Recently, I gave a talk to my residents entitled "Investing 101." I am sure they expected to sit down and learn the difference between stocks and bonds. Or maybe how to define a putt, call, or mutual fund. Instead, the first 15 minutes were spent on an entirely different subject.

At the end of the day, investing talks aren't very helpful when there is no money to invest. See, doctors don't have an investing problem, they have a spending problem and a lifestyle inflation problem.

One of the "hooks" I use to help my residents understand this problem is to first show them my last resident paycheck, where my monthly take-home pay was around $3500. Then, I show them my first attending paycheck, which resulted in a monthly take home of about $16,500.

Then, I wait.

Their eyes start to open, and "oohs" and "ahhs" are voiced as the residents wrap their minds around that number.

Then, finally, someone says it: "I can't even imagine making that much money in a single month. That's like six months of pay for us."

Unfortunately, the residents only get to enjoy this amazement momentarily as I then spend some time crushing their dreams of buying the big house, the nice car, the private school for their kids, and etc.

Why? Because this started as an investment talk, which would be unnecessary without any money to save.

So, I show them what it'll look like if they don't save intentionally and spend conservatively when they finish training.

Here is a common example that I use:

If they want to have four million dollars for retirement by age 60—this allows for about $160,000 in annual spending in retirement based on the four percent rule—they need to be saving about $4,500 per month (assuming that they graduate around age 32).

After a massive lifestyle inflation, this might not be possible.

The following big picture items swallow up that substantial attending paycheck quickly. How much would we have left if we subtract all of the following from that $16,500 paycheck?

- $4,000 mortgage payment (home value of $750,000 at 4.5 percent, 30-year fixed)
- $3,000 student loan payment (paid off in ten years)
- $2,000 for daycare or private school for kids
- $1,200 car payments
- $1,650 to tithing/charity
- $500 for disability/life insurance

All of the above doesn't include vacations, traveling, gas, groceries, utilities, cell phones, etc. Despite that, guess what your take-home pay is after those large lifestyle decisions?

Only $4,150.

And, we just said that we needed to be saving about $4,500 per month to retire at age 60 if we started saving at age 32. Yikes. With the kind of lifestyle inflation listed above, we aren't going to make it.

Even without tithing/charitable giving, the take-home would be $5,800. I don't know too many doctors who can save $4,500 monthly and live on $1,300 per month for gas, groceries, cell phones, dining out, and vacation.

Remember, they were living on $3,500 a month as a resident.

This, my friends, is The Big Dilemma.

Massive lifestyle inflation crushes any chance you have of financial success. It simply cannot be done after you finish training, if you hope to be able to retire at an age that most would consider acceptable.

But can it be different?

Yes. It can.

It simply requires residents/fellows finishing training to make intentional decisions based on what they want. They need to figure out their monthly savings requirements and how quickly they want to pay down their debt FIRST.

Then, they need to build a lifestyle that allows them to reach these goals.

Often, residents/fellows ask: How much do I need to save? How does this work?

Well, follow this formula and we can figure out how much you should be saving each month based on your individual goals.

- Determine the age at which you'd like to be able to retire.
- Determine how much you would like to be able to spend in retirement annually. (This assumes, of course, that you are debt free—because you read articles like this one. Spending in retirement should only account for travel, food, leisure, utilities, taxes, health care, etc.)
- Multiply the annual spending from step two by 25 for a typical retirement at age 60-65. Multiply by 30 for an early retirement.
- Then, you get to do some fun Excel math using the future value function (which is explained below.) Plug in your anticipated monthly savings rate to see how close you are to getting to the number you need to retire when you want.

The Cold Hard Math: Future Functions Formula

- Plug this formula into Excel: =FV(6%/12, N, [pmt],[pv],1)
- For "N," plug in the number of months that you are from your anticipated retirement age determined in step one above.
- [PMT] is the amount of monthly savings. For Excel to make sense of things, the amount needs to be negative. So, if you are saving $5,000 per month you need to put in -5,000.
- [PV] is the present value of your savings accounts. Again, plug in a negative number. If you have $50,000 in savings it should be input as -50,000.

Here is an example:

Let's say that we determine we can save $5,500.

Let's further say that, including an employer's 401K match (maxed out to $55,000) and a $11,000 backdoor Roth IRA contribution, we think we will be able to save $5,500 per month.

How much would we have in 28 years (336 months), assuming we have nothing saved and will receive six percent compounding interest? Well, plugging that into Excel would look like this:

=FV(6%/12, 336, -5500,0,1) = $4,801,343

That's more than enough! What if we wanted to retire by age 55 (23 years or 276 months)? Plugging that into Excel would like this:

=FV(6%/12, 276, -5500,0,1) = $3,273,669

Now, if we want to retire at age 55, we aren't quite making it. Three million would only allow for $120,000 in annual spending. So, if we want to retire by 55 and be able to spend $160,000 in retirement, we would need to be saving more each month.

The point is this: the attending paycheck seems large until we account for inflated lifestyle costs, which prevent us from accomplishing our financial goals. Instead of inflating our lifestyle and hoping that we have enough left to save for retirement, the opposite should occur.

First, we should determine the savings rate required to retire by the age we want.

Then, we should build a lifestyle with what is left. Pay the future self first, and the current self last.

*This article was previously published on The Physician Philosopher.*