If you’re working a side hustle just so you can spend more money, you’re missing the point. If you can’t live on one physician’s salary it’s time to get your priorities straight. You don’t have to take The Live on None Challenge, although it is an excellent way to pay off debt or accelerate your savings.
Today we’re going to look at what that extra savings can do for you and compare it to increased returns from a riskier portfolio. We’re going to take 3 scenarios: a newly minted attending, a mid-career doctor with a healthy nest egg and a late-career physician who is approaching financial independence. All three people want to retire at age 60.
For each of these physicians we will look at 3 portfolios:
- A savings rate of $100,000/year with 8% return.
- A savings rate of $100,000/year with a 9% return
- A savings rate of $130,000/year with a 8% return
Those are admirable savings rates, although well within reach for most physicians. Between 401k, profit-sharing, HSAs, solo 401(k), cash balance plan and a good old-fashioned taxable account you can quickly hit these targets. The fact that Uncle Sam Loves Side Hustlers is just one of the reasons you can hide $215,000 from the IRS.
Our new attending finished residency at age 30 with $50,000 in savings. Now that she’s making the big bucks she makes the wise decision to keep living like a resident so she can pay off debt and start saving.
Our new attending is young and cocky. She decides with her new-found income she can afford to take more risk, and luckily for her it pays off.
Although our new attending has never been through a bear market before, she has been reading about risk and asset allocation at Bogleheads. She knows that not all risk is compensated. What if instead of taking more risk she decided to boost her savings rate?
Our mid-career attending is a 40-year-old who has already managed to save $1,000,000. They say the first million is the hardest and he would agree. It took a lot of nights, weekends and holidays taking care of patients to amass that savings. Let’s see what happens when he keeps plugging away until age 60.
Despite having more to lose at this point in his life, our mid-career attending decides he’s going to take on more risk in his portfolio. Miraculously, he too is compensated for his gamble. Let’s see how far ahead it got him.
By mid-career our attending knows that life throws you curveballs. He’s learned a few lessons seeing dead people and decides that he doesn’t want to bear more risk than he needs too. He’s found an easy side hustle and decides he’s going to use that income to boost his savings rate instead.
Our late career attending can see the light at the end of the tunnel. He’s kept his nose to the grindstone for twenty years and at age 50 has managed to save $3,000,000. He still has some fuel left in the tank and wants to keep working until age 60. Let’s see where his savings will be when he reaches the finish line.
Maybe it’s a mid-life crisis. Maybe it’s twenty years of sleep deprivation from shift work. For some reason despite already having won the game our late-career attending decides to take on more risk with his investments. Like our other two docs, his gamble pays off and he ends up with a bigger nest egg by age 60.
Our 50-year-old with 3 million in the bank decides the last thing he wants to do is invest in riskier assets in the last decade of his career. Instead he decides the safer route is to simply save more money. With his mortgage long gone and his kids out of the house, it’s easier to sock away the extra cash.
There are several limitations in this experiment. There is no magical world where every year the market yields a consistent positive return. A portfolio could average 8% over a 30 year span, but it would also see some horrific bear markets. Those bear markets would be great buying opportunities for people with higher savings rates which ultimately would yield higher returns.
The second limitation is that all three of our attendings were compensated for their risk. They call it risk for a reason. Sometimes risk = reward, but other times risk just = risk. Not only do these docs have to worry about if their portfolio loses money, they also have to worry about when it loses money. The S&P 500 lost ~50% of its value between 2007 and 2009. That may be great for a 30-year-old, but it can be devastating to a 60-year-old getting ready to retire.
Investing as much as you can as early as you can always pays off. There is no point in the new attending’s 30 year career where higher returns beat increased savings. That doctor should spend less time worrying about her asset allocation and more time thinking about how to boost her savings rate.
Higher returns could eventually outpace an increased savings rate by your mid-to-late 50s, but only if your riskier portfolio pays off. Probably the worst time to take on more risk is right before you decide to call it quits.
Investors sometimes talk about alpha (excess returns compared to a benchmark) and beta (volatility). The ideal investment has excess returns with lower risk. Any doc seeking alpha needs to look in the mirror. You are the alpha. You have a job that lets you save more than the average American family earns and still have enough left over to live a comfortable life. Your safest bet is simply invest a little more of that ridiculous income. You’ll be glad you did.