[Editor's Note: The following is a re-published post from the newest addition to the WCI Network, The Physician Philosopher. This article is all about a question I answer frequently — what should your savings rate be to reach retirement goals? My rule of thumb for attending physicians is 20% of your total income should be saved for retirement, but that doesn't include debt paydown, college savings, or short term savings. TPP's rule is 30%, but it includes those things. Both are easier than the Physician on FIRE's admonition to live on half of your net income! Enjoy the post!]
The other day I gave a talk to my residents on Investing 101. Before I could talk about investing, we had to discuss some personal finance basics, including budgeting and preventing large lifestyle inflation after finishing training. One of the most important questions that we covered was answering the question, “how much should I be saving“?
Today’s post is bent towards answering this question. However, the slant on my site isn’t towards just numbers. I want to specifically focus on how much of your income you should be using to build wealth when you are feeling stressed out by your personal finances.
The Big Picture
Let’s keep this simple. Money can dramatically impact most relationships.
The first time I witnessed this was when a couple – two of my best friend’s parents – had starkly different views on finances. The husband could not have been more frugal, and the wife enjoyed spending the money that they made without a second thought.
They were doing well financially by most standards, but they still experienced an enormous amount of financial stress because they had different views on expectations and reality as it related to finances.
We all know the feeling – when finances put a strain on our relationships with those that we love. The question is whether this feeling of stress is caused by overspending or by being so frugal that we aren’t just trimming the fat, but have now sunk the knife deep to the marrow.
The 30% Rule can help us figure out what’s causing our issue.
WAR and the 30% Rule
I don’t talk about war much on this blog, but today it’ll be necessary as I introduce you to a different kind of WAR – your Wealth Accumulation Rate (WAR).
In simple terms, your WAR is the % of your gross income spent towards building wealth.
The amount of money you are putting towards building wealth involves both the amount of money you are using to aggressively accumulate assets (savings rate towards investments) and destroying debt.
To calculate your WAR: Add your percentage savings rate (hopefully at least 20%) and the amount of money you are putting towards debt (hopefully at least 10%).
Wealth Accumulation Rate (WAR) =
% Gross Income paying down debt** + % Gross Income savings rate
A Case Study
For example, for someone making $250,000 gross per year, a 30% WAR would amount to $75,000 each year going towards paying off debt or investing. For the physician on the traditional path, this kind of WAR will typically result in financial independence before the age of 60.
Here is an example of what that might look like for a married couple:
- Maxing out your 403B/401K at 19,000 (any matching money goes towards your WAR, but it also increases your gross salary!)
- $19,000 into your spouses 401K
- A backdoor Roth annual contribution of $6,000 (per spouse, if married) = $12,000
- Paying $25,000 in student loan debt each year
Of course, the higher the student loan debt burden that exists, the more likely it is that a person will need to shift their WAR percentage towards paying off debt.
Hopefully, this person is also applying The 10% Rule towards their bonuses and promotions to help increase their WAR, which will allow them get to their goals even faster!
**Edit: Debt being paid off when calculating your WAR should be “Good debt” such as a mortgage or student loan debt. It has been pointed out that it should probably not include your consumer debt like that Tesla you are financing. Increasing your WAR in this way prevents wealth accumulation.
How Much Should I Be Saving? The 30% Rule
Obviously, the higher your WAR the better – as long as your life is tolerating it. A high WAR is how people achieve FIRE.
However, aggressively building wealth to the extent that it negatively impacts your wellness may not be worth it. A WAR that is too high can negatively impact your life and relationships. On the other hand, if your WAR isn’t high enough, your wellness will also be impacted as you limit your future choices and fail to obtain financial independence.
How much you should be saving can be directly answered after you calculate your WAR. And, if the thought of saving stresses you out, then you need to figure out if you have a spending problem or a frugality problem.
After you determine whether your WAR is above or below 30%, you put yourself into one of two camps.
Less than the 30% Wealth Accumulation Rate
You are putting less than 30% of your adjusted gross income waging WAR and yet you are still feeling financial stress.
This means you likely need to build something I like to call financial resilience.
Life can be full of tough decisions, but if you are suffering from financial stress (not related to other happenings in your life) and you are at a less than 30% WAR, as a physician, you likely need to find your frugal gene and express it.
Speaking of genes, are your other jeans all designer brands? Are you paying two brand new car payments? Did you buy the big house (or are you contemplating it)? Do you live in a high cost of living area?
Maybe, its time to make lifestyle changes if you are feeling financial stress with a WAR of less than 30%.
More than the 30% Wealth Accumulation Rate
If, however, you are feeling the tight constraints of your budget and you are saving over 30% of your income, you may need to question the extent of your frugality. Is it cutting too deeply?
For example, my friends' parents mentioned in the introduction:
Their WAR was likely much >30%, but this was clearly negatively impacting their marriage. It simply isn’t worth it to pinch pennies with a high-income if it negatively impacts your marriage. Becoming Financially Independent and Retiring Early (FIRE) is important, but it should not be an all-consuming goal that prevents you from living a life well lived.
Who cares how big your bank account is if you aren't enjoying life?
Take Home
Calculating your WAR and using The 30% Rule should serve as a guideline for discussion and thought. You can either adjust your spending or adjust your WAR to improve your wealth and live the intentional life of your dreams.
I think a 30% WAR is a pretty reasonable goal, but I need to show some grace and recognize that not everyone’s situation is the same.
Regardless, this is one of the tools I use to consider how I am doing in my mission to obtain both wealth and wellness.
Am I investing enough? I don’t know…
What is your WAR? Does it impact your lifestyle negatively? Are you feeling financial stress with a WAR more than or less than 30%? What do you think?
“Adjusted Gross Income” is not the correct term this calculation because AGI is reduced by 401k and 403b contributions. If you make $100k a year and max out a 401k your AGI is going to be $81k. If you calculate you are saving $19k out $81k(AGI) you are to get an overstated savings rate.
Josh, you are right. That should say Gross income. I noticed that when I was reading through it again this morning, too.
TPP
would get rid of all the AGI issues with the article. everything based on gross creates a clearer and cleaner image, easier to reproduce,. WCI has said he doesnt care, but one should be consistent, which this article wasnt “For example, for someone making $250,000 gross per year, a 30% WAR would amount to $75,000 each year going towards paying off debt or investing. “
Yeah, as I said above. Simple mistake. Typed in AGI when I meant GI 🙂 I’ve fixed it on my original post. Will see if I can get it corrected here, too.
TPP
Correcting now.
My situation may be a atypical because I am a US physician working in Japan, but I am not sure the 30% figure is realistic given the trend of very high tax rates at top income levels. Last year my marginal tax rate was 58% (45% national Japan tax, 10% local Japan tax, 3% additional US tax from AMT, etc.) and my effective tax rate was around 52%. That was before health insurance, the Japanese equivalent of social security and unemployment insurance so I didn’t receive anything close to 48% of that gross income with each paycheck. Someone who is in the top tax brack in California or Manhattan could be facing a similar net tax rate if they don’t have access to a 401 K equivalent (as I don’t). I did beat that 30% last year because I am a “super saver” and have no mortgage or other debt but this year just learned my local tax rate is increasing by around half. Following this advice I find I am paying 3+x more in taxes each year than I get to spend on my family (not just food and entertainment but very high health insurance and cash-flowing college, etc.) and then saving around twice those immediate expenses in order to meet that 30% bar.
Wow! 52% effective tax rate. That’s terrible. It’s really tough to get there in the US, even in NY or CA.
What do you calculate the effective tax rate for someone in NYC or California with a low seven figure earned income?
The effective rate is a little trickier than the marginal rate, but the marginal rate in CA on a 7 figure income is easy- 37% federal plus 13.3% state plus 2.2% Medicare Plus 0.9% Obamacare = 53.2%. It’s going to be very tough to have an effective rate of 50%+ with a marginal rate of only 53%.
In my case, my marginal rate is 37% federal plus 5% state plus 2.3% Medicare plus 0.9% Obamacare = 45.2% and my effective rate is about 34%. In order to get an effective rate of 50% on a low 7 figure income, you’d probably need a marginal rate closer to 70%.
White Coat Investor: In Cali if self employed then with self-employment tax of 2.9% and .9% obamacare tax on top of 13.3% and 37% you can get to a higher than 50% effective tax rate.
Do you understand the difference between effective and marginal tax rates? Yes, it’s possible, but it’ll take millions of dollars in income a year. I’m sure an enterprising person can calculate exactly how much but it’s got to be well over $2M to have an effective rate over 50%, especially considering $10K of the state income tax is deductible and half the Medicare tax is deductible.
Thank you for the concept. I’ve been focused on the 20% savings rule without quite making it but our WAR last year was 37% due to a high student loan to income ratio (thankfully loans are going down and income going up!). Still trying to push that up to get rid of the loans, which will always cause financial stress until they’re gone.
My husband and I are both graduating and becoming interns in about a month and I have a couple questions. I’ve been reading WCI and am currently reading The Physician Philosopher and really have appreciated all the advice.
As a resident is the goal to be saving 20%? Or what is an appropriate goal? Also, if for the first year of residency the REPAYE 10% payment is $0, should you set a goal of how much to be paying toward the loan? (In our case, we have no dependents, just student loan debt from medical school). I’ve been trying to decide if it would be worth it to just pay the minimum payments during residency, put savings money toward maxing out our Roth IRAs and then any extra in index funds. Then once we are out of residency aggressively pay off our loans. I just can’t decide if index funds vs paying extra toward the student loans is the better choice. Our residency doesn’t have a retirement match. Thank you!!
My wife and I were interns together. We didn’t have time to spend much money. We did go to Puerto Rico for a week vacation in January to maintain our sanity. Keep your rent and car costs low. We did Roth IRAs, but we didn’t have PSLF back then.
There is a lot to unpack here. I’ll take it in turn:
1) Thanks for reading my book!
2) As a resident who has a zero dollar monthly payment towards their loans, a 30% WAR is still reasonable, though I think saving 20% in residency is fine, too.
3) If you are in PAYE, whether you put extra money towards your loans versus towards investments depends on your ultimate plan. If you are going to pursue PSLF, your goal is minimum payments and maximum forgiveness. Extra payments do not make sense in this situation. If planning to pay back loans yourself after training, then extra payments make sense because you are trying to pay the least amount over the time it takes to pay them back.
4) Regarding savings. 20% is a reasonable goal. Assuming a salary of $55,000 each. That’s $110,000. 20% of this is $22,000 annually. If you both fill up a Roth IRA, you could save $6,000 per spouse ($12,000 total). Then, you only have to put $5,000 each into your employer’s 401k/403B and you would have met your goal.
5) For the record, there are investment vehicles and investments themselves. You said, “put savings money toward maxing out our Roth IRAs and then any extra in index funds”… and I just want to make sure you know that an IRA is a vehicle just like a 401K, 403B, 457, and 529. You can (and probably should) invest in index funds inside of each of these different vehicles, including your IRA.
P.S. If you get to a 30% WAR in residency, you are really doing well.
Hope this helps,
TPP
Consider doing all your retirement contributions Roth at resident tax rates. Count extra tax not saved as part of war? I guess not, but still better less now as Roth, will cost more presumably for the rest of your life unless you FIRE.
30% in residency? Seems rather extreme to me. That said, I’ve certainly seen plenty of docs do it, I just think it’s overkill. The time to get rich is as an attending.
Personally, I don’t think the goal is to get rich as a resident. As a resident, the goal is to avoid disaster and prepare. Avoiding disasters means being in the right IDR program, getting disability insurance, getting life insurance if someone else depends on you and making sure you finish residency in good standing. To prepare means learning how to save and budget and having a written financial plan for those first 12 paychecks as an attending. Then you start making massive progress on the net worth as an attending. I tell attendings, at least after the live like a resident period, to put 20% of gross toward retirement. I tell residents to “do the best you can without feeling deprived.”
As far as debt vs investing, it’s something you’ll struggle with from now until you’re debt-free: https://www.whitecoatinvestor.com/pay-off-debt-or-invest/
Avoid disaster includes ensuring your partner if you have one putting up with you doesn’t regret it. Your time pays better dividends than money and is nonfungible- can’t be spent on the tennis pro when you’re moonlighting.
So in determining the 30% contribution to wealth number, we’re including annual P+I payments on mortgage, correct? That number seems easy to meet when you include P+I, but does that really contribute to your wealth? My P&I appears to be 40% of my total contributions (60% is to retirement accounts), all of which is at least 35% of my GI. Or should we only be counting principal payments?
Mortgages are tough. You could totally buy more house than you should, and get to a 30% WAR pretty quickly. And I agree, this doesn’t contibute meaningfully to your wealth. Particularly not liquid wealth.
In the end, these two numbers came from the idea that you should be saving 20% + 10% towards “good debt”. In early years (when lots of student loans are present), we might be using 20% (or more) towards our student loans, and 10% savings until the loans are gone.
P.S. If your P&I is 40% of your gross income annually, you are either paying down your mortgage very quickly (which definitely counts towards a high WAR) or you have an expensive house (and are likely in a high cost of living area). My required annual P&I costs less than 10% of our gross salary. Almost closer to 5%.
TPP
Thanks. To clarify my earlier numbers, I’m paying about 35% of GI toward “wealth”, with about 40% of THAT number (so 14% of GI) to P+I on mortgage. So while it’s great that I’m done with student loans, this number (P+I) isn’t going away anytime soon either (leaving only 21% GI to retirement, which is not much since I’m low income physician). So I’m meeting your criteria technically, but…
I only counted P in mortgage payments. Made me recognize how little it is at start and how much quicker the amount of P in regular mortgage payment grows each time I paid off extra P.
Yes, that makes more sense to count principal only. In that case I’m only contributing about 25% (if I don’t count any extra cash sent to taxable account or solo-K). That helps give a ballpark figure of how much more I should be planning to save, at a minimum.
I do a modified version of this where I don’t count principal payments on our 30 year mortgage but I do count our extra payments of principal. My rationale is that I consider the 30 year mortgage an expense. But our extra payments I view as a form of savings bond with a 3.7% guaranteed return.
Our retirement savings rate is around 18% right now but we are at 20% if I include extra mortgage payments. We currently save around 12% for kids college and expect to do the same next year (we are trying to front load it). We expect to put around 3-4% into taxable accounts this year. I don’t think we can go higher than 35% without it hurting a ton. Maybe if we significantly increase income but at a 47% marginal rate (phase out territory to the business deduction) that percentage won’t change that much.
While paying off student loans we were at 40-45%. But since paying them off we bought the doctors home and I reduced my work hours. Between the increased costs and reduced income 35% is a realistic goal for us right now.
I would only include extra payments, not your regular mortgage payments, but I guess you can do it however you like.
@WCI – Just to clarify what you are saying here: My only “debt” is a 30-year mortgage. The goal is to be taking 10% of my GI and putting it toward debt reduction, but that should be in the form of “extra” payments on the mortgage. Is that correct?
That’s what I’m saying, yes.
Thanks!
Just curious how you think about college savings and/or 529 accounts in this? I’m guessing that doesn’t count in WAR because ultimately it’s money not for you but your kids via education
Yes. 529 is outside of this calculation.
I don’t see any point in putting money into a 529 until your own loans are paid off. Pay off your education first. It’s a pretty natural transition that when your loans are gone you have some extra cash flow that can start going into 529s (and spent).
I like the clean easy numbers thank you. How would a match from the employer figure into the percentage, maybe I’m over thinking and just go for the 30% and let the match be icing?
Thank you for the hard work and excellent content on top of an already challanging occupation.
Hobbes
Similarly, how do factor profit sharing contributions in savings rate and WAR? Technically not gross income. Thanks for the post!
I count them as both income and savings.
I count match as both income and savings.
So you count the employer contribution towards you 20% GI saving rate?
I count it in both the numerator and the denominator.
I’ve asked this question before, and I still have a difficult time wrapping my head around it. So…let’s look at some real numbers:
$215K salary
$5K employer HSA contribution
$6K board stipend
$42k employer profit sharing contribution
= $268k gross salary
20% savings goal = $53,600
Because you say you count profit sharing contribution as both salary and savings:
$53,600 – $42,000 = $11,600 total left to add to savings via regular 401K contributions, backdoor ROTH contributions and HSA contributions
Is that correct? It seems like I’m not saving enough if I include the profit sharings in my calculations.
What I have been doing is treating the profit sharing completely separate; like the icing on the cake since 100% gets contributed.
You can save as much as you want. It’s your money. But my general guideline for a doc wanting to have a relatively normal length career followed by a comfortable retirement is to save 20% of gross income. Profit sharing counts on both the income and the savings side. So in your situation, yes, I’d put in at least $53,600 toward retirement. Since the employer is chipping in $42K, you need to chip in another $11,600 (not counting the HSA in my book, but reasonable people could disagree.)
If you save more than that, great! You can either retire earlier or spend more in retirement or save less later.
Reflecting on the/your 30% Rule; should I also include the profit-sharing amount when calculating 10% of GI to put toward debt reduction? We won’t have access to the profit-sharing monies until retirement, so they obviously can’t be used for debt reduction now. However, I can see that including it for the purpose of calculations will push us to pay off the debt even faster. What would you do?
I include it on both sides of the equation.
Okay. Thanks! And, thank you for taking the time to reply.
Is the goal to maintain 30% when student loan and other “good debt” have been repaid? Or does the WAR decrease to the 15-20% range?
This is going to be different for everyone. Given that I like to encourage people to get to financial independence quickly so that they can choose to practice medicine because they want to (and not because they have to), I think staying around 30%, or even slightly above is a great goal.
If you only save 15-20% starting out in your early 30s when we finish medicine, you won’t reach retirement numbers until you are in your late 50s, and maybe even 60-65.
Just keep it going once you’ve gotten used to it.
TPP
Meant to reply to Kristen
In California taxes : 12.3% plus 2.9% medicare, 0.9% obamacare tax on 37.0% yields 53.1 % plus our high property taxes, wish I could move but am locked in and self employed.
This is basically the same idea as Pete the Planner’s Power Percentage: https://petetheplanner.com/power-percentage/.
I’ve been at 40% the first couple of years out in the real world. I got a late start both medicine career-wise and saving-wise. I haven’t done any projections to see how close I can get to the curve I would have been on had those factors not been the case, but trying to get a chunk set aside to help with that before we grow into the extra too much. Still feels like I won’t ever “catch up”. Really need to self-assess to find my “number” and confirm that the path is accurate.
You don’t need to catch up. As a high-income professional, you can make some major “mistakes” and still do just fine.
I know everyone has a different definition and different reasoning, but some of this gets too complicated.
I think anything that is increasing Net Worth should be the baseline calculation if one is going to be used at all. Paying down a mortgage (even without extra principal payments) increases net worth, no different than paying down a student loan. I’m not sure I understand the reasoning that would include payments towards student loans and not a mortgage.
Same as 529 savings — that $ belongs to the account holder, not the beneficiary. Even if it won’t be spent on the account holder, it’s net worth. My HSA money may all get spent on my kids braces and ear tubes (if I wanted to spend it now), but I would assume most people count $ going to an HSA as savings even if I know I will never use a dime on myself.
I think one big inclusive # is appropriate, because as soon as you get past that it is all based on specific criteria and goals regarding goal lifestyle/spending in retirement, funding for college, eliminating housing payments, real estate, whatever. So having a “big” calculation that excludes things to me sort of misses the benefit of having a calculation at all.