Skip to content
  • About
  • Contact
  • Contribute
  • Book
  • Careers
  • Podcast
  • Recommended
  • Speaking
  • All
  • Physician
  • Practice
  • Policy
  • Finance
  • Conditions
  • .edu
  • Patient
  • Meds
  • Tech
  • Social
  • Video
    • All
    • Physician
    • Practice
    • Policy
    • Finance
    • Conditions
    • .edu
    • Patient
    • Meds
    • Tech
    • Social
    • Video
    • About
    • Contact
    • Contribute
    • Book
    • Careers
    • Podcast
    • Recommended
    • Speaking

How physicians can calculate their savings rate

Wall Street Physician, MD
Finance
April 23, 2018
Share
Tweet
Share

The savings rate in America is abysmal. As a result, many Americans rely on Social Security and pensions to fund their retirement.

However, physicians would not be able to maintain their lifestyle on Social Security payments alone. And few physicians receive pensions from their employers. Therefore, they have to fund the majority of their retirement through savings.

But how do you define savings rate? Let me count the ways. Do you use gross income or net income? What about retirement and matching contributions?

Methods to calculate savings rate

Percentage of gross income. The most straightforward way to calculate your savings rate is to divide your savings by your gross (pre-tax) income. For example, if you make $300,000 a year before taxes and save $60,000 of it, then your savings rate is $60,000 / $300,000 = 20%.

Percentage of net income. An alternative way to calculate your savings rate is to divide your savings by your net income (gross income – taxes). This savings rate will be higher than the savings rate calculated using a percentage of gross income because it subtracts taxes from the denominator.

For example, Mr. Money Mustache, in his famous The Shockingly Simple Math Behind Early Retirement post, uses savings rate based on net income.

People like this method because you cannot save what you pay in taxes — this is forced spending. Using net income (or take-home pay) as the denominator in calculations allows your savings rate to potentially be as high as 100%. If you calculate your savings rate as a percentage of gross income, the highest possible savings rate would be (100% – tax rate).

Special situations

What about retirement contributions? I would count retirement contributions as savings. For simplicity, I would not differentiate between pre-tax and post-tax (i.e., Roth) contributions in terms of calculating a savings rate. Having more retirement contributions will boost your after-tax return.

HSA money could potentially be included in your savings rate, since it serves as a stealth retirement account for many physicians. The HSA can be withdrawn without penalty after the age of 65 (only have to pay taxes on the withdrawal, similar to a 401(k). You would have to estimate how much of your HSA balance would go to retirement expenses versus healthcare expenses.

What about matching contributions? I would consider matching contributions as a benefit from your employer, so you can add that to your savings without adding to your income.

Why I prefer calculating savings rate as a percentage of gross income

I like to use percentage of gross income as the way to calculate savings rate. It is the easiest measure to calculate. Everyone knows their gross income. Take-home income is much harder to calculate, and most people don’t know their after-tax income until they finish their taxes and either send a check to the IRS or receive their tax refund.

ADVERTISEMENT

Also, using gross income as the denominator in calculating savings rate will give you a lower number versus if you use net income. Given that taxes can take out 40% or more of a physician’s gross income, you can’t actually save 100%. This gives you more motivation to increase your savings to raise your “number.”

Finally, by calculating your savings rate as a percentage of gross income, legally reducing your taxes becomes a way to boost your savings rate. Techniques like contributing to a 401(k) end up improving your savings rate.

Conclusion

I prefer to calculate savings rate as a percentage of gross income to calculate savings rates. It’s simple and relatively unambiguous.

However, how you calculate your savings rate is up to you. It’s just semantics. What’s more important is to track your savings rate over time, making sure that you remain on track to reach your financial goals.

“Wall Street Physician,” a former Wall Street derivatives trader , is a physician who blogs at his self-titled site, the Wall Street Physician.

Image credit: Shutterstock.com

Prev

The intensity of EMR warnings: Who do they really help?

April 22, 2018 Kevin 9
…
Next

Computer algorithms don't think like doctors

April 23, 2018 Kevin 1
…

Tagged as: Practice Management

Post navigation

< Previous Post
The intensity of EMR warnings: Who do they really help?
Next Post >
Computer algorithms don't think like doctors

ADVERTISEMENT

More by Wall Street Physician, MD

  • 4 reasons why physicians should hire a financial advisor

    Wall Street Physician, MD
  • Investing in the stock market is like playing that game of rock-paper-scissors

    Wall Street Physician, MD
  • 7 sources of financial anxiety for physicians

    Wall Street Physician, MD

Related Posts

  • Are patients using social media to attack physicians?

    David R. Stukus, MD
  • The risk physicians take when going on social media

    Anonymous
  • Beware of pseudoscience: The desperate need for physicians on social media

    Valerie A. Jones, MD
  • When physicians are cyberbullied: an interview with ZDoggMD

    Monique Tello, MD
  • Surprising and unlikely rewards of social media engagement by physicians

    Lisa Chan, MD
  • Physicians who don’t play the social media game may be left behind

    Xrayvsn, MD

More in Finance

  • Decoding your medical bill: What those charges really mean

    Cheryl Spang
  • 5 blind spots that stall physician wealth

    Johnny Medina, MSc
  • The most overlooked skill in medicine: contract negotiation

    Cynthia Chen-Joea, DO, MPH and Peter Baum, DO
  • The business lesson new doctors must unlearn

    Stanley Liu, MD
  • The hidden impact of denials on health care systems

    Diana Ortiz, JD
  • Why physicians are unlike the “average” investor

    David B. Mandell, JD, MBA
  • Most Popular

  • Past Week

    • Who gets to be well in America: Immigrant health is on the line

      Joshua Vasquez, MD | Policy
    • Why specialist pain clinics and addiction treatment services require strong primary care

      Olumuyiwa Bamgbade, MD | Conditions
    • Harassment and overreach are driving physicians to quit

      Olumuyiwa Bamgbade, MD | Physician
    • Why peer support can save lives in high-pressure medical careers

      Maire Daugharty, MD | Conditions
    • When a medical office sublease turns into a legal nightmare

      Ralph Messo, DO | Physician
    • Addressing menstrual health inequities in adolescents

      Callia Georgoulis | Conditions
  • Past 6 Months

    • Forced voicemail and diagnosis codes are endangering patient access to medications

      Arthur Lazarus, MD, MBA | Meds
    • How President Biden’s cognitive health shapes political and legal trust

      Muhamad Aly Rifai, MD | Conditions
    • Why are medical students turning away from primary care? [PODCAST]

      The Podcast by KevinMD | Podcast
    • The One Big Beautiful Bill and the fragile heart of rural health care

      Holland Haynie, MD | Policy
    • Who gets to be well in America: Immigrant health is on the line

      Joshua Vasquez, MD | Policy
    • Why “do no harm” might be harming modern medicine

      Sabooh S. Mubbashar, MD | Physician
  • Recent Posts

    • The shocking risk every smart student faces when applying to medical school

      Curtis G. Graham, MD | Physician
    • Clinical ghosts and why they haunt our exam rooms

      Kara Wada, MD | Conditions
    • High blood pressure’s hidden impact on kidney health in older adults

      Edmond Kubi Appiah, MPH | Conditions
    • Deep transcranial magnetic stimulation for depression [PODCAST]

      The Podcast by KevinMD | Podcast
    • How declining MMR vaccination rates put future generations at risk

      Ambika Sharma, Onyi Oligbo, and Katrina Green, MD | Conditions
    • The physician who turned burnout into a mission for change

      Jessie Mahoney, MD | Physician

Subscribe to KevinMD and never miss a story!

Get free updates delivered free to your inbox.


Find jobs at
Careers by KevinMD.com

Search thousands of physician, PA, NP, and CRNA jobs now.

Learn more

Leave a Comment

Founded in 2004 by Kevin Pho, MD, KevinMD.com is the web’s leading platform where physicians, advanced practitioners, nurses, medical students, and patients share their insight and tell their stories.

Social

  • Like on Facebook
  • Follow on Twitter
  • Connect on Linkedin
  • Subscribe on Youtube
  • Instagram

ADVERTISEMENT

  • Most Popular

  • Past Week

    • Who gets to be well in America: Immigrant health is on the line

      Joshua Vasquez, MD | Policy
    • Why specialist pain clinics and addiction treatment services require strong primary care

      Olumuyiwa Bamgbade, MD | Conditions
    • Harassment and overreach are driving physicians to quit

      Olumuyiwa Bamgbade, MD | Physician
    • Why peer support can save lives in high-pressure medical careers

      Maire Daugharty, MD | Conditions
    • When a medical office sublease turns into a legal nightmare

      Ralph Messo, DO | Physician
    • Addressing menstrual health inequities in adolescents

      Callia Georgoulis | Conditions
  • Past 6 Months

    • Forced voicemail and diagnosis codes are endangering patient access to medications

      Arthur Lazarus, MD, MBA | Meds
    • How President Biden’s cognitive health shapes political and legal trust

      Muhamad Aly Rifai, MD | Conditions
    • Why are medical students turning away from primary care? [PODCAST]

      The Podcast by KevinMD | Podcast
    • The One Big Beautiful Bill and the fragile heart of rural health care

      Holland Haynie, MD | Policy
    • Who gets to be well in America: Immigrant health is on the line

      Joshua Vasquez, MD | Policy
    • Why “do no harm” might be harming modern medicine

      Sabooh S. Mubbashar, MD | Physician
  • Recent Posts

    • The shocking risk every smart student faces when applying to medical school

      Curtis G. Graham, MD | Physician
    • Clinical ghosts and why they haunt our exam rooms

      Kara Wada, MD | Conditions
    • High blood pressure’s hidden impact on kidney health in older adults

      Edmond Kubi Appiah, MPH | Conditions
    • Deep transcranial magnetic stimulation for depression [PODCAST]

      The Podcast by KevinMD | Podcast
    • How declining MMR vaccination rates put future generations at risk

      Ambika Sharma, Onyi Oligbo, and Katrina Green, MD | Conditions
    • The physician who turned burnout into a mission for change

      Jessie Mahoney, MD | Physician

MedPage Today Professional

An Everyday Health Property Medpage Today
  • Terms of Use | Disclaimer
  • Privacy Policy
  • DMCA Policy
All Content © KevinMD, LLC
Site by Outthink Group

Leave a Comment

Comments are moderated before they are published. Please read the comment policy.

Loading Comments...