The flying flagpole from Super Mario 3D World
There is a level on Super Mario 3D World (it's a Wii game for those of you without small kids) where the flagpole that usually marks the end of the level is visible at the very beginning. However, as soon as Mario starts moving, so does the flagpole. In fact, even if you run as fast as you can you cannot catch it until it slows down slightly just before time runs out. That's a bit how I feel with respect to financial independence. Despite running as fast as I can, the closer I get, the faster the flagpole seems to move. Why is that? Lifestyle creep.
Lifestyle Creep
My wife and I have tracked every penny we've made since we were married in 1999. That habit is particularly useful when it comes time to look at something like lifestyle creep. I was able to find copies of our budgets going back as far as 2003, the year I graduated from medical school. So I compiled the data to see just how much lifestyle creep we have had. I decided to take the budget spreadsheet from each October, from 2003 to 2015, and see how much money we spent in that month. To keep things simple and most meaningful, I did not include taxes, retirement savings, large purchases such as cars or expensive vacations, charitable contributions, 529 contributions etc. I did include mortgage payments, rent payments, utilities, insurance, groceries, gifts, clothes, gas, regular vacations, road trips etc. Here's what I found:
Let's analyze this just a little bit. In October 2003, I'd been a resident for 3 months. We had no children and had a dual income. We spent about $2000. That gradually increased as a child was born in 2004 even though our income went down as my wife stopped working for pay. It continued to increase in 2005 and again in 2006 when I graduated from residency and went into the military. Things leveled off for a bit but increased slightly throughout my four years in the military despite having two more children, although much of that increase was actually extra mortgage payments as we saved up a downpayment for our fancy mansion.
2010 is the year I left the military and started making quite a bit more money. The end of 2010 was also when we deliberately upgraded our lifestyle as we felt 4 years of “living like a resident” was enough. You can see that huge spike in 2011. 2012 was a little bit lower, but mostly that just reflects the fact that I took the expenses for the home we couldn't sell in Virginia out of our budget since we turned into an investment property. In mid-2012 I made partner and had a big rise in income. In 2014 and 2015 we deliberately loosened the purse strings, but that was primarily in the purchase of big-ticket items, not the categories tracked by this chart.
[Update for 2018: I put this post originally in 2016, that's why the chart ends in 2015. Since then, our spending has actually trended up a bit more, but it's actually a fair bit different. We've paid off the mortgage and I just dropped my disability insurance, but all of that (and a little more) has been replaced with travel costs and additional fun stuff. The good news is our income has gone up dramatically, dwarfing the minor increase in spending.]
What About Inflation?
When I first looked at this chart, it really bothered me. Not that we're spending more than we can afford to spend, but that the trend is up, up, up! Project that out far enough into the future and we'll never be financially independent.
However, some of this increase is simply due to inflation. Perhaps we ought to factor that out before we spend too much time discussing lifestyle creep. Inflation over that time period has been low, averaging 2.33% and ranging from -0.34% in 2009 to 3.85% in 2008. Just to keep things simple, I'm just going to take the average, apply it to each year, and put everything into 2015 dollars.
That makes me feel a ton better for several reasons. First, it shows that despite the upward trend, we did a really good job of living like a resident for four years out of residency. We were living on <$4K a month as residents and basically only increased that 25-50%. Second, I'm proud at how well we did dragging our feet with the increases. Third, I'm proud that only really large jump (at least when adjusted for inflation) was a deliberate increase in lifestyle associated with buying a much larger house (with all the necessary expenditures there) as well as a getting a second car (and two SUVs to boot.) And finally, what I am most proud of, is the fact that, at least adjusted for inflation, we've managed to keep our expenses mostly level since that large jump, despite a dramatic increase in gross income.
Has there been some lifestyle creep? Absolutely. But are we keeping it under control enough that we should still meet our financial goals? Of course.
Has Your Lifestyle Creep Gotten Out of Hand?
So, why does all this even matter? Certainly blowing even $120K a year on living expenses isn't particularly noteworthy for a doctor of any specialty. It is a small fraction of my income, especially my gross income. But I suspect our experience is fairly rare among doctors. I would bet if the average doctor did this exercise there would be quite a steadily rising trend. The worst part, however, is that the doc and his family probably aren't any happier, and don't feel any better off despite spending more and more each year.
When we wrote our first financial plan back in 2006 or so, the plan was to save up enough money that we could spend $80K a year (in 2006 dollars) in retirement. Using the 4% rule, that means a retirement portfolio of about $2 Million. If you factor in inflation, that figure is now $108K, or a portfolio of $2.7 Million. Can we have the comfortable retirement we seek on $108K? Well, if you take our current spending, and subtract out the $2400 a month mortgage principal and interest, the $400 disability insurance premiums, and the $100 life insurance premiums, we're currently living on $7100 a month, or about $85K a year, well less than the $108K. So far so good, especially since we're currently clothing, housing, and feeding four extra mouths.
However, we've got to add a few things back in. Remember my figure doesn't include taxes (there will be some in retirement as a big chunk of our income will come from tax-deferred accounts,) charitable contributions (we don't plan to stop those in retirement), and large purchases. Will $23K cover all that even with the kids gone? Probably not, so it looks like we'd better adjust our goal retirement stash accordingly. Perhaps another $500K-$1 Million. A little more with a super early retirement (since we would still have child-related expenses. No big deal, as we're clearly still well on track, especially if we keep earning and saving like we have the last couple of years.
The more important question relates to your own situation. Has your lifestyle creep gotten out of hand? Is it now outpacing your ability to generate the portfolio needed to support it?
Stopping Lifestyle Creep
# 1) Recognize it
Step one is to recognize it for what it is. It is natural and normal. If you just do what feels right and what everyone around you is doing, you will have lifestyle creep, and perhaps more than you can handle.
# 2) Start really low
As you'll notice, we were spending the equivalent of $3-4K a month in residency. Upon graduating from residency and getting the big bucks (in my case, a USAF captain's salary, allowances, and medical “special pays” totaling about $120K) we were basically still living on $4K a month. Rent in residency was $800. The mortgage in our townhome was in that same ballpark. We drove the same car (notice the lack of an “s” at the end of that word.) We used the same phone (although I confess we splurged on a second flip phone upon graduation.) After six months or so, we did buy a second car. It cost $1850 and was sold four years later for $1500. Guess what? When you're living on $4K, even spending $500 more a month feels like you have money coming out of your ears!
# 3) Slow it down
The slower you grow into your income, the better. Remember the difference between your income and what you spend is what gets invested. For us, there was nearly a million bucks between those two figures in the first seven years out of residency. Just because doctors earn a lot of money doesn't mean they have to spend a lot. You aren't what you drive, live in, drink, eat, wear, or do. Like a pressor or other dangerous medication, starting low and going slow is usually the right move.
# 4) Remember taxes hate you
Our progressive tax code rewards those with a low income. The lower your income, the bigger the reward. Increasing lifestyle expenditures have an accelerating, perhaps even exponential, effect on the amount of money you must earn and save. In most states, if you're in the top bracket, if you want to or need to save another $100K a year you must earn another $200K a year. That's not an easy feat for most docs who are usually already running as fast on the hamster treadmill as they can. At typical doctor incomes, it is way easier to cut expenses than to increase income, and due to the tax code, it has a larger effect anyway.
# 5) Bake inflation in
I was amazed at the effect inflation has already had on our required portfolio. In just a little over a decade of what historically has been very low inflation, our required retirement nest egg has increased by $700,000. If you fail to account for the effects of inflation on the size of your nest egg and on your investment returns, you are likely to end up with much less than you planned for in real terms, even if you still hit your nominal goal.
# 6) Watch out for red flags
In medicine, we often take a red flag approach toward working up symptoms. For example, if someone comes in with low back pain, red flags that might trigger ordering an immediate MRI (instead of waiting 4-6 weeks to see if symptoms resolve on their own), include weakness, numbness, bowel or bladder issues, a history of cancer, trauma, fever, or IV drug abuse. Likewise, there are red flags for lifestyle creep. They include a dropping savings rate. If you used to be able to save 20% of your income, but only saved 10% this year, that's a problem. Increasing debt is a problem. Difficulty coming up with your quarterly estimated tax payments is a problem. Your spouse expressing a desire to own a wakeboat is also a problem.
# 7) Spend deliberately
Each time you weigh an increase in lifestyle, just like a one-time expenditure, evaluate it for the happiness factor. How much happier will it make you to spend $8.54 a month on Netflix? How much happier will it make you to store your boat indoors? How much happier will it make you to fly to Asia for vacations instead of camping in the woods near your home? Is that sweater or pair of shoes going to make you any happier than the four you already own?
# 8) Win the big battles
Lifestyle creep red flag!
You don't have enough psychological willpower to deny yourself all the lattes in your life. Concentrate it for when you buy the big items, like a house, a car, a private high school education, a college education etc. Win the major battles and you'll win the war, even if you lost dozens of skirmishes along the way.
In short, lifestyle creep happens to the best of us. If you're not careful, it will move your retirement goalpost faster than you can run toward it.
What do you think? Have you experienced lifestyle creep? In what way? How much creep is okay? What have you done to combat it? What's the worst lifestyle creep you've seen a doctor have? Comment below!
Great post … It makes me want to break out my old excel files and compare them with today’s spending
If anything, my wife and I have been bringing the goalposts closer, or marching down the field in bigger chunks.
Like you, I finished residency ten years ago. I don’t have the data to show it (we’ve only tracked spending for ~9 months) but I would say we’re more mindful of our spending now than we were in the first five years out of residency. We certainly don’t live a life of depravity, and we spend more than the typical family of four, but far less than the typical physician. It’s a balance that seems optimal for us.
If financial independence is a top priority, lifestyle creep is a double whammy. You put less money toward your desired nest egg, and that egg must now be larger. Inflation will also have more time to become a more significant factor as those goal posts get further and further away.
Another great post WCI. I wish that I had kept records like you have. A back of the envelope calculation from about 10 years ago showed I was spending around 80k when saving for retirement, disability, etc was subtracted out. I am currently spending 51k. I track it with quicken. I have made it a game to see what expenses I can eliminate. I was definitely guilty of lifestyle creep in my younger years. My guilty pleasure involved going to antique auctions and granite, onyx, and marble. I no longer redecorate my house.
Interesting and a great post!
Just curious- why continue the disability policy? It’s pricey, they tend to be hard to actually use and have significant exclusions, and, despite lifestyle creep, you have ample cash flow should something unfortunate occur. Why not just invest or save the $400 a month?
I guess I worry about the possibility of a disability eliminating my ability to both practice medicine and run this website. My investments by themselves aren’t yet adequate to maintain our current lifestyle. I’m not yet financially independent, so I still carry disability and life insurance.
We’ve kept records for the last four years–since we decided we wanted to retire super-early–and our expenses have decreased quite a bit. We dropped cable, switched our phones to Pure Talk, etc. I can’t wait to drop the disability insurance!!!
We don’t have kids, though, so that speeds things along quite a bit.
as a PGY2, i’m already starting to see some lifestyle creep. I’m becoming more liberal with spending on my daughter in her lessons, parties, and our family travels. however, as my lifestyle creeps, i reign it in by simply paying myself more, FIRST. for instance 2015, i saved 23.5k in my Roth IRA and Roth 403b, this year my life style crept and i’m buying dream/2nd home, so i decided to pay myself 37.5k instead (with additional 14k maxed into my kids’ 529) with the end goal of also starting and maxing my kid’s 5.5k in her Roth IRA.
so as long as my paycheck to self/family is ever increasing, i’m fine with spending a bit more of what’s left 🙂
this way i feel not deprived at all, i feel that i’ve taken care of my priorities!
What’s your daughter doing to earn $5.5K?
Modeling for blogs at $100/hr, of course…
Great article. I’ve noticed some lifestyle creep in the last several years, and kids were a big part of that. We essentially lived like residents for five years first though, so we are at least in a better position to be increasing our spending. I remember your loosening the purse strings article, and while we haven’t gone for the expensive dining room set so far, we have started buying nicer things in general. Articles like that one and this one help me keep perspective and see the bigger picture. I think another interesting graph would be to plot annual spending vs. net worth. I’m sure it’s over 100% for most when they start, and the goal is to get it down to below 4% so you can be considered financially independent.
OneCVJ, I’ve done an anaylysis like this using annual budgets of $80K, $120K, $160K, and $200K on a $300K salary.
The time to financial independence varies from about 10 years for the super saver to probably never for the big spender http://www.physicianonfire.com/a-tale-of-4-physicians-the-importance-of-lifestyle/
Best,
-PoF
I was very conscious of how much I spent on my house (~1.8x gross income). Our two cars combined around about 15% of gross income. Once those big ticket items are in order then everything else just seems to work. I don’t stress the comparatively little one time expenses because I’m saving 25%+ and am adequately insured.
Also note that I’m saving 25%+ when I have his and hers student loans, two car notes (at ridiculously low interest rates), preschool expenses, and life insurance to pay for. Take away those obligations, pay off the mortgage, and then financial independence will come quickly, whether I buy a Tesla Model 3 and an expensive carbon mountain bike or not.
In retirement you will need 60-70% of your income more or less
best to increase your goal by 20-25% so you can invest a bit more aggressively, especially with rates being so low and seemingly for many yrs to follow
I dislike that rule of thumb. If I needed 70% of my current income in retirement I couldn’t retire until I’m 80. It’s just BS to link your retirement income to your current income. It should be linked to your expenses. Better your future expenses than your current ones, but current expenses are going to be more accurate than some random percentage of your current income.
I expect to pay 27% of my income in taxes this year, I’ll give another ~10% away, and I’ll probably save 30%+. Just taking that away puts me at 33%. Now take away the mortgage, life and disability insurance, child related expenses etc and the number gets even lower.
Agreed. What does income have do with need in retirement if one lives off 20% of the total? Makes no sense…
I have never liked this rule of thumb either. In your peak earning years 60-70% spending rate is much higher than what you will spend in retirement. You really have to focus on the fact that some expenses start disappearing. Student loans, mortgages, car payments, saving for retirement, social security, disability insurance, life insurance, etc. I have really been surprised by my numbers. I also like to think in terms of net worth and not income for comparisons. Are you upper middle class, high net worth, a member of the one percent etc. Do you include passive income? These numbers make more sense when net worth is used rather than income.
I think I think these heuristic rules are derived from statistical averages. This site clearly caters to people well above the mean in terms of income, so the standard guidelines don’t apply. One’s expense budget is likely a far better baseline.
My father expressed the caution against life style creep in the phrases “live beneath your means” and “delayed gratification”, but the point was the same. As your income rises, increase your savings rate as fast as you can and hold the line on expense growth as best you can.
However, those of us who enjoy significantly higher incomes are likely to want to realize some near-term enjoyment from our fortunate position. The trick, as the author describes, is to be deliberate, thoughtful and restrained in our lifestyle changes. It is easier than we think to fill our lives with clutter while satisfying our desire for homes, cars, gadget, memberships, etc. In my experience there is a steep decline in the marginal utility of all those great things in terms of enhancing happiness. Financial independence might be the largest single source of happiness and that might just be the best example of “delayed gratification” we can find. live more simply now and live more independently later.
that’s what I have read and being retired it is in the ballpark with kids out of the house and hopefully no mortgage and no debt
assuming you stay in the same home its accurate
if you sell and move to a low tax state and lower expenses it might be 50-60%
you docs live too high in general-big egos or an inherited trait-NOT ME-wealth created from ground zero thanks to mr malkiel and mr bogle
FWIW-Bogle has a podcast after 65yrs at Vangaurd at their website-LISTEN UP!
What pod cast? I looked up fwiw and it’s a “furries” podcast “fur what it’s worth”. I googled listen up! And wnyc did have an audio program but I couldn’t find anything on bogle and listenup.com is an audio hardware site
Cut Ken some slack. His style of commenting can be tough to follow until you get used to him. I think this is what he is referring to:
https://personal.vanguard.com/us/insights/article/live-webcast-bogle-062016?email=returnarticle&oeaut=vuMLegNHGv
Thanks wci… My fav part of the WEBcast was when bogle said that people were idiots for investing in hedge funds
FWIW = text-speak to abbreviate For What It’s Worth.
Now if you’ll excuse me, I’ve got a new podcast to listen to. I can’t wait to find out what this Furries business is all about! 😉
Oh I don’t doubt it is in the ballpark for some, but probably not most docs.
Fantastic post, with real data very helpful.
A strong case can be made that lifestyle creep is inconsequential as long as progress is made along another variable year to year ( unless of course the creep slows down progress along this variable to an unacceptable rate for your personal needs, goals, or risk tolerance):
If the goal is FI, a much better metric may be:
(Net worth / annual expenses).
As long as you are consistently raising this, you are making progress towards your goal ( until you exceed the goal ratio, e.g., x25 if you follow the 4% rule, higher or lower depending on how conservative you want to be).
Posting this in contrast to the charts above would be quite illuminating, welcome & appreciated.
Thanks for being candid and honest with your finances. It helps your reader gauge where they should be relative to their careers. I kept track of my budgeting, expenses etc. on an excel spreadsheet since 1999 and have similar profile as yours with respect to annual burn rate. Wondering if you could show a graph of how your savings rate changed through the years and how much you were able to save on an annual basis.
I could definitely tell you how much I saved in any given year. That’s all on my investment spreadsheet. I know I kept track of savings rate for years as well, whether you agree with my numerator/denominator or not. It would take some effort to put together. Maybe in a future post.
I have savings rates from 2004 to 2011 handy. The low was 5.03% in 2004 and the high was 62.95% in 2008.
If you are using pivot tables/charts in excel, all of those charts you created should be easy to assemble. If you need a tutorial, I’d be happy to show you via gotomeeting since you have helped me a lot.
Not sure what a “pivot table” is but I think I know how to get the data, it will just take a little time and not sure it’s all that useful to anyone to know how many dollars I saved in 2010.
I was not really talking about that specific data, but that’s alright – thought I would offer. Made it this far in life, no need to get any better at excel ;).
How much does the recent doc going into practice today need to save for retirement. My estimate is to strive for 4 million plus SS. Hopefully in 35yrs you will see normal int rates. I expected 5-6% on 4 million but had to go into long term cds and corporates and hi yield corporates to garner 4-5% with much more principal risk. It has worked for the last 8 yrs for my portfolio
Few items to note … General rule of thumb is that you should take 100 minus your age and that percentage should be stocks (i.e. Index funds)…so if your 30 … 100-30=70% in stocks… You might want to rethink CDs…ok we got that out of the way…
If you save 47k a year (max out you and your wife’s Ira / 401k and assume no additional employer contributions) at 5% return for 35 years you will have 5.5 million….if you just save 30k a year you will reach you 4 million goal…that being said do you really want to save so little and not have a fufund just in case you want to retire early? I’ve been told dr burnout is a real thing and I think I’ve started to see it with some drs
Ken Vanguard has several articles about the increased risk you take by investing for income as opposed to a total return strategy. To get enough to live on in a low yield environment you increase your yield with junk bonds etc. It is actually less risky to have a higher stock allocation and sell off some shares from time to time than fill your fixed income portfolio with bonds that act like stocks.
Very sorry, slight miscalculation. I was including employer/extra contributions, the real number is that 44,500 per year will get you to 4 million in 35 years (I still say 35 years is too long to wait before its financially possible to retire)
Here is my formula (make it easy on yourself and put it in excel)
(StartAmt*(1+Int)^numYears)+addPerYear*(((1+Int)^numYears-1)/Int)
StartAmt = the amount you start with
Int = interest as in .05 is 5% interest
numYears = the number of years you want to save, in this case 35
addPerYear = the amount per year you are going to contribute, lets start with 45k
You’re making that way too hard. You can use the Excel “PMT” calculation:
=PMT(5%,35,0,4000000) = -$44,286.83
Or if you like, the NPER calculation if you saved $60K a year and already had $100K:
=NPER(5%,-60000,-100000,4000000) = 28 years
Hell that is a lot easier, thanks
FYI ken is closer to 70 than 30. He’s a retired dentist multimillionaire with a portfolio heavy into individual munis. Too late for him to get burned out and a decent dollop in CD and other fixed investments is probably quite reasonable.
I guess I am a bit unclear about the scenario… He is asking about a new doc investing for 35 years but then he also mentions his own portfolio (which should be different asset allocation which he didn’t ask about but I thought I would mention it)
Not unusual. His comments can be cryptic.
Depends on how much he spends.
No reason you have to invest in something you don’t want to invest in just because the yield is higher. As a total return investor, you can declare your own dividend any time you like.
Nice post, WCI. Thank you.
BTW, can I suggest adding another technique to your list of techniques? I find it’s really useful to do something like keep a gratitude journal or create some other document where one regularly writes out and documents the stuff one is grateful for.
This tends to make someone not just see anew materialistic stuff that hedonic adaption desensitizes us to… but also the really important stuff like our spouses or kids, good health, etc.
FYI I can’t remember where I first heard about gratitude journaling. I do remember once watching some news story where Ben Bernanke talked about this…
80% bonds-little more than bogle’s axiom of AGE IN BONDS
I LISTEN WHEN BOGLE TALKS
I was playing around with a retirement calculator on Vanguard. Tellingly, the highest % of income being saved for retirement it allowed me to choose was 21%. The lowest % of current income for retirement I could set was 60%.
I thought about this since this mornings banter above…maybe the 60 rule of thumb or vanguard calculator assumes average-ish income 54k. If you make 54k a year you probably do need 60% of your income at retirement (and prob won’t save more than 20%) and maybe vanguard wants to protect those people from saving too little thus the calculator forces you to put in 60% and realizes the people with advanced degrees and higher wages will just use excel (and the rule doesn’t apply to them) … Just speculation on my part
It allows you to enter a yearly income up to $400k and to enter how much you’ve already saved (though the limit to that was similar).
I’m not a FIRE guy at all, but I still couldn’t quite get it all set to what I want.
The FIRE guys think that’s hilarious. See how early it lets you retire if you want another laugh.
I just tried to use the retirement calculator on bankrate.com and it won’t let me set my expected income need below 40%.
Insane calculator at the otherwise respectable Vanguard! No earlier than 50, can’t live on less than 60% of one’s income, can’t save more than 60k a year…it’s nuts.
Thanks for the laugh, though. According to them I can NEVER retire.
Outstanding post
I too now want to see how my spending has changed. I finished residency in 1995. Retired in 2015. Our spending is about 10000 a month (includes healthcare, taxes). We were spending about 60% of my after tax/savings/charitable income. But definitely can’t have lifestyle creep now
You are right. The more we earn, the more we spend, even though it is a fraction of your income. I think about it now, and in the glee we experienced with my husband’s recent raise, we have started spending more out of the feeling of deprivation that we have had for so long. Instead of never eating out, we have started occasionally eating out. Instead of one pair of jeans when we need clothes, we are buying two pairs. I see it looking back. Thank you for this article! I needed to recognize it!
We don’t budget, but we are not big spenders. We max all savings including 403b for spouse and I, 457(I am at a University), SEP (I have a side business), and any IRA we are eligible to contribute to. I also fund a Roth for any kids that work.
I guess we have some “wasted” money every month, but we pay ourselves first which seems to keep everything else in line. We also avoid “things” and focus on “experiences” with the family. “Things” like high end cars, boats, and extra houses seem to absorb much of the extra money that many of my friends make.
We do occasionally splurge on travel or a half-court basketball facility(best money I have ever spent!), but we just pay in full as we go.
“…Certainly blowing even $120K a year on living expenses isn’t particularly noteworthy for a doctor of any specialty. It is a small fraction of my income, especially my gross income…”
$120K is a small fraction of your income? Either we must have differing opinions on what constitutes a “small fraction” or you must make much more than the average physician.
I do make much more than the average physician these days. The average physician makes $200K. A typical emergency physician partner working full time makes $350-500K. WCI is the equivalent of another physician income for the last couple of years. So yes, $120K is a small fraction of our income and we’re grateful to have that first world problem.
Thank you for your very informative article. I have recently discovered this website so it seems I am always reading these articles years after they were written. I am wondering if you have any specifics on how you made the actual calculations for factoring inflation into your calculation of expenses in 2015 dollars.
Another general comment. One of the issues that I have not yet seen discussed on your blog is the issue of financial support for aging parents. This is something that I had never considered in my retirement plans and is looming larger every day as my family has to prepare to support our 97 year old mother.
It’s been 4 years, so I don’t really remember, but I likely pulled inflation data from here:
https://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx