been. After the recent round of new contracts at most major and fractional airlines, professional pilots now have more income-producing power than medical doctors, according to a recent article in Flying Magazine.
According to the U.S. Bureau of Labor Statistics, the median annual wage for airline pilots is around $202,180. Medical doctors came in with a salary of $208,000, lawyers $127,990 and engineers with a median annual wage of $79,840. To be a doctor, lawyer, or engineer, you can expect to pay for several years of college—and possibly a master’s degree. For doctors, add in years of residency.
Professional pilots, on the other hand, have a much shorter path between the “learn” to the “earn” phase.
Now that I'm not flying anymore, it’s such a privilege to be able to help young pilots take advantage of this financial opportunity of a lifetime. Of course, it’s easy for me to observe and bloviate about this opportunity now that I’m an old dude looking at it from the outside-in.
You however, the professional pilot, have the challenging task of not squandering this opportunity. It would be easy to do! In fact, many of you have reached out with that exact request, citing, “We don’t want to mess this up!”
So, let’s dive in and discuss some sure-fire ways to not screw this up!
Life happens, be ready…
One of the first lessons is to never forget that you are in one of the most volatile industries in the world. I’ll never forget that in January 2020, I may have said these exact words, “It appears the airlines are finally past the days of instability, bankruptcy and furloughs.” I know, I should choke myself for saying something so stupid. About three months later one of our pilots (evidently “in the know”) informed me that all major airlines would need to file for bankruptcy in 90 days if the government didn’t intervene soon.
Never ever forget that anything is possible in this crazy business. It seems to me that whatever worldwide calamity may happen, the airlines are the first to suffer and the last to recover. (See 9/11, energy crisis, war, pandemics, etc.) Whether this is true or not may be irrelevant, however, we should always behave as if it were fact!
Since many of you reading this article were dramatically affected by the COVID-19 pandemic, this lesson may be a silver lining to the unimaginable year of 2020. If you can avoid what I call the short-memory syndrome, you may have the fortitude to financially prepare for the next potential airline catastrophe that threatens your livelihood.
In addition to industry volatility, professional pilots must be ready for the day when they walk into the flight doc’s office as a bad-ass airline pilot with the world at their fingertips and then walk out of the office with a revoked FAA medical due to some unforeseen medical condition.
It can and has happened to many pilots that quickly. And it will happen to many more. Unfortunately, one of the major deficiencies to a highly confident professional pilot is the hazardous attitude of, “It won’t happen to me.” It did happen to me! However, I was lucky. Like many pilots who are disabled, I was able to return to the cockpit after several months.
If you read last month’s Aero Crew News article, you heard from our very own Leading Edge advisor, Jonathan Schultz, where he told his personal story and lessons learned from walking out of the flight doc’s office one day to never fly airplanes again. He’s had to adjust his entire life at the ripe old age of 28. Luckily for us at Leading Edge Financial Planning, he has a passion for sharing his story with other pilots so that they can be more financially prepared for this possibility than he was.
Hopefully by this point, I’ve scared you sufficiently to motivate you to take the appropriate action. Below are a few tasks to tackle immediately to ensure you’re ready for the scenarios we discussed above. Quite frankly, I feel like a broken record when I list these tasks because I know you’ve heard them many times before. It’s akin to telling someone to eat right and exercise—totally true and a very simple strategy, but very challenging to execute consistently.
I want to encourage you to start now and start small. The positive results from these simple action steps will have a compounding effect over time and will result in significant wealth building by the time you’re a senior captain. Soon you’ll be telling other new pilots about these simple axioms as well.
1. Establish a spending plan—yes, a budget!
You must work now to establish good money habits that will last throughout your airline career. One of my favorite sayings is “Choose your hard.” You can work hard now to build an emergency fund, establish a disciplined spending plan and avoid unproductive debt, or you can deal with the stress of years of overspending, living paycheck to paycheck and the effects of poor financial decisions on your personal relationships.
No, I’m not using hyperbole to motivate you! These are real problems that are not uncommon with high-income professionals of any industry, not just professional pilots.
2. You make a great income…BUT you don’t make THAT much.
I understand the feeling of “I work hard and make lots of money so I should be able to buy whatever I want. I deserve it!” This is a false narrative that we should never tell ourselves. This is also a quick way to destroy your wealth-building power. There are few income levels where you literally cannot outspend your income. Additionally, there are income levels where budgeting (or at least good spending habits), are not required anymore. I would argue that that is not true for young professional airline pilots. Please be on guard for this type of mindset.
You do make a great income, and you can build generational wealth. However, if you are a new first officer and you buy your captain’s home and that ninety-thousand-dollar truck, then you don’t make enough money anymore. It’s gone!
3. Warning: Do not try to get rich quickly with complexity. Seek simplicity and disciplined processes instead.
For some reason, it is human nature for successful, smart professionals to seek out complex solutions instead of embracing simple truths that have stood the test of time. This is known as the complexity bias and marketing firms take advantage of this all the time. From the article from www.themarketingsage.com: Why Do People Have a Complexity Bias? Jeff Slater, November 9, 2021:
Marketers take advantage of this bias by adding confusing language or meaningless details to product descriptions. Shampoo with protein-enriched vitamins or calcium-infused milk are two examples of making a product seem more sophisticated, fancy, or worth more dough. I’m guilty of doing this too when I used invented language to market products that we thought would sell better if they had fancy technology language attached to them.
This same complexity bias leads some smart, high-achieving people to believe they can solve the unsolvable problem of becoming wealthy over time. In other words, “I can short cut this process if I just find the complex solution that nobody else has been able to find.”
Not only do marketers use this bias to sell their products, but financial-services companies will develop a product so complex that even their own salespeople don’t know how it works. For example, most annuities, options and currency trading, cryptocurrency (that’s right—nobody truly understands it), life insurance that also serves as a college or retirement plan, etc.
I think the antithesis of the get-rich-quick attitude is an attitude of abundance. There is a great story from the book as told in Morgan Housel’s book, The Psychology of Money wherein Warren Buffett talks about the third partner (in addition to Charlie Munger) in their early days:
Do you recognize the name Rick Guerin? Probably not…Warren Buffett and Charlie Munger had a third partner at one time. Rick was that partner. He had a wonderful investing track record on his own…What happened to Rick? He was in a hurry to get rich. He invested using leverage. During the bear market in the 70s, Rick suffered margin calls. Many of the Berkshire shares that Warren Buffett still owns once belonged to Rick.
Buffett went on to say, “Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy as we knew it would happen. Rick was just as smart as us, but he was in a hurry.”
4. Strongly consider saving in your Roth 401k, backdoor Roth IRA, mega backdoor Roth 401k for as long as you can stand it.
Each year during tax time, high-income pilots have an adverse reaction to paying their astronomical income-tax bill. The good news is that you have a high tax bill because you make a lot of money. The bad news is that it will only get worse—or better, depending on whether you believed the first part of this sentence. So, what can you do about it?
It may sound counterintuitive, but you may consider prepaying your taxes now because as a young airline pilot you’ll probably make more money evermore, including in retirement. Therefore, your current tax rate may be the lowest of your lifetime. This is probably not the case for senior captains, but it does make the Roth versus pre-tax decision a little easier for younger pilots.
Furthermore, due to the power of compound interest and the time value of money, the money you invest in your twenties and thirties makes up the majority of your wealth after age 65.
From the VisualCapitalist: “The Benefits of Investing Early in Life”
For example, let’s say you started investing at 20 years old, and you invest $250 each month with an 8% annual rate of return. By the time you reach 65, over 50% of your total portfolio would have come from money that you invested in your 20s.
With these two ideas in mind, a professional pilot early in their career can conceivably get to retirement with the majority of their investment portfolio tax-free. Additionally, once you retire from your airline, you will probably have more opportunities to convert pre-tax dollars to Roth at lower tax rates.
Can you imagine what retirement would be like if the majority of your assets were tax-free? That would be incredible! However, achieving this result takes planning and discipline right now. Perhaps, the most obvious strategy might be to avoid the pain of taxes at all costs, within the law of course! However, this reaction to the pain of high taxes might cause you to pay more taxes over your total lifetime.
Clearly, the Roth versus pre-tax decision can be a technical discussion that requires the consultation of tax professionals. However, there are also many other non-mathematical reasons to potentially pay the tax bill up front for the potential benefit of tax-free income in the future.
Finally, as your tax bill increases throughout your airline career, do not give in to the impulse to do whatever it takes to reduce your tax bill. This emotional reaction often results in paying less tax at the expense of reducing your overall net worth. A good example is a money-losing side gig to reduce your airline income.
For more information about Roth versus pre-tax 401k contributions, backdoor Roth IRAs and more, refer to the Pilot Money Guys podcast Flight #76: To Roth or Not to Roth?
This article is discussed more in-depth on the Pilot Money Guys podcast, Flight #97: Building Financial Success for Young Professionals.
Charles Mattingly, MBA, CFP® | CEO & Lead Planner
Leading Edge Financial Planning
865-240-2292 Office
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