Q. When is it OK to Spend on Luxury Items and Expensive Hobbies?
Lately my wife and I have been looking at future budgets and the possibilities of getting a plane later (I know your post about boats/planes). We wanted to know if you thought this was reasonable.
After running the calculations we reasoned that we'd have less money in retirement, but figured what's the real benefit of retiring with $10 Million instead of $5 Million?
A.
What a difference between your lifestyle and that of the physician last week considering the purchase of a starter home costing $1.25 Million! You guys can probably buy a mansion on a couple of acres for $300,000 in your small town. Your question is a good one (and one that I struggle with at times too.) At what point do you say enough is enough and go spend some money?
4 Considerations Before Loosening the Purse Strings
#1 Save 20% for Retirement Savings
My rule of thumb for retirement saving is that you should save 20% of your gross income toward retirement. With your $400K income, that's $80K, or less than $7K per month. Once you are saving that much, I don't think you should have a lick of guilt about spending or giving away every dollar you make above and beyond that. 
#2 Budget Conservatively
Airplanes and boats are exceedingly poor “investments.” They say a boat is a hole in the water into which you throw money, and after owning a boat for a couple of years, I can testify that's correct. Ownership of these expensive toys is usually far more expensive than you at first realize, so budget very conservatively for these items. Planes in particular have high fixed expenses including storage costs and annual inspections.
#3 Fund Other Non-Retirement Financial Goals First
Young physicians (and I include myself 6+ years out of residency) often have other (non-retirement) financial needs and goals they need to save for. We often have inadequate emergency funds (especially given our new spending habits), some high-interest debt, and little to no college savings for our kids. These things are all above and beyond the “20% retirement savings rule.” So you should ensure your plan covers these items as well before committing to an expensive hobby.
#4 Income
Last, keep in mind that your income isn't static. While we may hope our real, after-inflation, income will rise throughout our career, the trends in physician reimbursement are not reassuring in this regard. Physicians in many specialties are working harder and making less than they were 10 years ago, and between Obamacare, the growth in ACOs, bundling of payments, and the very real concerns about the cost of Medicaid/Medicare, I suspect the trend may continue or even accelerate. There's something to be said for “making hay while the sun shines.” Saving $50-100K a year now for retirement may be far easier than it will be ten years from now. It isn't like you couldn't sell the plane in a few years if your income drops, but you ought to at least consider the possibility of a decreasing income in your plans.
What say you readers? How do you decide when enough is enough? Comment below!
great question.. how much is enough.. wish i knew.
depends on how important retirement is to you i guess.
I was inspired by Dr. Cheap’s posts from another topic… guy is retired at 36 and while he has a lifestyle that many wouldn’t find particularly enviable, I’d say the value he derives from not having to work and deal with any red tape or people or anything is HUGE.
Depends on how fulfilling you find your work i guess. Some people live for it… i feel the most alive when i’m not there.
Like him, I feel like every dollar spent now is a dollar that could either be used for making more money, or could buy me freedom… and i value freedom more than any material purchase money could buy.
so in my case, i don’t set a hard %… i put everything i possibly can away while living at a nice but not “doctor” level and keeping the slightly materialistic wife just happy enough not to leave and devastate my assets… this usually ends up being 25-30%
what’s the value in owning a plane when you can rent? would you fly it so often that you would save money doing so?
That last paragraph is the most important one. I keep telling my colleagues this and its something people just don’t want to hear obviously – our incomes will DROP over our careers. The most obvious reason is reduced payments, but there are a slew of other reasons this is happening and will continue to happen. For instance, if documentation requirements and other non-billable requirements keep creeping into our practices like they are expected to, our incomes may come down of our own choice out of frustration. Unlike other professions where you expect to retire at or near your greatest earning potential, our greatest earning potential was 20 years ago. If you are just getting out of residency, like me, it is the next 5 years or so (accounting for the majority of specialties where it may take a little time to grow a referral base). Of course buy a plane if it can be afforded, but the calculations have to take this downward trend in income seriously. The other smart thing mentioned: living somewhere very affordable.
Why would you settle for a rule of thumb when it’s so easy to do your own financial planning?
It’s simple, just…
1. Make a list of all your goals: retirement, college, buying a house, and major purchases (a plane, a second home, extended travel).
2. Assume an inflation rate and figure out the future value of each goal.
3. Assume a discount rate (rate of return) and figure out how much you would need to save each month to build that future value.
4. Prioritize the goals according to your family’s needs, wants, values and your station in life.
5. Find your discretionary income by subtracting your cost of living from your after-tax income.
6. Apply your discretionary income to the list of goals and see how far down the list you can go before you run out of money.
This way, you can not only build financial security but enjoy what you’ve achieved. It’s one thing to save money. It’s quite another to realize you can live your life without regrets, secure in the knowledge that you’re saving every penny you’ll need for your most important goal, even if that goal is to own a depreciating assets with high carrying costs. Life is precious. Live it to its fullest.
I would agree with Josh that incomes adjusted for inflation are likely to drop in the future, because of efforts to slow the rise in costs. Even though physician salaries account for roughly 9% of total healthcare expenditures, they can be very closely tied to other healthcare spending (particularly for hospital employed physicians). Some would also consider cuts here to be “low hanging fruit” which would not greatly impact quality or access for patients.
agree with @Josh
incomes are getting ready to stagnate or drop.
people want their health care cheaper, and they’re going to stop at nothing to do it… and that’s going to mean they are sick of doctors making a good living doing it.
it’s ok for CEOs, lawyers, and corporations to get rich off of consumer products and stuff like that.. but it’s like it’s a big sin to profit from healthcare.
Then they’re going to complain more when the best and brightest decide they’d rather have a career in finance than in medicine due to decreased compensations and the quality level peaks and begins to drop.
what? you want smart people to choose a career where you spend hundreds upon thousands of hours studying, rack up monster student bills, and have no life for years, AND then get paid just “good” wages on top of that?
Good luck America.
I feel bad for those of you still in school or newly graduated.
The 90’s is when everything peaked
A reader emailed in this comment:
My wife (also physician) and i are in our early 60s and have been saving since internship-we have over 5 million in iras and more in personal investments. using the 3% rule, and not counting real estate, we could retire on $150,000 per year. our fixed expenses are about $8000 per month, but start to think about inflation, health insurance (currently employer provided), and we plan to work until medicare age, take social security at 70 ($3300 per month each), 3 more years until a great retirement, think high end cruises and more travel, everyone needs to do your own math, but I say rent the boat and the plane, keep your car 10 years and dont invest in restaurants
“After running the calculations we reasoned that we’d have less money in retirement, but figured what’s the real benefit of retiring with $10 Million instead of $5 Million?”
I think the answer is – about $200k more a year in retirement at a 4% withdrawal rate. Only you can decide if that’s enough of a “real benefit.” Depends on your spending wants (probaby are beyond true “needs” when talking about $5 million plus). But my wife and I (late 40’s) have a bit over $5 million now and don’t feel it is enough for our “wants” (which include desire to leave a legacy), particularly given that if I retire this early we probably would not be comfortable withdrawing more than 3% per year.
The two best days of boat ownership: The day you buy it and the day you sell it.
I don’t know. The day you can surf without a rope is a pretty good day. So is the first day your six year old gets up on his Snoopy skis. And cruising Lake Powell at sunset on glassy water 50 miles from a marina is always a good day.
People bag on boat ownership for people who don’t use their boats. I’ve had my new one 3 months and have 92 hours on it. I see 3 year old boats for sale around here that don’t have 92 hours on them. If you actually use it and enjoy using it, they can be a lot of (admittedly expensive) fun.