80% Savings Rates

Mainstream personal finance advice is to save somewhere around 10-20% of your income. It’s advice based on the median household which earns somewhere around $60,000.

The math works out so that you retire sometime around age 65. That’s when you get a little Social Security and can access Medicare.

If this $60k household pays $10k in taxes, they’re left with $50,000. A 20% savings rate would be $10,000/year. That’s approximately the maximum IRA contribution limits each year for a couple.

Work 30 years. Set aside $10k/year. Invest it conservatively at 5% a year. That comes out to $740,000 at the end of that 30 years. An amazing retirement stash.

The Reality

In practice, most households don’t consistently make that $60k income. Or they have life events, like having kids. They will also have debt and unexpected expenses like dental emergencies or car repairs. Or vacations.

As for the investing – most households won’t get “market returns”. Market returns refers to the underlying investment performance depending on what the household invests in.

If they invest in a broad stock index fund, they might sell out early or pull cash out of the investment. This will cause their portfolio to perform more poorly in comparison.

The Physician Household

Physicians like to think of themselves as high-earning households. As in, we’re upper middle class or 1%-ers in some places. But I don’t think that’s accurate.

If you live in Los Angeles, Portland, San Diego, Denver, NY, DC, your $250k income as an employee, which is only $150k after taxes, is not that impressive compared to others around you.

Not to mention, you didn’t start earning that $250k right out of college, unlike the computer programmers. And you accumulated a ton of debt to get to that position.

Oh, and everyone will treat you as if you’re the richest person on the planet. Not to mention the bullseye painted on your medical license.

80% Savings Rate

I made about $300k as an Urgent Care doctor at Kaiser. I maxed out my retirement contributions and paid about 40% in taxes. Every year I would keep around $180k of my money – my real income.

An 80% savings rate would mean keeping $144,000 of the $180,000. That leaves $36,000 to spend for living expenses. That’s $3,000/month.

$50k of that $180k went towards retirement contributions (401k, 401a, Keogh, IRA). So that left me $94,000 to invest outside of retirement accounts.

Investing

Imagine investing $144,000 a year, every year, for several decades… that’s the power of an 80% savings rate:

• After 5 years: $830,000
• After 10 years: $1.9 million
• After 15 years: $3.4 million
• After 25 years: $7.7 million

I used an investment return of around 5.5% which is fair. Some investors will earn more and if you’re more conservative, you might earn around 3.5%.

Spending $36,000

I can’t imagine spending $36k for 25 years. Fuck that – eventually you’re going to want to inflate your spending. But I could see myself attacking my student loan debt and then living frugally for 5-10 years.

$3k may not go very far in Los Angeles or SF but in those cities you can earn a lot more than $300k – it’s ratios.

Imagine all the possibilities after you got a $2m stash! You can take any job you want. You can go live wherever you want and work as much or as little as you want.

When I became frugal in 2012, my friends said I would regret it. It’s 7 years later and I don’t have any regrets. The nice think about spending is that you can always spend more money if an 80% savings rate doesn’t do it for you.

Other Radical Advice

1. buy your house in cash
2. get rid of your car
3. invest in other skills outside of clinical medicine
4. master investing
5. move to a lower cost-of-living area
6. avoid debt

I know that these are radical lifestyle choices and they aren’t right for everyone. But just know that you have a fellow physician who was able to do it.

My life isn’t any worse. I am not suffering. Sure, I miss the heated seats in my blacked out H2 Hummer. I miss the massive TV’s in my San Diego condo. But those luxuries came at a price.

I also remember the hard work I put into buying those things. Other than the memories I don’t have a lot to show for those things. Had I started an 80% savings rate back then and invested that money, I’d have another $1,000/month coming in passively now.