As investors looking for financial success and even financial independence, there are really only two levers we can control.One is fees, and much has been made about the low-cost index fund approach to investing. The other is your savings rate.
Saving a lot can be a challenge even for high-income professionals. Even if you’re naturally a frugal person, making a home in some areas with a high cost of living.In this post, originally published on White Coat Investor, we look at savings rates and how to maintain them at a high level.
If your income is $300,000 per year, you would want your portfolio to produce an income of $150,000 per year, and your “number” is $150,000*25=$3.75 million (using the 4% rule).
What percentage of your $300,000 income do you need to invest each year for 25 years to finish with $3.75 million in today’s dollars? About 25% per year.
Think of it as something that has to be paid right off the top, just like your taxes. Even with the much higher tax bill associated with the higher income, a typical doctor can still “double or triple their lifestyle” and still meet their savings goals.
One of the best ways to increase that savings rate is to use tax-deferred retirement accounts like 401(k)s, profit-sharing plans, and defined-benefit plans.
#2 Minimize Taxes by Maximizing Tax-Deferred Retirement Accounts
While every little bit helps, you’re likely to get a lot bigger bang for your buck by watching the big things, like the size of the house you live in, the expense of the car you drive, and the state in which you choose to practice.