By Dr. James M. Dahle, WCI Founder
Here's an email question I received that asked about increasing your savings rate.
Q. I'm leaving the military for a hospital-employed urology practice (all W-2 income). I haven't been a great saver the last few years but would like to do better. I know I can max out my available 403(b) and HSA, but I'm trying to decide whether to use the 457(b) or Backdoor Roth IRAs. I'm not sure I can do both. I know you say you need a 15% savings rate per year for retirement, but that seems like a huge number for now. Any advice on how to increase my savings?
First, let's be really clear about what I recommend for your retirement savings rate. Although Dave Ramsey recommends 15% for retirement, I think most doctors should be putting away 20% of their gross income toward retirement each year. The reasons doctors need to save more is that Social Security will make up a smaller percentage of their retirement income than that of a typical worker and that they generally get a pretty late start, essentially losing an entire decade of compounding returns. And, if you're a doc like this one that has saved very little so far into your career, that makes for getting an even later start.
15%, 20%, or 25% Savings Rate?
Saving in and of itself isn't the goal since you can't take it with you when you go. Investing for retirement is all about deferring spending now in order to spend (or give) more later. It always helps to run the numbers when deciding how much to save.
I've shown elsewhere that a typical doctor will want their portfolio to replace something like 30%-60% of pre-retirement gross income. Let's assume 50%. If you start saving at age 35 and want to retire at age 60, that leaves just 25 years to reach your “number.” If your income is $300,000 per year, you would want your portfolio to produce an income of $150,000 per year, and your “number” is $150,000*25=$3.75 million (using the 4% rule).
If you use an aggressive portfolio and minimize taxes and investment expenses, you can probably get a long-term return of 5% per year after inflation (but if you don't like that number, pick your own). What percentage of your $300,000 income do you need to invest each year for 25 years to finish with $3.75 million in today's dollars? About 25% per year. Saving 15% per year would lead to an income of $90,000 per year (30% of pre-retirement gross income), and 20% would give you $120,000 from that portfolio (40% of your pre-retirement gross income).
Now, you can adjust any of these variables. You can start saving earlier, you can work longer, you can save more, and you can decide to get by on less in retirement. But the hardest variable to adjust may very well be that rate of return on your investments—so I suggest you be as reasonable as you can be in choosing that number, and track your return to ensure you are on track. Assuming your portfolio will compound at 7%-10% after inflation, taxes, and investment expenses is probably folly. If you are counting on those sorts of returns, you will likely undersave.
Max Out All Tax-Advantaged Accounts
Now, seeing that saving less than 20% per year probably isn't a great idea, let's see how much that might be for you. According to the 2020 Medscape Physician Compensation Report, the average urologist makes $417,000. Twenty percent of that is $83,400 per year. So, the real issue here isn't whether you should use the 457(b) or the Backdoor Roth IRAs. The real issue is where to put additional savings in 2022 after you've maxed out the 403(b) ($20,500), 457(b) ($20,500), Stealth IRA ($7,300), and Backdoor Roth IRAs for you and your spouse ($12,000), totaling up to only $60,300 per year. Depressing? Yes. But better to find out now than when you're 60 years old.
How to Increase Your Savings Rate
#1 Don't Ever Grow into Your Income
The easiest way to boost that savings rate is to not have to increase it at all. Upon residency graduation, most doctors are quite used to living on $50,000 per year. When their income jumps to $200,000, $300,000, or more, there is plenty of room to increase their lifestyle significantly while still carving out 20% of that new higher income for retirement savings.
Think of it as something that has to be paid right off the top, just like your taxes. Even with the much higher tax bill associated with the higher income, a typical doctor can still “double or triple their lifestyle” and still meet their savings goals. This doc is in a similar situation since his income is likely to double upon leaving the military. You can have it all—a nicer lifestyle and an adequate savings rate. But you need to be deliberate about how much you are going to save and how much you are going to spend.
More information here:
Make It Automatic
Moving the Goal Posts: Attack of Lifestyle Creep
#2 Minimize Taxes by Maximizing Tax-Deferred Retirement Accounts
One of the best ways to increase that savings rate is to use tax-deferred retirement accounts like 401(k)s, profit-sharing plans, and defined-benefit plans. Not only does every dollar put into the account go toward your savings rate, but the government will help subsidize your efforts. If you have a 33% federal marginal tax rate and a 9% state marginal tax rate and you put $50,000 into a tax-deferred retirement account, only $29,000 comes out of your lifestyle. The other $21,000 comes out of what you would have otherwise paid in taxes. Roth retirement accounts work in a similar way, although most of the tax breaks won't be realized for many years.
More information here:
Tax-Deferred Retirement Accounts: A Gift from the Government
#3 Watch the Big Items
Many investing authors like to talk about “the latte factor“—which basically says if you'd just skip your $5 latte every day, you'd be rich. While every little bit helps, you're likely to get a lot bigger bang for your buck by watching the big things, like the size of the house you live in, the expense of the car you drive, and the state in which you choose to practice. The difference between living in a $300,000 house in Tennessee, driving an old F-150, and not paying state taxes vs. living in a $2 million house in California, driving a brand-new tricked-out Lexus SUV, and paying 9% in state taxes is immense.
More information here:
Why Tesla Owning Doctors Hate Me
Should Your Kids Go to Private School
10 Lessons Learned Buying a Wake Boat
#4 Make More Money
For many physicians, one of the easiest ways to save more money is to simply work harder and make more money. You can keep the same spending habits and save more if you just make more. This might mean taking a better-paying job, improving the efficiency of your practice, taking more call, or picking up more shifts. There is obviously a limit to this strategy (and burnout is a very real issue), but there's no doubt it does work, especially in the short term.
More information here:
How to Double Your Income as a Primary Care Physician
#5 Minimize Fixed Expenses
Many people get locked into their lifestyle due to long-term contracts and debt. The more of this you can avoid and eliminate, the easier it is to change your budget each month in response to changes in income. Avoid consumer debt like the plague. Minimize student loans, and prioritize paying them off (especially the ones with higher interest rates). StudentLoanAdvice.com can help you with that. Buy a less expensive house, refinance to a lower rate as able, and pay it off early. Try to minimize contracts that lock you in when choosing cell phone, data, internet, and cable providers, as well as daycare, lawn care, and housekeeping services. Being able to cut back if income drops provides a great deal of financial flexibility.
More information here:
How Fast Can You Get Out of Debt
A Budget Without Payments
#6 Watch the Credit Cards
Although most of us aren't dumb enough to actually carry a balance on a credit card (if you are, quit it), studies are quite clear that we spend more (and thus save less) when using credit cards. If you're having trouble putting 20% of your income toward retirement, go to a cash-only budget. You may be amazed at how much less you spend when you have to hand over cold, hard cash—not to mention take the time to go get it from an ATM or bank. This effect is likely higher than any 1%-5% rewards you may be getting back for using the card.
More information here:
Doctors Need to Budget Too
Why I Don't Go for 0% Financing Deals (Anymore)
Savings Rate Too Low? Get Rid of Your Credit Cards
#7 Track Your Savings Rate
Your employer likely cares a great deal about your “metrics” at work. At our shop, our door-to-doctor time, door-to-discharge time, patients per hour, and RVUs generated are all carefully tracked and reported each month. As a result, people think about these things and they gradually improve. Your savings rate is also a metric that can be tracked. I suggest you calculate it at least once a year. The mere act of doing so will subconsciously cause you to increase it.
What do you think? Are you saving 20% or more each year? What are you doing to increase your savings rate? Comment below!
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Great post!! These are the posts that keep me coming back for more. I agree that what is most commonly needed to address this question is a close evaluation of one’s budget. While it is stated over and over again, automating one’s retirement contributions to be withdrawn from one’s paycheck is the easiest way. You never miss the money.
Is there any way for the person who asked the question at the beginning of this article to post a breakdown of his monthly budget? I can’t understand how any practicing physician in the United States, especially a surgical specialist, can have any degree of difficulty putting away 15%. I’m genuinely curious as to how all this money is being spent.
The OP is military and they make significantly less than their civilian counterparts. If they are just finishing off their original commitment, they may not be eligible for certain “bonuses”. The pre-tax salary may not be more than 200K (depending on commitments, BAH, time in grade, rank, etc.)
It almost surely isn’t more than $200K. It’s probably less than $150K.
As an FP in the military, both finishing my original commitment, my highest grossing year was $117K and that was spending 7 months in war zone getting bonus pay. (Granted I lived on post so I probably had about $24K in unseen pay as well)
It’s pretty easy for me to draw up a budget where I spend all my money. Just spend a little more on everything. Little nicer house, little nicer car, little nicer vacations, little nicer clothes, go out more often, better furniture etc. I don’t find it difficult to spend a lot of money in a hurry. Sure, it looks bad when you total it all up, but in the moment you’re spending it….not so hard at all.
I have a 2 to 1 match on my 403b, should I include their portion in factoring in the 20% target saving rate? Or just the money I put in?
I can see doing it either way, but I personally only count the money I put in.
If the powers that be decide to end or reduce the match, you won’t feel as much like you have to put more in as it wasn’t factored into your equation. Plus that match will keep your balances ahead of projections, which I think helps psychologically.
As an example, my wife works for the state government. She has a mandatory 3% deduction and the state provides an additional 6% to bring the total to 9%. I don’t count either of these contributions in our savings rate and projections as both are out of our control, but I do check the balance each month to put on our net-worth statement. Kind of a nice bonus when we look at the numbers.
Just curious but when you advise “20%” would that be including a matching 401K if you had it?
I currently put about 9.5% into a retirement account (counting match) and another 3.1% into long term savings (which I will probably never change). I have a plan to increase my retirement to about 12% next year and to about 15% in 4 years when my school debts are gone. I can’t reasonably see me being able to put away more than 15% unless my income goes up more than I expect it to or until my wife starts working again which likely is 4 years away (kids in school).
Perhaps that partially has to due with the fact that I am an FP and starting with a salary a that is likely a good $75-100k below most specialists.
I would include a match in both the numerator and denominator. I view a match as part of your salary. When people don’t get it they’re just leaving money on the table. 15%, 20%, whatever. The point is that 5% isn’t enough. You can save a little more later, work a little longer, spend a little less in retirement. Lots of options. But 20% is my rule of thumb.
Thanks. Thats what I was doing. Hopefully I can work up to 20%
GK: I am not the starting physician but to give you an idea (not my exact numbers mind you)
FP Pay: 12.5-16.5k monthly
Big Budget Items:
– Mortgage, Insurance & taxes: 2300
– Autos & Insurance: $1100
– School loans: $500
– Other Bills: $700
– College Funds: $200
– Insurances: $200
– Savings: $500
– Taxes: $2 -3K
Difference at 12.5 per month: $5k (3K if putting 15% to savings)
Difference at 16.5 per month: $8k (5.5K if putting 15% to savings)
That difference has to pay for every thing except the bills.
Granted I spend to much on autos and will remedy that down the road but I also spend much less on school loans than the average physician thanks to a military scholarship.
My income lies much closer to the lower number than to the upper. I essentially live off about $800 a week. Definitely not a pauper but but not high rolling. Imagine if I was paying $1500 a month to school loans though.
I would also add taxable accounts. My wife (the doctor) and I (the engineer) are each maxing out our 401Ks, Backdoor Roth, and I am using the stealth IRA for my work (she pays nothing for her health insurance at work, so her switching to a high-deductible plan didn’t make sense, especially with our first child on the way).
She maxes her 401k out in the first 4-months of the year (she started her job in August of 2012, so we were originally trying so squeeze 12-months of savings into 4-months). We didn’t notice any substantial impact to our lifestyle, so she have kept her contribution rate high (about $4000 per month). After April, we put the $4000 “bonus” dollars into a taxable Vanguard account. We have liquidity and flexibility when unexpected expenses come up. I max out my 401k much later (October), but after that all “bonus” money goes to Vanguard (along with all “unexpected” bonuses from work).
I definitely agree on the lifestyle. Chicago is a modestly expensive city, but our lifestyle can be higher than our friends in NYC, San Francisco, and the DC area. We still live in the 1,000-square foot condo I bought before I even met my wife. Payments (tax-deductible) are less than my wife’s student loan payments (at this point, the interest is non-deductible). We just bought a used 2007 Toyota Camry (she has a new Passat TDI for her 100-mile round-trip drive to work in non-litigious Indiana), before that we were a 1-car family (I take the bus to work).
Another great post! I agree with GK. If you “can’t” save 20% of your income then that is by choice. My wife and I didn’t get cell phones until after I had finished residency. We just barely upgraded to smart phones–4 years into practice. We still don’t have cable TV because of the $75/mo set expense. We wouldn’t even consider a house keeper or nanny. I drive a 13 year old Honda Accord and my wife a 6 year old mini-van. It’s not an income issue, it’s a choice issue. It boils down to whether you want/willing to save enough for retirement or live in the moment and deal with the consequences later.
That sounds familiar. Although I admit we splurged on a single cell phone as residents. 🙂
1) @WCI – do you advocate 20% for a doctor that completed all their schooling and started earning a full wage by age 24/25 (and maxing 401k) and thus didn’t lose the “decade” of compounding?
2) How do you feel about the Mr. Money Mustache blog that advocates that as high earners we should be able to work 7-10 years and then retire? And that putting too much into accounts like 401k keeps you from super early retirement due to not being able to touch the account as early?
No, I think you can get by with 15% if you don’t have a lost decade. There aren’t a lot of US medical doctors earning much money before age 30 though.
I had dinner with Mr. Money Mustache last week. He’s a cool guy and a lot of fun. However, he is trying to figure out a way to ride his bike 45 miles to the Denver Airport when he goes on trips. Now I’m pretty frugal, and I ride my bike several times a week (for enjoyment primarily) but I’m sure as heck not going to toss my luggage into a bike trailer and haul it 45 miles. If you hate your job so much that you’re willing to make sacrifices like that, then yea, work 7-10 years and retire. In my experience, there are very few doctors that hate their jobs that much. As far as early retirement and 401Ks, you certainly can access them prior to age 59 1/2. Here are the ways to do so:
https://www.whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/
However, if you want to retire at 30 like Mr. Money Mustache, then I suggest you have an alternative plan such as a taxable account. That doesn’t mean you can’t use a 401K, it just means you need to save a bunch outside of a 401K. A doctor who wishes to be a hyper-saver probably needs to save much more than he can stuff into a 401K anyway.
Something that Mr. MOney Mustache may want to consider too is that you can bust you butt for 10 years, live like a pauper, and save up a ton of cash to retire early. But a single prolonged and unexpected illness (cancer for instance) could wipe out a huge chunk of that in a year or two even with decent insurance (which most unemployed people don’t have).
@wci that’s cool u had dinner with mmm. I agree that both my wife and I are not willing to live that light.
My siblings are both MDs but did 6 year med school and completed residencies by 27 and most general dentists are done by 24/25. That was the source of my question. So just on the basis of who I know the idea of the lost decade didn’t make sense
Don’t most dentists go to college at 18 for four years and then to dental school for four more? Even without residency, it would seem that a straight through dentist couldn’t be done before 26. 6 year med school grads are also pretty unusual. I think the average age of the med students in my class when we started was something like 26 or 27. I was one of the younger ones at 24. Add on 4 years of med school and 3-5 of residency and you quickly see why the vast majority of docs don’t have significant earnings in their 20s. Even a straight through doctor who did a 3 year residency doesn’t finish until 29.
Yes. You are right. The University I went to was all 6 year med and 1/2 6 year dental. So everyone I knew was graduating at 23/24/25 so at my current age of 36 I’m entering my 12th year of practice, 11th year of contributing to my 401, but it took me 2 years before I was maxing it.
If I had not started until 30 I can see where u would need 20 to 25 percent savings. I would have a fraction of my net worth now without the extra years.
Whereas the guys my age who got done at 24 are already flirting w/ their first million in net worth.
MMM has an interesting approach to frugality. However, I wonder how much of that can apply to doctors or professionals who have spent over a decade learning their trade. Getting run over while I am commuting on my bike or breaking my hand while repairing my roof would end my surgical career. It probably isn’t worth it to me to make that risk.
For me as a new grad, I’m still trying to figure out how to balance my repayment of student loans (various interest rates 6.8, 5.8, 4.75, 3.25%) while contributing to nontaxable and taxable investment accounts.
One fun thing about being a highly paid professional like a doctor is that in many respects, you’ve already won the game. You just have to not screw it up. You don’t HAVE to commute on a bike or repair your own roof because you have such a high income. You don’t really have to be particularly frugal. What you do have to do is carve out 20% of your income and use it to build wealth in some reasonable fashion. That’s it. Sure, if you want to exit medicine at 40 you’re going to have to make some serious sacrifices. But retiring at 50-55? Nah, that’s pretty easy when you’re making $300-400K for 15-20 years, even if you’re starting in a good size hole.
I find it funny that people talk about lack of cell phones. Unless you are pretty young, a pager was your only real option. Today it’s better and cheaper to have a cell phone but no home phone.
One thing for the original poster to remember is that your cash flow may improve substantially over the first 2 years after you start, allowing you to save more. I’ve moved for a new attending level job twice and both times was surprised how much I was able to save after a couple years. Between down payment on a house, moving expenses, buying stuff for the house, etc. I spent a lot. And if your income is substantially production based it may take a while to really ramp up. So be sure to look for opportunities to increase savings over the first few years.
Well written, keep it up!
In Ohio you may find a job that will give you access to the State Teachers Retirement System (STRS) or Ohio Public Employee Retirement System (OPERS). With those systems you opt out of social security but you have very nice employee match.
STRS: 14% from employee 6% from employer (total 20% of salary)
OPERS: 10% from employee 10% from employer (20% of salary)
They also offer a great 457 plan.
So its nice to have the money automatically taken out of your paycheck and then a nice contribution by employer to make 20% of salary.
That’s a pretty sweet deal. Many university/academic/state employees have similar deals. Not getting your match is like leaving part of your salary on the table.
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This was a great post. Thanks!