[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 part of PoF's famous “4 Physicians” series and discusses how decreasing your spending can make FI possible even for a high spender. Enjoy!]
4 Physicians Revisited: Dr. D & The Impact of Lifestyle Deflation
It’s time to tinker with the hypothetical life of another one of our 4 physician friends.
Doctors Anderson, Benson, and Carlson have taken their turns, so we’ll turn our attention to Dr. Dahlgren.
To recap, Dr. D was a big spender, with an annual budget of $200,000. When your salary is $300,000 and you’ve got to pay taxes, there isn’t much left at the end of the day for saving. In fact, after funding a 529, he only had $4000 left to put in his 401(k) every year. At least his employer was contributing $16,000 in profit sharing and match to his 401(k).
With only $20,000 in annual tax deferred savings and a high rate of spending, Dr. D was on track to work more or less indefinitely.
After a lousy round at the country club, Dr. D looked over PoF’s analysis and didn’t like the numbers he saw any more than the double bogies he recorded on the course. One of his buddies in the foursome was 18 months into fighting an unfair malpractice claim, and another just learned that his 56-year old brother was diagnosed with pancreatic cancer. Dr. D worked hard to pay for his club dues, private school tuition, and the precious pony’s stable fees, but he couldn’t see himself keeping it up forever.
Dr. D Undergoes Substantial Lifestyle Deflation
Dr. D had a heart-to-heart talk with his dear wife, and together they decided it was time to scale back on the spending. Over the course of a year, they traded in their overpriced vehicles, enrolled the kids in public school, started golfing at the municipal course, and sold the beachfront condo.
They weren’t able to let go of all their spendthrift ways, but found they could live quite comfortably and happily with a $120,000 a year budget. Assuming Dr. D had his change of heart around the time Dr. A became financially independent, 11 years had passed since we first met our 4 physicians. We’ll assume Dr. D had a 4% real return like his colleagues, accumulating $277,000 in those 11 years. Let’s see how the 40% reduction in annual spending changes Dr. D’s timeline to becoming FI.
Excellent! It’s not too late for Dr. Dahlgren to make meaningful changes. He was hoping to be able to retire in this lifetime, and it appears he can now afford to retire in his fifties. The $80,000 in lifestyle deflation gave him a smaller nest egg goal and allowed him to save an extra $102,000 per year. Financial independence can now be achieved in about 13 to 18 years with reasonable market returns.
Dr. D also gains the advantage of tax diversification. In his first 11 years, the only retirement savings was in his 401(k). All of that would be taxed upon withdrawal.
Now, he’s got Roth money which will never be taxed again, and HSA money that will be treated the same if used for healthcare. He’s got funds in a 457(b) that can be accessed if he opts for an early retirement, and a sizable taxable account that may not be taxed at all in retirement. If he plays his cards right, he could potentially have many years of zero federal income tax in retirement.
Which Doctor are You?
In order to learn something from these posts, you should be able to compare yourself to these physicians. Does your situation more closely mirror Dr. A, B, C, or D? Or none of the above? In what ways are you different? How much do you spend in a year? No idea? Start keeping track or work backwards by subtracting your after-tax investments from your take-home pay.
How much do you invest in a year? How much are you paying in taxes, and can you improve your tax situation? The answers aren’t that difficult to come up with, but they do require some time and attention. I’ve created a spreadsheet you can use to calculate your own savings rate here.
When you’re equipped with pertinent financial information, you’re better able to look at the big picture. You can reflect on what’s most important to you and decide what you want your life to look like in 5, 10, or 20 years. Your priorities and vision of your ideal life will evolve and change with time, and so will your plan.
I think and blog about an early retirement, but I can’t promise you I’ll follow through with it. It sounds pretty sweet right now, but my priorities may be different 5 years from now, and I reserve the right to grab the rudder and change course.
Do you know someone like Dr. D who spends two-thirds of his salary, saving next to nil? Apparently there are many Dr. Dahlgrens out there. According to a Fidelity study, nearly half of physicians are saving less than 15% of their income, and 71% do not contribute to a non-qualified plan, such as a 457(b). I find it worrisome to imagine such a large percentage of our physician workforce working past retirement age out of necessity.
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How about you? Do you know your savings rate? Would you be able to make drastic changes like Dr. D if necessary? Comment below!
Excellent commentary!
I find it interesting how when one’s savings rate is increased beyond around 20%, increasing the savings rate further has a substantially bigger impact on the time to financial independence than the rate of return. For instance, doubling the rate of return from 3% to 6% does not nearly impact time to FI as much as doubling the savings rate from 20% to 40%.
I think the lesson is to focus on what we can control rather than what we largely cannot.
True. Brute force savings tops investment returns, particularly in the short term, and of course we have much more control over our savings rate than the rate of return on our investments.
Best,
-PoF
My family situation isn’t too far off from the revised version of Dr. D. I have a specialty-Dr. level income. We save about a third of gross which works out to about half of net. We are past our FI number though since we have had that savings rate for a couple decades.
I think this post shows facts that support the hope for change for anyone who “sees the error of their ways…” The question I have is, how realistic is that? Do you know someone who went from spending 200K to 120K on purpose? I don’t think I do. I know dozens who have gone the other way – for sure!
It’s tough to go backward. Far better to not grow into your income in the first place.
Most of the doctors who ask for my help in doing a financial makeover are just like the doctor described in this blog. Dr. D is very common. In fact, in my book “The Doctors Guide to Starting Your Practice Right,” I compare the lives of two doctors, Dr. Timex and Dr. Rolex. Dr. Rolex is equivalent to Dr. D in Physician on Fire’s 4 physician series. When Dr. D wakes up to the fact that spending all his money and not saving much is the path to working forever, he wants to make a change. He needs to be more like Dr. Timex, but he doesn’t know where to start. I have received emails that just read “Help!” It is very possible for Dr. D to make the changes described here. The changes are psychologically difficult after living this high spending life for so long. Within a couple of months of living the new way, the changes get easier.
Take the road less travelled and don’t spend all your money every year. Put some away for the future. If you are like Dr. D and need help making the change, get the help. The change will be worth it. I don’t know how many times I’ve heard, “Thanks for helping me, I’m never going back to that lifestyle again!”
I came up with this series before your book was published, but when I read the book, I recognized Dr. Rolex as being much like my Dr. D, with Dr. Timex a lot more like Dr. A, Dr. B, or me.
I think we all know a few Dr. D’s.
Cheers!
-PoF
Cutting one’s lifestyle is very very difficult. When you are used to caviar and champagne its tough to switch to canned tuna and Miller Lite. The reality is that for most physicians the financial mistakes they make are not small like buying Starbucks every day. They are huge items that embed them into their choices for e very long time. Things like buying an expensive house, sending kids to expensive private schools and leasing expensive cars. It’s just not that easy to uproot your whole family especially if you have a thriving practice that can’t move with you.
EnjoyIt,
You are so right, it is hard to swallow at first. Change will not happen until the pain of staying on your current path exceeds the pain of making a change to a new path. Usually something big happens to increase the pain of the status quo. Once the threshold is crossed, you are ready to make the change.
It’s not too late for lifestyle deflation for Dr. D but it does get harder the further away you are from training. Unless you make a huge change like moving to a completely different location, it’s tough once you’ve settled on your job, neighborhood, social circle, etc. That’s why I definitely share with my residents what WCI says – that the first year or two out of training are the most important years of your financial life. Start smart and you’ll set yourself up well.
I agree it is very difficult to make big changes such as downsizing a home, but in many cases dramatic lifestyle changes aren’t necessary to make a substantial difference in savings rate. I work with many affluent physicians and other professionals, and I find that a huge amount of spending is usually discretionary. Renting a lake or beach house instead of flying the family (including grandparents or a nanny in many cases) to Hawaii every summer could save you $10,000 a year. Upgrading the luxury car every 4-5 years instead of every 2-3 years can save many tens of thousands over an adult lifetime. Sometimes the house or the private school is too big a percentage of income, but more often than not there are many overpriced “extras” that can be pretty easily substituted at a big savings without a dent in your lifestyle as observed by outsiders.
Getting value for each dollar is important. Cutting memberships that aren’t used and exchanging a vacation home for a vacation rental shouldn’t impact lifestyle too much. For some people once you start cutting into expenses it can be actually be rewarding to do things in a more frugal way.
Our plan is to never increase our lifestyle until we’ve earned it. Net worth of $1 million? Congratulations, you’ve earned the ability to spend $30,000 per year for the rest of your life without working. Net worth of $2 million? Make that $60,000 per year. Net worth of $5 million? Now you’ve entered the ranks of the truly wealthy and have earned the ability to spend $150,000 per year, over double the spending of the average household. First class here you come.
It really goes to show that with today’s dollars being worth what they are, being a multi-millionaire is needful for one to have an ‘average’ income in retirement.
I really wonder what the typical 65-69 year old with under $200k in net worth, most of which is home equity, will do. Certainly most of them will need to continue working as long as possible, but that is not a long-term panacea for the problem. I suspect that supporting one’s parents may be added to student loans as one of the big burdens that Millennials will have to carry in the future.
That’s a cool concept, thanks for sharing!
You’ll be in great shape with that mentality, although it doesn’t work out so well for many without a 7-figure net worth. Early on, focus on a high savings rate, and eventually you’ll see your net worth climb into the range where you can comfortably live on your portfolio returns alone.
Cheers!
-PoF
Nicely illustrated. These charts should be required reading in medical schools and residency programs. PoF, a question – have you been doing any presentations or lectures using these 4 Physician series? Or may be staying anonymous and not doing it yet?
The problem with traveling around giving lectures is it is like having another job, and you’re addressing someone who is debating whether to work half-time or zero time. But if you bought a ticket to the WCI conference, you’ll not only get to hear PoF speak, but you get to actually find out who he is too!
You can hear POF speak now if you listen to his podcasts.
I’ve got 5 of them out now. Dr. Nii Darko just released our conversation on Docs Outside the Box.
http://www.physicianonfire.com/guest-posts/#podcasts
Cheers!
-PoF
Maybe I should have counted how many of these I’ve done…
Powerful stuff. Downsizing housing and/or transportation can produce a tremendous positive change in your finances. Not only can that excess money be invested, it will reduce the amount of funds you will need in retirement. A true double whammy!
When you retire for some costs can go down in some areas. In my case clothing, gas, car insurance, were all things that cost less. In addition now that I am retired those funds that used to go into a retirement fund no longer need to be done. That can reduce expenses / savings by a significant extent like say 40 – 50 percent.
I agree.
https://www.whitecoatinvestor.com/percentage-of-current-income-needed-in-retirement/
I think most docs will only need their nest egg to replace 25-50% of their pre-retirement income to maintain their standard of living.