[Editor's Note: This is a republished post from Physician on FIRE, a member of The White Coat Investor Network. The original post ran here, but if you missed it the first time, it's new to you! It's a discussion of just how much of an impact lifestyle inflation can have on retirement dates and lifestyles. Like usual with the PoF “4 Physician” posts, he gets into the nitty gritty of the numbers and shows you just how big of an effect seemingly minor amounts of spending can have.]
In the Tale of 4 Physicians, we analyzed the impact of different spending budgets on wealth creation. Each of our 4 physicians was married with 2 kids and had a household income of $300,000. In the second post in this series, we explored the financial impact of Dr. Anderson working after achieving FI. Next up is Dr. Benson.
Dr. B had the second lowest annual spending at $120,000. Dr. B heard that Dr. A was considering an early retirement after 11 years in practice and he promptly scoffed at the idea. With a net savings rate of 44%, Dr. B was already saving way more than most of his peers. And spending less. But Dr. B got an uneasy feeling when he parked his 3-Series Beamer next to the 5-Series and 7-Series performance vehicles in the physician’s lot.
Logging into Facebook, he saw his colleagues and their families vacationing in Paris and enjoying new pontoon boats at their lake homes and Dr. B started to feel inadequate. It seemed half the kids in his upscale neighborhood were in private school and how many of their parents were doctors? The insurance salesman / financial advisor next door had three kids in private school, for crying out loud. And a new RV!
Dr. B Opts to Upgrade
Dr. B and his wife decided it was time for a lifestyle upgrade. They’ve never seen Dr. Dahlgren’s balance sheet, but he’s obviously doing quite well. I mean, even his kids fly first class when they go skiing in the Alps. So from now on, Dr. B is going to live more like Dr. D.
Let’s dig into the numbers. Here is a look at where Dr. B’s and Dr. D’s $300,000 salary has been going up until now.
To keep things fair, we’ll assume Dr. B got the same market return that Dr. A saw over the 11 years that it took her to become FI, a return that outpaced inflation by 4%.
His nest egg after those 11 years is worth about $1.5 million in today’s dollars. By golly, he’s rich! Time to start spending like it, so let’s assume his spending from this point on will match Dr. D’s $200,000 and see how that changes Dr. B’s future.
Dr. B was on track to be financially independent in the next 6 to 9 years with a nest egg of $3 million. By upping the spending, he can expect to work another 17 to 42 years with real returns in the 2% to 6% range to attain the larger required nest egg of $5 million.
Keep in mind, we are starting from a baseline of having already been an attending physician for 11 years, which would put him at least in his early forties at the beginning of this exercise. With excellent market returns, he may still be able to retire close to 59.5 when he will have access to the 401(k), but it’s best not to rely on 6% real (8% to 9% nominal) returns.
What if Dr. B waited to upgrade his lifestyle until he retired? In other words, how long would it take Dr. B to amass a $5 million dollar net worth if he continued his current spending of $120,000 per year?
The Benefit of Delayed Gratification
You’ve seen enough spreadsheet for one post, so I’ll spare you the math and give you the answer. Spending $120,000 a year, it would take 12, 15 or 20 years at 2%, 4%, and 6% real returns to reach $5,000,000.
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In this case, we’re no longer relying on stellar returns to have the ability to retire in style at a reasonable age. You could call this a benefit of “delayed gratification” although spending $120,000 a year could hardly be considered a life of deprivation, and not everyone will be happier indulging in $200,000 of annual spending. Not all of us are comfortable living the Lifestyles of the Rich & Famous.
Also, remember that Dr. B has two children. If his family is spending $200,000 per year while the kids live at home, those kids will be accustomed to a life of luxury. While some people may want that for their children, I think it can be a setup for disappointment and financial difficulties later on when they are on their own. I think it may be best to wait until the kids are self supporting or at least living away from home before rewarding yourself with a big lifestyle upgrade. That, of course, is a personal decision.
What do you think? Have you upgraded your lifestyle? Was it gradual, or a virtual lifestyle explosion like Dr. B underwent? Is financial independence within reach for you? Comment below!
In college and medical school, I lived on around $20,000 per year (not counting tuition, of course). My wife and I now live on around 60K per year, which would be 30k per year each. That represents about a 50% lifestyle inflation since college.
We plan to stay at this level of spending for the foreseeable future. If our income increases substantially, or if our savings ever surpasses $2 million (60K per year retirement spending using the 3% rule), then we may consider a gradual lifestyle inflation.
Resist lifestyle inflation as long as possible and you will appreciate it that much more when you can finally do it!
Needing a low cost, reputable third party adminstrator for my medical office 401k/profit sharing and Cash Balance Accounts.
Had the luck for my husband to tolerate the Army long enough to get the pension, and perhaps more important money wise, Tricare 15+ years before Medicare eligibility. Our lifestyle choice is to remain in low cost rural Alabama, house paid off so when he retired didn’t have that payment to find every month, and we haven’t lost money buying it in the 2006 boom until we sell it for a loss- if we keep living here long enough we might yet think we spent less than renting.
Rather than up our lifestyle we’re doing hopefully one off big spends. Blew a few thousand running for office (considered that charity 🙂 ), now a lot more getting him a new sailboat, and we’ll see how much the last kid costs for college.
I often wish we lived in a town with great restaurants, theaters, etc but not enough to have us both work another 20 years. And I enjoy being able to afford 6 acres and a mansion by city standards. Trying to loosen up the travel budget by visiting exciting towns more often but then I miss the garden. If we could have a big garden closer to the sailboat (without going back to work!) we’d move there.
Definition of depravity
1. a corrupt act or practice
2. the quality or state of being corrupt, evil, or perverted : the quality or state of being depraved
He is awed by its fabulous wealth but deeply troubled by what he sees as its moral depravity … — Nicholas D. Kristof
Good catch, CM. I’ve changed it to deprivation on my site. I have deprecated my proofreader for deplorable performance. 🙂
Best,
-PoF
🙂
A similar word that is so often misused Im sure they’ll change the definition is “enormity”.
It does not mean large or have to do with size at all, but evil. Interesting stuff.
You taught me something here.
Usage note:
3. Enormity has been in frequent and continuous use in the sense “immensity” since the 18th century: The enormity of the task was overwhelming. Some hold that enormousness is the correct word in that sense and that enormity can only mean “outrageousness” or “atrociousness”: The enormity of his offenses appalled the public. Enormity occurs regularly in edited writing with the meanings both of great size and of outrageous or horrifying character, behavior, etc. Many people, however, continue to regard enormity in the sense of great size as nonstandard.
A life of depravity? Sounds interesting.
“And across the street is a house of ill repute with an excellent reputation.”
Sometimes I think my readers can’t possibly be reading every word I write, then I have comments sections like I’ve seen in the last week where a few words get discussed for dozens of comments.
Changing depravity for deprivation now….
Thanks! I’ll try to do better to deprive the depraved minds of our readers of future fodder for such banter. 🙂
Cheers!
-PoF
We have upgraded a fair amount. Pay for lawncare, housekeeper….We have not always made the best financial decisions on one time expenses but we have kept our mortgage to less than 1 year salary and other fixed expenses well below our means.
Just remember to have some fun while you are accumulating and not spend each and every day nitpicking your finances.
Totally agree – in the sense that I have a lot of fun being a multimillionaire…
😉
I think the line between “frugal” and “cheap” is different for every family and varies with time and experience. I’m a lot better now at looking at my lifestyle creep decisions and asking how many additional days/weeks of work is the activity worth…
Interestingly, my own lifestyle/money creep items are now things like “Do I want to work part time to help my kid pay for medical school or to help my kid max their 403b while they are still really young…” more than a desire for more stuff of my own. And the right answers for those questions depend on my enjoyment of work, and also the kid in question and how they are doing in their financial/life quest. The ones I most want to help are the ones who will do great even without my help…
Sigh
“Just remember to have some fun while you are accumulating and not spend each and every day nitpicking your finances.”
Great statement Dicast.
Making saving automatic is key. Focusing on making a difference to improve others’ lives should be the priority.
My wife and I reviewed our 2017 spending report through May last night. Could we do better? Always. Are we kicking butt? I’d like to think so. We have saved 91% of her take home pay this year. She is a FT PA.
Hoping to increase it to 100% or more.
My husband and I have definitely engaged in lifestyle inflation – mostly consciously so – since getting married 3 years ago and buying our first home 3.5 years ago (which was the root of most of the inflation). Our incomes have both jumped several times though, and we are also saving more than ever, both as a percentage of income and in real dollar terms. So I don’t regret the inflation – more/better trips (i.e. paying more for ideal flight times, staying in nicer hotels), better car for him (moved from a 10+ year old Mazda to a 2 year old Cadillac sedan), some mostly unnecessary upgrades to the house – flooring, primo HVAC, now debating windows for better sound insulation.
I go back and forth because we are approaching FI assuming we were willing to live on what we both lived on just a few short years ago. But with our new $10K per month “basic” necessities, we are probably 4-5 years out from FI. Then again, what would we really change if we quit our jobs? We don’t hate them – in fact we rather enjoy them – and we work normal 40 hour weeks close to home. So besides *more* golf and travel and time for exercise and hobbies, there isn’t a lot we are aching for in retirement life. Makes it hard to cut back just because we could.
As somebody who FIRED a couple years ago at 43 and still has highly successful friends working pulling in doctor money or better, I think it is important to remember that not everybody wants the same things as us…and that’s ok! Hell I live on less than $100k a year with an 8 figure net worth and I feel it is extravagant. I see the way some people around me spend their money and it makes me cringe, but they also have exciting careers they have no desire to leave, and they are living well within their means so I suppose it is all good. If you live in an affluent area I think you might be surprised at how fiscally responsible some of these people driving new cars or fancy boats are…granted its not the majority, but it is not a dramatic as the blogosphere makes it out to be IMO, but then again I could be living in a bubble : )
How are you calculating the “All Contributions” column? It doesn’t seem to add up when I add pre-tax investments+post-tax investments
Thanks!