Lifestyle inflation: Avoid the golden handcuffs in retirement

Note: This is an excerpt from “The Financial Checkup” with Bryan Jepson, M.D. The transcript below has been edited for brevity and clarity.

As we all know, to become a physician requires many years of training, where we are overworked and underpaid. Consequently, we all suffer from delayed gratification issues.

The problem is that, along with delayed gratification, most of us have also had to delay any significant investing. So we're also behind on creating the assets that we need to retire comfortably down the road.

Unfortunately, for many physicians, high income can become an illusion of wealth and a false sense of security. Sadly, that is not a given.

Really, the problem isn't about occasionally spending extra on some of those things we want. It's when that higher spending pattern becomes fixed, either because we've taken on a lot of new liabilities, like mortgages or fancy car loans, or because we get so used to a certain lifestyle that we can't ever think of going backward. Let's call it the fixed overhead problem.

So here are some examples: your home. Maybe you purchased that dream house straight out of residency. Any time you think about purchasing a luxury item, you should think of it in terms of how many more months or years you would have to work to own it compared with if you had just invested that money instead.

So the burn rate concept. The problem with creating a high level of fixed expenses is that it erodes your financial flexibility. No wonder it’s called the golden handcuffs. Contrast that with a high savings rate.

So take a physician earning $450,000 a year but with a fixed lifestyle [of] $300,000 a year. So take away at least one-third of the earnings for taxes, and you've eliminated any financial flexibility. Plus, if you plan on sustaining your same lifestyle after you retire, you need to save $7.5 million in retirement assets if you use the 4% safe withdrawal rate. In contrast, if you can reduce your lifestyle to $220,000 [a year], your portfolio need drops dramatically and you now have extra money from your paycheck to start creating that portfolio.

Number one, delay permanent upgrades. You don't have to live like a resident to make it all work, but if you can build your lifestyle gradually, it gives you more money to save and invest and more time in the market to create those assets. This will translate into a much bigger nest egg.

Number two, increase your savings rate, especially in those first three to five years. As you make more money or get a raise, save that extra income instead of just spending it. Try to get up to at least a steady savings rate of 20%. If you can push it to 30%, you're going to become financially independent way earlier than you would have ever expected.

Number three, avoid stacking major fixed commitments simultaneously. You don't need a new house, new cars, country club membership and vacation upgrades all at once.

Remember that, ultimately, true wealth is about control over your time. Lifestyle inflation doesn't feel dangerous when your income is rising; it becomes dangerous when your income stops. Free yourself from those golden handcuffs and take control over your own time by developing the discipline that is needed to create assets instead of just buying more stuff.