In January of 2016, a week after this website was launched, I first published the original Tale of 4 Physicians. This short post became the basis for a series of posts as I explored how changes in life situations and lifestyles affected the ability of these 4 physicians to attain financial independence.
Five years have now passed since the world met Drs. Anderson, Benson, Carlson, and Dahlgren, and it’s time to change things up a bit and expand upon their stories.
To make their financial lives more relatable, these early-career doctors are now paying down student loan debt, spending a bit more, but also earning a bit more as they’ve increased their household incomes by $40,000 as compared to five years ago.
In terms of taxes, they’re now paying a bit less than they were in 2016. The Tax Cut and Jobs Act lowered their tax rates and gave them access to the Child Tax Credit that was previously only available to those who earned less.
Let’s see what the future holds for these doctors, who, when reimagined in 2021, are burdened with student loan debt, earning and spending a bit more than before, and paying lower tax rates.
These 4 physicians have a lot in common with one another. They are early in their careers, married, and they each have two children that are past the daycare stage but living at home. Their net worth is close to zero as the little bit of assets they’ve saved up is offset by their debts.
Their household incomes, whether from a single, strong income or as part of a dual-income household, are identical at $340,000, and as employed physicians, they have access to a 401(k) with a match plus profit sharing, and a 457(b).
They choose a high-deductible health insurance plan, the premiums of which are partially paid by their employer with the rest coming out pre-tax from their paychecks. They can therefore contribute to a Health Savings Account (HSA).
Although they earn too much to contribute directly to a Roth IRA, they’ve been reading Physician on FIRE and know everything there is to know about the backdoor Roth IRA, making annual contributions if there’s enough money left over to do so.
Where do they differ?
This tale shows the impact of lifestyle, and by lifestyle, I’m not talking about the choice to be an ovo-lacto vegetarian or ultimate frisbee fanatic. I’m talking about money — how much each household spends, in particular.
We’ll take a look at how various levels of annual expenses allow these doctors to save for retirement and how long it will take them to become financially independent as a result of their spending choices.
Meet the 4 Physicians
The Budgets of the 4 Physicians
Dr. Anderson is relatively frugal. While expenses of $120,000 a year may not seem frugal to the average American household earning about half of what her household spends, the good Dr. A doesn’t know many physicians that practice the fiscal restraint that she does.
Her mortgage is $2,500 a month, which affords her family a nice home in a relatively low cost of living area. The next biggest expense is her student loan payment at $2,000 a month. She was able to refinance to a fixed rate of about 3% for a 10-year term, although she’s jealous of her colleagues with variable rates than floated down to well under 1%.
Most of their vacations are spent close to home, and if they venture out further, they usually visit family and friends, keeping the travel budget very reasonable at $4,000 a year.
Their $5,000 in giving includes both gifts to individuals and charitable giving. They’ve also got a sinking fund to cover the occasional expense like a new vehicle or possibly an RV one day.
Health insurance premiums are partially covered by her employer, and the remainder of her premium comes out of her paychecks pre-tax, so it’s not reflected in this line item budget.
Similarly, the $7,200 she contributes to an HSA and the $10,000 a year in 529 contributions are considered investments rather than spending, and they’re not a part of the spending budget.
This is what a typical year might look like for Dr. Anderson and her higher spending colleagues. The exact numbers ebb and flow a bit from year to year, but her lifestyle costs her family about $120,000 annually.
Dr. Benson doesn’t know how people can live like Dr. Anderson. He didn’t spend “six years of evil medical school” to be called Mr. Evil or to live like a resident as an attending.
On the other hand, Dr. Benson understands that it’s important to save for the future while living a little, and has a lifestyle that has his family spending a bit less than half of his annual salary.
Since finishing residency, they’ve upgraded their vehicles. They wanted to fit in when they bought a nice home in an upscale neighborhood in an otherwise average cost of living area.
When you move into a nicer home in a higher-end neighborhood, everything costs a little more than it did before. In some cases, it’s because the costs are simply higher. It costs more to heat and cool a larger home. The property taxes are based on the home’s value. The same is true of home insurance.
In other ways, spending seems to increase based on osmosis. When everyone around you is golfing or skiing most weekends, you’re more likely to do the same. It’s easy to see how Dr. Benson’s family could easily spend 1/3 more than Dr. Anderson’s family, and that’s exactly what they do.
Their expenses average $160,000 a year.
Dr. Carlson doesn’t think her family’s living all that grand, but in a high cost of living area, $200,000 a year is not enough to let them live like kings and queens.
Don’t get me wrong; they’ve got it pretty good. Their home, purchased with 20% down for $850,000 a couple of years ago is now worth nearly a million dollars. They upgraded from Toyota to Lexus, and they take an international vacation most years.
Dr. Carlson’s kids aren’t hurting, either. The family’s $5,000 education budget gives them private piano, guitar, and tennis lessons.
They still manage to set aside $4,000 a year into a sinking fund for future big-ticket items while realizing that it’s probably not enough.
They’re saving for their kids’ college education in a 529 Plan, but there’s not enough income to do that while still maxing out all tax-advantaged retirement accounts. While she makes a very solid income, she struggles to stretch the money as far as she’d like, especially while paying down about $200,000 in student loan debt like her colleagues, at a clip of $2,000 a month.
Dr. Dahlgren went to medical school with champagne wishes and caviar dreams. He should have gone to business school instead.
It was not easy to delay gratification for all those years, and now he’s making up for lost time. His college buddies who went on to get their law degrees and MBAs have been living the country club lifestyle, and now it’s time for him and his family to join them.
He doesn’t want to live paycheck to paycheck, and he stashes a little money away in his 401(k) but not nearly enough to max it out or take full advantage of the company match.
Dr. Dahlgren’s home was worth over a million dollars when he bought it; waterfront doesn’t come cheap. Between the luxury auto lease, the equestrian lessons for his kids, and the frequent dining out, there’s not much left for a sinking fund, but he does set aside a few thousand dollars a year.
He figures he’ll start saving more for retirement and that next big purchase with increased patient volumes in the future. That was the plan all along, but extra shifts were hard to come by in 2020 with elective procedures down across the board.
Follow the Money
With household incomes of $340,000, these families are able to live well. Two of the four families are able to max out all available tax-advantaged retirement accounts while also saving for their children’s future college educations.
By maxing out her 401(k) with $19,500 annually, Dr. Anderson qualifies for the full match and profit sharing of $20,000 that her employer contributes to her 401(k). She also puts an equal $19,500 into a tax-deferred 457(b) deferred compensation plan.
She pays federal income tax based on $285,800 of income. That’s her $340,000 paper salary minus $54,200 in deductions from pre-tax 401(k), 457(b), and HSA contributions plus insurance premiums.
Take away the $24,800 standard deduction (based on 2020 taxes paid in 2021) and $300 for cash donations, and her family’s federal income tax is $46,700. Her marginal federal income tax rate is 24% for an effective rate of 18%. These calculations were done using TurboTax’s free TaxCaster.
Assuming a moderate state income tax of 5% gives her a $14,300 in state income tax due, and her share of combined Social Security and Medicare taxes (a.k.a. FICA) are $13,500.
After Dr. A sets aside $5,000 her each of her kids in a 529 Plan and does the backdoor Roth for her and her husband. After accounting for her family’s $120,000 in annual spending, she has $69,300 left to invest. She splits this between a taxable brokerage account and real estate investments.
Dr. Benson’s retirement savings and taxes look very much like those of Dr. Anderson.
The only place the difference shows up is in the taxable investment account. Dr. B’s $160,000 in annual spending leaves his family with only $29,300 to invest in post-tax investments. That’s less than half of Dr. A’s annual sum.
At least he’s putting money aside in a taxable brokerage account. Dr. C and Dr. D haven’t yet found a way to do so.
Dr. Carlson’s $200,000 annual budget leaves less room to save for retirement.
She is able to max out her 401(k) and HSA while making backdoor Roth contributions for herself and her husband. However, she only puts about 30% of the max into her non-governmental 457(b) and isn’t quite putting away the $5,000 a year she wanted to into each of her kids’ 529s.
Taxable account? Forget it.
By not maxing out that 457(b) with tax-deferred investments, her taxes climb, and she owes $3,200 more than Drs. A and B in federal income tax and an extra $700 in state income tax.
“YOLO,” shouts Dr. Dahlgren as he strolls into the Maserati dealership to see what’s available for when his practice does bounce back.
The only retirement contributions he made last year were the $5,600 into his 401(k). No HSA, 457(b), 529s, Roth IRAs, taxable account or anything else. He plans to play catch up eventually. You know, after the future Maserati is paid off.
Fortunately for him, his employer put $16,000 as an employer contribution into his 401(k). If Dr. D had contributed more in the form of employee contributions, his employer would have kicked in a full $20,000, but you can’t get the full match without higher contributions.
His total tax due is $56,500, a full $11,900 more than Drs. A & B, and $8,000 more than Dr. C. It turns out you really can lower your taxes by making tax-deferred investments.
Reaching Financial Independence
Altogether, she has investments $147,500 or $12,292 a month going towards retirement. This, out of a total of $277,500 that includes her pre-tax investments, match & profit sharing, and takehome pay.
That gives her a gross savings rate of 41% and a net savings rate of 53.2%. That’s well in line with my recommendation to live on half of your takehome pay to reach financial independence (FI) quickly.
As a result, her family will be financially independent and able to retire in about 15 years, give or take a couple of years, depending on market returns. The calculations for this post were made using real (inflation-adjusted) returns on investment of 2% to 6%.
You might notice that some of her expenses, like the student loan payoff and her 529 investments won’t be with her forever.
Should her FI target be lower? Possibly, but keep in mind that in retirement, she’ll also be on the hook for taxes to be paid out her annual spending. In this exercise, we’ve kept that expense separate from her annual budget.
Additionally, while some expenses can drop in retirement, spending can also increase, especially when retiring young with plans for more travel and entertainment. She may simply choose to loosen the purse strings in other categories as those college savings and student loan payments go away.
Dr. Benson’s $107,500 in total retirement savings per year give his family a 38.7% gross savings rate and a 29.9% net savings rate. Even with $160,000 in annual spending, these are excellent numbers thanks to their $340,000 household income.
With an FI target number of $4,000,000, equal to 25x their $160,000 in annual spending, they’ll go from a net worth of zero to financially independent in about 23 years, give or take a few. Assuming he’s in his early 30s now, he could potentially afford a comfortable retirement in his mid-50s.
It’s going to take longer for Dr. Carlson, but she’s still on target to reach her $5,000,000 retirement goal after a full career. With 4% real returns, she’ll get there in 35 years.
By using inflation-adjusted returns, we get inflation-adjusted final numbers. In other words, she’ll actually have more than $5,000,000 in nominal or actual dollars when she reaches the goal several decades down the road, but it will be a sum of money that has the spending power of $5,000,000 in today’s dollars.
If her investment returns only manage to best inflation by 2%, she’ll be working into her 70s by maintaining the status quo of earning and spending, whereas returns of 6% above the rate of inflation get her to the goal in 29 years.
When you live like there’s no tomorrow, as Dr. Dahlgren does, your distant tomorrows aren’t likely to look as good as today.
With excellent investment returns of 6% real, he might be able to retire by his 80th birthday. Realistically, something’s going to have to change eventually. Yes, he will have Social Security to rely on eventually, and, as we mentioned above, the student loan balance will be paid off at some point.
However, with all of his retirement savings are in a tax-deferred 401(k), he’ll have a higher-tax retirement than Dr. Anderson and Dr. Benson who have a mix of taxable, Roth, and tax-deferred investments.
Dr. Dahlgren may be living it up today, but he may regret his free-spending ways in the later stages of his career or as soon as burnout begins to rear its ugly head.
Lessons from the 4 Physicians
Relative Frugality Pays
You don’t necessarily have to live like a resident, but it’s clear that keeping your spending to a reasonable level will allow you to make quick progress toward financial independence.
Dr. A can retire 15 years into her career with that $120,000 annual spend. Dr. C, spending $200,000 a year, will be working more than twice as long before she can afford to retire, given the same 4% real returns.
You don’t have to shy away from the latte or your favorite craft beer, but developing some frugal tendencies, particularly on the big ticket items like housing, automobiles, dining, and travel will make a serious impact on your ability to become wealthy.
Taxes Can Be Reasonable
I suppose people will have different ideas of what’s reasonable, but many high-income professionals state that they owe something in the range of 30% to 50% of their pay in taxes.
While it’s true that in certain states at very high incomes, a marginal rate can equal or exceed 50%, we’re nowhere near that here.
Three of our physicians with $340,000 salaries pay under $50,000 in federal income tax. Two of them pay under $75,000 in federal, state, and FICA taxes combined.
There’s also property tax, sales tax, and other use taxes, but when looking at the income-based taxation alone, each of our 5 physicians has an effective federal income tax rate under 20%.
It’s OK to Spend Six Figures
When you earn a lot, you can spend a lot. In all but the most expensive U.S. cities, a low six-figure spend buys you a comfy lifestyle.
If you take out the $24,000 a year in student loan debt service, Drs. A & B are spending $96,000 and $136,000 a year, and they’re both on pace to retire early (if they choose) in their 40s and 50s, respectively.
This is true, of course, if your household income is $340,000 a year. That’s a bit more than the average physician makes. If your position doesn’t pay this well, it may take a second income from a partner to get closer to that number. You may be able to earn more money in any number of ways with a side hustle, locum tenens work, or a different position. Geographic arbitrage can be your friend.
If such an income is not attainable, FI is still there for the taking if you spend less. If you can live on half your takehome pay, you’re only about 15 years away from financial independence, assuming you’re starting from broke.
To calculate the federal taxes due for each of the 4 physicians, I used the free and easy TurboTax Taxcaster.
FICA Taxes were calculated with a MoneyChimp calculator.
To download the spreadsheet I built to calculate the savings rates, FI goals, and time to FI for the 4 physicians, along with a bunch of other calculators in one file, enter your info into the subscription box below and I’ll send you a copy. If you don’t see a subscription box, you can find one here.
Which of the 4 physicians do you resemble? When do you anticipate reaching financial independence?