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What Do Doctors Need to Include in Their Savings Rate?

As I’ve shared before, the formula for wealth as a physician is quite simple. And a savings rate of at least 20% is pretty much mandatory.

As a refresher, I listed some bullet points to the formula below or you can check out the whole original post here.

  1. Choose a specialty that you like
  2. Find a job that you like
  3. Save 20% of your pre-tax income (If you can do this as a trainee, great! But definitely you need to do this as an attending)
  4. Pay off student debt within 5 years
  5. Invest in broadly diversified stock, bond, and/or real estate index funds (maximize tax advantaged accounts first)
  6. Work for 25-30 years
  7. Enjoy life knowing you have a secure financial plan (in other words, your overall well-being will improve now that you’ve cared for your financial well-being)

Why a savings rate of (at least) 20% is mandatory

savings rate

Well, the answer is because if you do this and invest safely, you will be almost assuredly set.

Let’s illustrate with an example

We can determine that we would need to save $50,000/year for 30 years assuming a very conservative 5% return to live on $120,000 annually in retirement.

If your annual gross income is $250,000, 20% of your gross income is equal to the necessary $50,000/year. This salary is right around the median (actually a bit below) average physician income in 2020.

So just about every physician should be able to do this, and really even do a lot more.

And imagine if you save ~40% (my savings rate is 43%) instead of 20%. You would be able to shave significant years off of your retirement age or retire with a much higher annual “salary” if retiring at the same age as you had previously planned.

You can control your savings rate much easier than you can control your rate off return on investments. And in the beginning of your investing career, the amount you save has a MUCH bigger impact on your growing nest egg than rate off investment return.

So, we have established why a savings rate is imperative.

But what is included in your savings rate?

This is where things get a little hinky.

I see and receive a lot of questions about what should be included in your savings rate. Basically, people asking, “Does X count towards my savings rate?”

I have pretty strong feelings about what does and does not count. And the reason I feel strong is because I base it on (what I think is) a pretty simple definition.

My definition

If you are setting aside any money from your gross pay (your paycheck or self-employed earnings), that counts towards your savings rate.

Based on my definition, it really doesn’t matter what you are saving that money for. Money is fungible. Each dollar can be used interchangeably to buy things or build wealth in any way.

So, here are the things that are included in me and Selenid’s savings rate

  • 403(b) contributions
    • It’s coming out of our paychecks before we even see it
  • Debt payments
    • Each $1 of debt that I pay off increases our net worth by $1. So of course it counts towards our savings rate!
  • 529 contributions for our kids
    • It’s money we set aside. Yes, it’s for our kids. But (with a penalty) it could be ours if we needed and were in a tight spot
  • Our real estate fund
    • This is the money we set aside every month from both our paychecks, our rental income, and my blog income to put towards more real estate investing
  • Our emergency fund savings
    • This is largely saved up. However, each month we still contribute from our paycheck to our emergency fund via automatic transfer. Obviously, counts towards the savings rate.

All told, these savings add up to about 43% on a monthly basis for us. We don’t even really notice it at this point.

That’s the beauty of only flexing a little life-style creep after becoming attending. Even a modest increase feels amazing after scrimping by as a resident or fellow for so long. And then there is a ton left over to increase your wealth and secure your financial well-being (not that I am even close to all the way there yet!).

Critics with my definition usually have the most issue with…

…529 contributions and debt payments.

I don’t really understand the contrary argument however. I won’t repeat my reasoning for including each in our savings rate as I already did that above. But if you disagree, convince me in the comments and maybe I need to make an adjustment.

Here are some other things that I don’t currently contribute to that would count:

  • 401(k) contributions
  • 457 contributions
  • HSA contributions
  • IRA (Roth/Traditional) contributions
  • Money put in alternative investments (although I do not recommend this)

Things that do not get included in your savings rate

There are really two categories of things that people often include in their savings rate that shouldn’t be there:

  • Employer retirement contributions/Social Security taxes
  • Delusions

Let’s start with the former

Your employer retirement contributions do not come out of your paycheck. Your employer contributes this. Therefore, you are not saving that money.

Yes, include that sum in figuring out how much you have saved for retirement, what your nest egg will be, and what your yearly withdrawal in retirement can be. But, don’t include it in your savings.

Similar issue with Social Security taxes. You are going to have to pay this anyway. You don’t know if you will even live long enough to use it. This is money that is taken away from you with the vague promise that you will get it back later. It’s not savings.

And that brings me to delusions

This is where the human ability to rationalize shows up in its finest. And trust me, I can be as guilty as the next person!

We try to include payments on our extended car loans in our savings rate. Nope, unfortunately, this was just likely a bad idea. It’s not the same as paying back your student loans or mortgage. You are paying excess for a depreciating asset. Pay it off as soon as possible and get it out of your financial life. Or better yet, just wait to be able to buy a car with cash to avoid it altogether.

Other “investments” also fall into this category. Like saying you increasing your savings rate because you are buying some subscription service that will help you with work. Like my course, it may be a smart thing to buy that helps you a ton, but it doesn’t count towards your savings rate.

Anything that is a tax deduction (above the line) also does not count. By doing this, you are getting a “discount” on whatever you are buying with that pre-tax money. But you are still buying it, it’s not free. So you didn’t save it.

Are you a resident? Learn how to make and save more money here!

What do you include in your savings rate? How much is your savings rate? Let me know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

    5 thoughts on “What Do Doctors Need to Include in Their Savings Rate?”

    1. Hey dude the great Victor Mangona has the best video explaining I think the best way to calculate a savings rate:

      The dude includes employer match in both the numerator and denominator, as an employer match is basically part of your salary. If you don’t do the match, you are leaving money on the table.

      PoF agrees with you with 529’s, but I think practically to protect those 529’s from any mental accounting or other financial behavioral biases we have, I like to think of that money as not part of savings for retirement, but more savings for a purchase of a goal, almost like saving to buy a car or vacation.

      but hey, no real right answer 🙂

    2. Using your example, you could put all $50,000 a year towards paying off your student debt, and might need 5 years to finish. At the end of 5 years, your debt is paid off: awesome! And a plus to your net worth. But you haven’t put anything aside for investing, so you would be 5 years behind on your retirement plans. I think that’s the problem with counting debt repayment in your 20% savings rate.

      • I totally understand that perspective. Which is why I both pay back debt and invest. However, my rebuttal would be that with no debt, your cash flow would increase significantly and you would be able to save/invest significantly more while you are still very early in your investing career. It’s obviously a very contrived example to make the math simple but that’s why I count debt payment. Thanks for reading!

    3. Love your articles and inspiration to help people get their finances in order. Appreciate your sharing target savings rates with your readers so they have an idea what it takes.

      I noticed in your list of additional contributions included in savings rate, you’ve listed structured savings vehicles (ie: 401k / IRA), but your list seems to be missing contributions to after-tax brokerage/savings accounts as an option.

      Also, I wouldn’t consider paying off debt in a savings rate. It’s paying off debt (mortgages and student loans included). You can’t live off it later, and it doesn’t get you to the $8m savings target (or whatever your number is). It can potentially lower your future target if you assume you no longer have to make debt payments, but debt payments aren’t savings.

      Thanks again for your great work!


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