The first time I witnessed the stress finances can cause in a relationship was when I saw a married couple have extremely different views on spending versus saving. The husband could not have been more frugal. He wanted to save a lot of money so that he could retire early. The wife enjoyed spending the money that they made without a second thought. This caused some major friction when they tried to determine how much of their income they should be saving for retirement.
They were doing well financially by most standards, but they still experienced an enormous amount of financial stress because they had different expectations when it came to money.
How much should you be saving for retirement? Is it too much? Too little. That’s where The 30% Rule can help us out.
Let’s dive in.
WAR and the 30% Rule
Before we dive into The 30% Rule, let’s first talk about your Wealth Accumulation Rate (WAR).
In simple terms, your WAR is the % of your gross income spent toward building wealth.
To calculate your WAR: Add your annual savings rate (hopefully at least 20%) and the amount of money you are putting toward mandatory debt (e.g. student loans, private loans, etc).
Wealth Accumulation Rate (WAR) =
% Gross Income paying down debt** + % Gross Income savings rate
For example, if 20% of your gross income went towards saving money for retirement and 20% of your income was going towards paying off student loans, this would result in a 40% WAR.
**Note: You’ll notice that paying down non-mandatory debt like a mortgage or a car loan is not included in your WAR. It has been pointed out that it should probably not include your consumer debt like that Tesla or buying more house than you can afford.
Why Should I Save 30% of My Income?
For the physician, the traditional 15% savings taught by many financial gurus will prevent most doctors from reaching financial independence even by a traditional retirement age of 60 to 65.
Let’s say that you make a gross income of $250,000 and you aim to be able to retire by age 55, and you want to spend $150,000 per year in retirement.
With a 15% savings rate, you will be saving $37,500 each year. If you begin saving for retirement at age 30 with a plan to retire at 55, assuming a 5% real rate of return (i.e. 7% nominal return minus 2% inflation = 5% return), that $37,500 annual savings rate will turn into $1.88 million by age 55, which would provide $75,200 in today’s dollars assuming a 4% withdrawal rate.
That’s not enough for most doctors making $250,000 annually to maintain their lifestyle.
Even for a more typical retirement age of 60, the math doesn’t favor a 15% savings rate. Assuming the same rates of return above, a $37,500 annual savings rate will turn into $2.6 million, which would provide only $104,000 in today’s dollars assuming a 4% withdrawal rate.
What if, instead, you saved 30% of your gross income? Well, you’d need $3.75 million to withdraw $150,000 each year. If you started at age 30, with a 5% real return, you’d reach that number by age 55.
What would a 30% Savings Rate Look Like?
For someone making $250,000 gross per year, a 30% WAR would amount to $75,000 each year going towards paying off debt or investing.
Here is an example of what that might look like for a married couple:
- Paying $24,000 in student loan debt each year
- Maxing out your 403B/401K at 22,500 (any matching money goes towards your WAR, but it also increases your gross salary!)
- $22,500 into your spouse’s 401K
- $6,000 into a backdoor Roth IRA
Once that student loan debt is gone, that monthly payment would then be shifted into retirement savings.
If you are concerned about waiting too long to save the full 30% toward retirement, don’t forget The The 10% Rule for any bonuses or additional pay you make outside of your base income to help supplement your WAR.
Saving Money. How Much Is Enough?
The higher your WAR the better – as long as your life is tolerating it. A high WAR is how people achieve FIRE.
However, aggressively building wealth to the extent that it negatively impacts your wellness may not be worth it. A WAR that is too high can negatively impact your life and relationships.
On the other hand, if your WAR isn’t high enough, your wellness will also be impacted as you fail to obtain financial independence by the age you want. You may be stuck in a career you cannot afford to leave.
If the thought of saving stresses you out, then you need to figure out if you have a spending problem or a frugality problem.
That’s where The 30% Rule comes into play. Is your WAR above or below 30%?
Less Than 30% Wealth Accumulation Rate
Let’s say that you are putting less than 30% of your gross income into your WAR and yet you are still feeling financial stress.
In this situation, you may need to build some financial resilience, though I recognize that certain life situations like living in a high-cost-of-living area to be near family prevent us from hitting this 30% number.
Life can be full of tough decisions, but if you are suffering from financial stress (not related to other happenings in your life) and you are at a less than 30% WAR, as a physician, it is possible that you need to find your frugal gene and express it.
Maybe, its time to make lifestyle changes if you are feeling financial stress with a WAR of less than 30%.
More Than the 30% Wealth Accumulation Rate
If, however, you are feeling the tight constraints of your budget and you are saving money at a WAR over 30% of your Gross Income, you may need to question the extent of your frugality. Is it cutting too deeply?
For example, the couple that I mentioned in the introduction:
Their WAR was likely much greater than 30%, and it was clearly negatively impacting their marriage. It simply isn’t worth it to pinch pennies with a high income if it negatively impacts your marriage.
Becoming Financially Independent and Retiring Early (FIRE) is important for many, but at what cost?
Who cares how big your bank account is if you aren’t enjoy life?
It is worth mentioning that personal finance is personal. For reasons not covered in this post, you may feel the need to save more or less than 30% of your gross income.
However, calculating your WAR and using The 30% Rule can serve as a helpful rule of thumb for discussion and thought. You can either adjust your spending or adjust your WAR to improve your wealth and live the intentional life of your dreams.