By Dr. Jim Dahle, WCI FounderI've been telling people to “Live Like a Resident” since at least 2011, and while I do not claim to have come up with the phrase, I'm pretty sure I'm almost singlehandedly responsible for popularizing it. I was even pleased to hear Dave Ramsey using it recently on his show. However, we get enough pushback on it that it made the list of The White Coat Investor's Most Controversial Teachings.
Apparently, some people really don't like hearing that phrase. Perhaps most prominent was a thread from the WCI subreddit. The funniest part about that thread was the reaction to it on the WCI Forum. Reddit skews younger (mostly Gen Z and Millennials), while forums and Facebook groups skew older (mostly Gen X and Boomers). The whole discussion basically devolved into the Boomers/Xers saying the Millennials/Zers were lazy, undisciplined bums, and the Millennials/Zers saying the Boomers/Xers were out of touch and could have bought mansions for less than $500,000 while the younger generations can't even get a condo for less than seven figures.
What Does Live Like a Resident Mean?
Live Like a Resident (LLAR) is a principle, not some sort of exact prescription. It's a recognition that the greatest wealth-building tool for high-income professionals, like doctors, is their income. Harnessing this tool and turning your high income into wealth (i.e., a high net worth) is the key to financial success. No matter who you are, when it comes to personal finance, the secret to success is to spend less than you earn and to take the difference and use it to accomplish your financial goals like:
- Paying off debt
- Investing for the future (spending less now so you can spend more later)
- Buying stuff and experiences you want
- Giving to people and causes you believe in.
LLAR is a recognition that the easiest time to use a massive chunk of your income to build wealth is in the beginning, before you get used to the income. It's a behavioral finance thing. Last year, you lived on $60,000 because you made $60,000. What would happen if you STILL lived on $60,ooo while earning $360,000? Good things, most likely. Even with a higher tax burden ($100,000?), there would be $200,000 that could be used for a down payment on a dream home or to wipe out half (or even all) of your student loan burden or to catch up to your college roommates as far as retirement savings.
LLAR is a recognition that half of American households live on an income less than that of a resident. It's not some sort of a vow of poverty.
LLAR is a recognition that the first dollars you save are the best dollars, since they have the longest period of time for compound interest to work on them.
LLAR is a recognition that medical school is still a wise investment, even if you have to pay for the whole thing with borrowed money, because you can wipe out that debt quickly by LLAR after training.
Who Doesn't Have to Live Like a Resident?
So, who doesn't have to live like a resident? There are really three things to discuss here.
First, nobody HAS to live like a resident. It's always been optional. It's your money. Do whatever you want with it. If you want to live your whole career with financial stress and have a less-than-comfortable retirement, that's your choice. Physician net worth surveys repeatedly show that about 1/4 of doctors in their 60s aren't millionaires, and about 3/4 of them aren't pentamillionaires. Here's an example of one of those surveys:
What does it take to be a pentamillionaire? It takes saving $75,000 a year for 30 years and earning 5% real on it.
=FV(5%,30,-75000) = $4.98 million
That's it. And that's just the investments. After 30 years, most doctors also have a lot of home equity and a whole bunch of stuff. Yet 3/4 of doctors don't get there. In fact, over 10% of them don't even have a net worth of $500,000 by retirement time. But hey, do what you want with your money. Who cares that you're starting a decade later than your college peers and $300,000 behind the starting line? I'm sure you'll be fine. You'll make up for it somewhere down the line, I'm sure.
Did I lay on that sarcasm thick enough? Good.
But my point remains that I don't know any doctors who lived like a resident for 2-5 years that didn't end up in that top quartile (pentamillionairehood). I'm sure it's possible to get there without LLAR, but why chance it when it's practically guaranteed by doing so?
The second point is that NOBODY actually lived EXACTLY like a resident. We all spent a little bit more. The point of LLAR is to avoid the lifestyle explosion that typically accompanies an increase in income from $75,000-$400,000. Plenty of docs commit themselves to that new lifestyle before they even receive a single attending paycheck with a big fat mortgage and a couple of Tesla payments. Then, a few months later, when their student loan payments balloon, they find themselves living hand to mouth on $250,000, $350,000, $450,000, $550,000, or more. That's not a good feeling.
But almost no one ACTUALLY lives the exact lifestyle they had as a resident. Most of us gave ourselves a little raise. Heck, a 50% raise would be huge in corporate America, but it probably still qualifies as living like a resident. If you're earning $300,000 gross ($225,000 net) and you increase your spending from $60,000 to $90,000, you've still got $135,000 with which to build wealth. You can do a lot with that. But diets don't work if you're hungry, and LLAR doesn't work if you're feeling financially deprived. You've got to spend enough that you don't feel like you're making some huge sacrifice.
The final point is that the LLAR period is supposed to be short. In our case, it was four years, precisely the amount of time I owed the Air Force for paying for my medical school. In general, that period of time should be between 2-5 years. Not forever. If you're still LLARing at 45 (or maybe even as young as 35 for traditional students who did short residencies), you missed the point. The better your financial situation, the shorter your LLAR period should be. Ask yourself, “Where do I want to be when my LLAR period is over?” You get to choose, but a typical doc might say, “I want to accomplish the following during my LLAR period:
- Boost my emergency fund to $40,000
- Pay off my student loans
- Have a nest egg of $250,000
- Be living in a ‘doctor house' (define that however you like).”
Then you just adjust the length of the period to your own financial circumstances.
Owe $400,000 in student loans and work in a $250,000 private practice job in an HCOL area? You probably need five years. Parents paid for school and gave you a $250,000 20s fund, and you're making $800,000 in a medium-sized town in Indiana? You may not even need two years.
More information here:
Living Like a Resident Is the Answer
A Financial Love Letter to My Wife (and the Realities of Living Like a Resident)
Factors That May Affect Your LLAR Period
Multiple factors can shorten or lengthen your LLAR period. It's even possible to shorten that period to zero years, although I think there are still some behavioral finance benefits to having at least a short one—even if it is not mathematically necessary. Here is a list of factors to consider:
- Income (The more you make, the more you can spend while still rapidly wiping out loans and building a nest egg.)
- Size and interest rate of student loan burden (The more you owe and the higher the rate, the longer it takes to pay them off.)
- Eligibility for PSLF (PSLF eligibility is an awful lot like having your parents pay for most of school.)
- Cost of living (Higher tax rates, and especially higher housing costs, prolong the wealth-building process.)
- Spousal income (A resident married to an attending four years out may never have a LLAR period.)
- Actual or planned inheritance (If you're already wealthy, you don't have to work as hard to get wealthy.)
- Previous career/wealth (It works similarly to an inheritance.)
- Length of career (Yes, saving “just” 20% into boring old index funds should make you a pentamillionaire, so long as you can do it for three decades. No burnout. No disability. No change in your passion level. No desire to go part-time or on the parent track for a few years. Or maybe you should just hedge against some of those risks by LLARing for a few years and front-loading some of your lifetime financial tasks.)
- Number of dependents (Children, parents, and others all count.)
I still recommend docs have an LLAR period after training. But life is a Choose Your Own Adventure book. You get to choose how long your LLAR period is, and you get to choose how extreme it is.
What do you think? Did you LLAR? What did that look like? How long did it last? Are you glad you did it?
Heck, I’m still “LLAR” after three decades as a doc, if that term means spend way less than you earn. It’s a powerful concept that leads to progressively powerful compounding. We continue to spend way less than we earn and invest the rest. Living well below our income level led to us becoming unfathomably wealthy. But we never deprived ourselves of anything we really wanted.
As military docs guess we didn’t need to LLAR, but there also wasn’t as much of an increase in pay (just the bonuses residents don’t qualify for). Both because military pay is often lower for attendings but is higher for residents. We paid off my student loan during residency, though we hadn’t paid for med school until giving Uncle Sam 4 and 10 years post residency for my HPSP and his USUHS scholarships. However those years were also (as it turns out, not so for all our military friends who chose more lucrative private careers ASAP) investments in his military pension and my eventual civil service pension after I did 5 years for the VA and Army as a civilian and bought my military years (including residency) as time towards my pension.
Geographic arbitrage can be a powerful tool to reduce spend on many levels. I wish more younger docs considered it. Have a five year plan to get out of your hole in a LCOL area. It’s much easier to avoid the hedonic treadmill in ‘less desirable’ places as well. And, you never know, you may grow to like it. I anticipated moving after 5 years, but my family grew to love it where we’re at. After 20 years, now in my early 50s, I’m in a good bar in the bar chart above, and have the option to stop working if it isn’t fun anymore. Thanks for all you do Jim! Your work is very much appreciated even in a small town in the Midwest.
My issues with this advice are that it’s not quantitative enough, doesn’t have a defined glide slope to gradually increasing spending, and is specific to docs when it doesn’t have to be. People should save and invest a lot when broke, and spend and give a lot when wealthy. LLAR qualitatively speaks to that first part. I think your annual savings rate should be 50% of gross income minus 4% of your investments. Both those numbers are arbitrary, but reasonable IMO, esp for high earners. It’s follows the right trend over a career. What do you think?
I guess it works for those who like formulas. But you’re right if people save 50% of their income they’ll build wealth very quickly and hit FI very fast.
I never really lived like a resident – however dual income physician family with 1 child. Income past few years has been 1-1.1 million. Still have student loans (we pay 6k a month but low interest rate and where we are on the amortization schedule it makes no sense to pay off sooner). Our net worth is a little over 3 million – this includes a house, a rental property, investment in commercial real estate my practice rents from and about 2.3 million in the stock market – mostly in a taxable account (1.6 mil or so). I’ve had numerous cars (currently 2 teslas), 3 corvettes, escalade, 7 rolex watches, intermittent vacations overseas. I think income is a big decider in this. If we made 300K a year combined it would not work. I rec choosing a high income field and getting lucky with the practice you join or a lot of side gigs – I do legal work, some telemed stuff, consulting for a few pharma companies. None of it brings in 100s of thousand but it all adds up and it is easy stuff I do on my downtime between patients or at home.
You recommend getting lucky and choosing a high income? Hard not to chuckle a little at that. But you’re right that a 7 figure income pretty much solves all financial problems.
Dunno their age but with those purchases they might not have enough NW to ever stop working if they keep living like rich docs.
Great discussion of emphasizing the benefit of living below your means. I moved to NYC post residency to do a fellowship and stayed on. I lived in a studio apartment for 10 years and have always favored public transportation. No doctor house or car here. Neither did I have kids or a spouse. I maxed out my 403-b and bought I bonds. Now I’m a penta. Still, I don’t feel rich in NYC.
Sage advice for anyone starting out with high debt. As a dual physician couple, we live in a LCOL area, had NHSC loan repayment and are able to bank her salary and live off of mine. It’s a great feeling to have a paid off house, three 529s with almost enough for the kids’ college funds and enough to retire as we reached our mid forties.
You don’t need 5 million to retire. I’m sure many reading this blog would retire once they hit 3-4 million (particularly with kids out of the house and 20 plus year of social security contributions), although their conservative withdrawal rate means they’ll likely hit 5 million eventually.
I’m sure you’ve covered this elsewhere. But there is a huge benefit of this LLAR and getting your debt gone and investments started that isn’t easily seen. We are all familiar with the sequence of returns risk in retirement.
Well while you are working it is the opposite.
After 10 years in practice I was nearing the $1 million mark in retirement accounts and finally had paid off student loans when the great recession hit. Retirement savings dropped to $450000. I kept contributing the annual maximum, I think about $50000 at that time. By time I early retired in 2015 it was $2.5 million. Every dollar contributed after the crash was turbo charged.
This was on a pediatrician salary in modest cost of living area. Start early and ignore the ups and downs.
$250k nest egg with $40k emergency fund sounds low. Do you mind sharing how you came up with that number? It sounds like you waited until $1 million to stop living like a resident?
You get to choose your own goals. If $250K doesn’t seem like much, then save up $500K. If $40K doesn’t sound like much, go to $100K.
I’m not sure why you’re personalizing any of this. I personally “lived like a resident” for four years and certainly was not a millionaire when I quit doing that.
I think this living like a resident is too simplified on a rather complex topic of financial security. Seems very old-generation oriented and very W-2 oriented. The best way to reach financial independence fast is to leverage your income to invest most of it in growing your business and a diversified liquid and non-liquid assets using the tax code system efficiently. Meaning straight out of training, do not even consider an employed position as being “paid for your benefits” when you do the math, it is a scam. If anything, the tax code is written to benefit S corps, LLC, and entrepreneurs, so if anything, we need to encourage people to take risks and be entrepreneurs in their 20-30 years of practice, so they can save on taxes and reach FIRE quicker. Employed physicians are in the worst situation ever with the corporate practices of medicine. Even partnerships are a scam. Just open up your own consulting company and start making moves early. If you invest early and know the complexities of the tax code, you will retire sooner.
Seems out of touch with the realities of the education, desires, and capabilities of the physician workforce. Yes, lots of us have an entrepreneurial bone in our bodies, but I can’t even talk most docs into reading their 401(k) document, much less starting their own practice. And that’s not even considering the starting of businesses (even a simple rental business) that lead to large amounts of wealth.
And no, it’s not a “scam” to work as an average doc employee, save 20% of your income throughout your career and invest it in boring old index funds, and retire comfortably as a multimillionaire in your early 60s. It’s a viable financial pathway that works just fine and should function as the default for all physicians.
Yes, the principles are sound, and I would recommend that people follow them, however Jim ignores the effects of “Black Swan” events. Having LLAR’ed through the era of education during the Carter/Reagan years with school loans tied to T-Bills +3 1/2 % (12-18%), while receiving low salaries as a feature of partnership buy-ins, experiencing crummy partnerships where the principals were siphoning off money, and surviving two of the worst market downturns since the “Great Depression” (Dot Com Bubble, Housing & Loan scandal), LLAR didn’t protect me from the fallout of those events. The random effects of changing jobs and being compelled to roll over funds at the “top of the market” months before those earth-shattering financial events unfolded cannot be discounted. And to those who say market timing is imaginary, I am living proof of its relevance. If it weren’t for some fortuitous investing during the Covid crash, I would imagine that I would be working until I dropped dead.
So yes, follow the principles and take advantage of tax saving vehicles which didn’t exist during my career such as Roth IRA’s, MSA’s, etc. Be sure to figure out ways of developing capital and passive income through means other than medicine, and most of all, hope for a little luck. Either that or marry big $$$.
LLAR isn’t some sort of diversification or hedging play. It’s just acknowledging that starting early and in a big way makes a big difference. Even with a .com bust or a Housing and Loan Scandal or getting hosed in a partnership scenario one is better off financially having had a LLAR resident than otherwise. But I’m not going to argue that LLAR and having a crappy job is somehow better than skipping the LLAR period and having a dream job. But LLAR and a dream job is going to be better than both.