Finding your lifestyle break-even point …

7 Millionaires … In Training! has been featured in iReport; you can check it out by visiting: and, this article has been mentioned in this weeks Carnival of Personal Finance!


I wrote a post a while ago that explained why most doctors aren’t rich … the point wasn’t to appeal to all the medico’s in our audience; it was to demonstrate that income does not equal wealth.

Jeff, a navy pilot who I would happily trade a month or so of my life with (Maserati for Hornet for a month? Fair trade, if you ask me) commented:

Your analysis failed to consider Scott’s ability to incrementally contribute money from his income over the 10 year period. I just thought it was odd that you left it out, since the mantra of this blog (at least in the beginning–money 101 and early 201 stages) is to save as much of your income and invest it. Why wouldn’t Scott be able to follow this advice? …and more importantly, how would incremental contributions affect Scott’s ability to reach his goals?

Also, I bet the doctor making $700k per year in your example isn’t having a hard time investing $150k/year after tax. Why couldn’t a professional making $350k+/per invest $150k/year after tax (assuming they were following your money 101 steps)?

As I mentioned to Jeff at the time, my point wasn’t really meant to be mathematical … it was based upon my (and, Scott’s – who is the doctor mentioned in the original post) ‘real life’ experiences/observations …

… let me explain using four hypothetical doctors as examples:

Good Doctor‘ saves a good proportion of his ridiculously high income (what would you guess: 20%? 30%? More? Less?); lives within his means; etc. but will still most likely ‘only’ get to the $2M – $4M range +/- a few mill. if he is reasonably passively investing. That’s just experience talking …

Bad Doctor‘ spends more than he earns … there’s no limit to what some people can spend …  just refer to the Millionaire Next Door example from my previous post, if you don’t believe it’s possible to earn $700k a year and still be ‘broke’!

Typical Doctor‘ doesn’t wake up to the difference b/w good/bad doctor until he reads a few books and blogs … typically too late to really become ‘good doctor’ … he can’t save, say, $150k immediately – if ever – because he has ‘commitments’, but he sees the light and builds up to his own saving maximum over time … it’s this ‘lost time’ that is his undoing, so he ends up somewhere less than ‘good doctor’, say, $1M – $3M.

Business Man Doctor‘ sees the light and realizes that income/savings alone won’t get him to where he wants to go. He reads my post, and the rest is history 😉

Now, here is the issue:

In all of our four examples, the doctor is doing well – just like the two doctors in Dr. Stanley and Danko’s book – earning $700k p.a. … the problem is, if they are spending all of it to live on now (one of those two doctors was certainly doing that!) how are they going to keep it up in ‘retirement’?

Let’s check the math: $700k salary x 2 [for 20 years inflation @ 4%] x 20 [for min. size of passive nest egg] to ‘replace’ $700k spending power …

that’s just shy of $30 Mill. in 20 years by my math!

So, there lies the real problem for any doctor / professional; how do they replace their income in retirement?

The mechanism is obvious – they need to channel part of their income into passive investments, and allow time for those investments to grow large enough to replace 70% – 125% of their final income depending on how much their spending will go up (most likely) or down (golf / travel, anyone?) in retirement.

There are only two ways that I know to achieve this:

1. Find their Replacement Income’s Break-Even Point: That is, as their salary increases over the years, how much do they allow their spending to go up in order to control their final spendable salary so that their nest egg neatly replaces it?

Let’s see:

Perhaps if they live off just half their salary ($350k) they may be able to get to somewhere in the near vicinity of $15M assuming that they allow themselves 20 years to get there (i.e. if $30 Mill. in 20 years was required, in our earlier example, to ‘replace’ the future value of $700k today, then $15M might do the same for $350K?)

How do we get that $15 Mill.? Well let’s see what happens if we save the other half of their salary:

$350k – 35% tax X 8% (say, after tax return of their ‘passive investments’). By my reckoning, if they increase these $350k (less tax) contributions by 4% to keep up with inflation each year, they may just get to $15M in 20 years. Success!

Naturally, this works for anybody on any salary … except the lower your required salary, the more that the ‘tools of the poor’ (401k; employer match; etc.) kick in to replace your final salary at perhaps less than a 50% of total income savings rate.

2. Find their Lifestyle’s Break-Even Point: The problem with the above example, of course, is that our ‘good doctor’ has to suffer with living off only half the income that he earns … now that he’s ‘retired’ he’s having to make do with playing at the local Public Golf Course while his professional friends are at the Country Club … poor sod.

To a greater or lesser extent this is the choice that conventional Personal Finance wisdom asks you to make: live large now and live poor later, or sacrifice lifestyle today to go for a longer period of being able to live the same lesser lifestyle in retirement (while your less-financially-astute friends simply take their chances).

But, this totally misses the point: what if the 50% Lifestyle simply ain’t good enough … are you going to take ‘second best’ (albeit for as long as you live) lying down?

If your answer is YES; then go back and revisit 1. with your own numbers and there you have your financial plan!

If your answer is NO; then you have come to the right place …  but, saving/investing alone is probably not going to do the trick 😉

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5 thoughts on “Finding your lifestyle break-even point …

  1. I love this:

    “Naturally, this works for anybody on any salary … except the lower your required salary, the more that the ‘tools of the poor’ (401k; employer match; etc.) kick in to replace your final salary at perhaps less than a 50% of total income savings rate.”

    “Tools of the poor;” can I borrow that?

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