How physicians can calculate their savings rate

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 The HSA can be withdrawn without penalty after the age of 65 (only have to pay taxes on the withdrawal, similar to a 401(k).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.

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.


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.

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