Dr. E’s Path to Financial Independence: A High-Income Case Study

M.D. Financial Services
I’ve shared my personal path to FI and we’ve explored a host of scenarios for our hypothetical 4 physicians. Today, I’d like to take a deep dive into the finances of another real physician who we’ll call Dr. E. The name has been changed (it’s not short for Dr. Evil), and the details rounded off, but we’re talking about one of your fellow readers and his actual finances.

The good Dr. E is a hard-working physician, a few years into his post-fellowship career. He earns a handsome salary, but boy, oh boy, does he work hard for the money.

In 2016, the independent contractor worked three jobs, took a total of 4 weeks off, and worked most weekends — 30 out of 52 to be exact. There are bills to be paid, you know, and the bills don’t pay themselves. Dr. E pays them to the tune of about $200,000 a year in total output.

Is Dr. E just another Dr. Dahlgren, the spendthrift of our 4 physicians who had no hopes of reaching financial independence? Not exactly.

First, Dr. E earns double. His income from his main job, side job, and moonlighting totaled a bit more than $600,000 last year. That’s double the salary of the 4 Physicians. Second, he has aspirations to become financially independent in a timeframe that most would consider early — by his 55th birthday, if not earlier. Dr. D had no prayer of that happening.

 

Can Dr. E Retire Early on a $200,000 a year budget?

 

Let’s compare them line by line on the savings calculator.

 

 

Although Dr. E’s salary is double, he doesn’t receive a match or profit sharing. Of course, his taxes are substantially higher than Dr. E’s — far more than double, reflecting the progressive nature of income taxes. Also, as an independent contractor, he’s paying both the employer and employee FICA taxes.

Set For LifeWith three children, Dr. E is contributing more to his 529 plans. He’s got enough income to max out his tax-deferred space, complete his and hers Backdoor Roth IRAs, and he invests $100,000 a year in a taxable account.

With reasonable expectations of 2% to 6% real (inflation adjusted) returns, Dr. E can be financially independent in 18 to 25 years with $5,000,000 and a $200,000 a year spending habit.

It sure is nice to have that income!

Dr. E has studied the numbers in the chart above, and he likes the idea of reaching his goal right around his 55th birthday as long as he can eke out a 4% for better real return.

But he’s not happy. Why not? He worked 30 weekends last year. He worked three jobs. He doesn’t mind working like a resident for a few more years, but Dr. E has recognized that this schedule is unsustainable. His kids are growing up too fast, and he’s going to want to slow down soon.

 

What if Dr. E Worked Less?

 

Let’s run the numbers for Dr. E reducing his workload, and earning “only” $550,000 or $500,000.

 

 

A $50,000 pay cut results in $24,000 less in take-home pay. This is a reality for a high-income professional in a high tax state, with a total marginal tax rate exceeding 50%. He’d be better off financially moving to a no-income-tax state, but we’ll assume that option’s off the table.

Devoting $24,000 less to the taxable brokerage account lowers his savings rate and increases his time to financial independence by two to three years.

A bigger pay cut of $100,000 means he is taking home $49,000 less. [note: these are rough estimates, but not unrealistic]. A lower salary along with the same $200,000 a year budget means Dr. E can expect to work an extra 4.6 to 8.6 years with returns in the range of 2% to 6% real.

In the best of these paycut scenarios, he is still looking at at least 20 more years to reach his goal.

What else can he do? Well, he could do the obvious. Cut spending like Dr. D did in a previous example of lifestyle deflation. With this income, we don’t need to make drastic changes (Dr. D cut 40% from the budget), but we can see what happens when Dr. E reduces the budget by 10% and 20% rather than cutting his hours.

 

What if Dr. E Spent Less?

 

Once again, we’ll use the calculator to see the results from a reduced budget of $180,000 and $160,000.

 

 

Now, we benefit from the synergy of not only putting away more money each year, but also having a lower target for financial independence. To maintain the new lifestyle requires less money.

The target number in today’s dollars with a $180,000 budget is down a half million to $4.5 million. By saving $172,000 a year, the new goal is reached in 16 to 21 years.

Lowering the budget by 20% to $160,000 a year results in financial independence, defined as 25 years’ in expenses, in 14 to 17 years. Dr. E could be free by age 50 if all goes well!

But… this assumes Dr. E continues to earn $600,000 a year. While there may be some pay increases to offset the reduced hours he’d like to implement, he can’t count on that. How would the numbers pan out if we combined lower spending with a decreased salary?

 

What if Dr. E Reduced Both Spending and Salary?

 

Now, we’ll get the synergy of a lower target, still rather high salary, and the lifestyle benefit of working less. Forget synergy. Trinergy?

For this exercise, we’ll look at a salary of $550,000 while spending 10% less and a salary of $500,000 while spending 20% less. Any bets on which one wins?

 

 

In this variation, we see that the reduction in spending has a greater effect than the reduction in salary. This is not so surprising. Dr. E has to earn a little more than two dollars to have an extra dollar to spend. Every $10,000 he and his family doesn’t spend is more than $20,000 he doesn’t have to earn.

His odds of being financially independent at 55 are indeed better when his salary is reduced by $100,000 with a concomitant $20,000 reduction in annual spending. Isn’t that remarkable?

 

dr. e vacations in paris, too

Caveats to the Equation

 

To compare apples to apples, in this exercise, we simply assume that current annual spending equals future annual spending. In reality, Dr. E can likely expect the annual output to go drop significantly sometime around the targeted FI date.

Eventually, his kids will be independent. Not financially independent, but no longer completely dependent on mom and pop. Work related expenses will disappear. The mortgage will be paid off — Dr. E currently puts $54,000 a year towards his. Term life and disability insurance will no longer be necessary.

It’s safest to plan as though at least some of these things won’t happen; after all, certain expenses will be swapped for increased travel and expenses related to newfound freetime, but it’s also smart to recognize that some of the budget line items have a shelf life.

If Dr. E reaches financial independence based on his current spending, then finds that his retirement spending is significantly less, he not only has financial independence, but also financial freedom.

It’s tough to argue with that outcome.

 

What would you do if you were Dr. E? Find a way to spend less? Work less? Both? Would you look for a way to earn even more? Give Dr. E your advice in the comments below.

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49 comments

  • I would advise him to reduce hours and cut costs. His work schedule is a recipe for burn out well before the age of 55. In an ideal world, he could live like a resident for 3-4 years, which would enable him to return to his current lifestyle after his “financial fellowship“. But with a large mortgage, that is likely not possible. With a $200,000 budget, hopefully there is some fat that can be easily cut from his spending diet.

    • anonymous

      This is Dr. E finally getting around to commenting on this post. I was actually on vacation when POF ran this post and I’m just now getting around to commenting on it….

      Anyway, I agree with you that this isn’t a great schedule for the next 15 or 20 years. I’m going to work significantly less next year, but I had aggressively pursued moonlighting opportunities a couple of years ago and since I agreed to do the work I’m somewhat committed for now. Next year I plan to focus on the moonlighting job that pays the most.

      I’m not exactly doing a financial fellowship as in the example you provided in your financial fellowship post since I’m not living like a resident, but this past year’s high income and the high income I’ll have this year were great to eliminate all but one student loan and hopefully that will be gone in a year or two. As you say I’m not going to living like a resident with an expensive house and at this point I’m not planning on selling the house , but we do plan on selling the house in 10 years or so when the kids are out of the house.

      As for fat in the budget, obviously there are things you can cut when you spend $200k/yr. My wife and I discussed this in December and we plan on aiming for $180k this year.

  • MS

    My husband is Dr. E and this is almost exactly the choices we have made. We spend around $200k a year. In year 14 of post-fellowship, we have 2.8 in retirement and 3.6 total net worth (340k total in 3 kids college funds and a paid off house worth 400k). Thank you for including this scenario. Our biggest non-necessary expenses are a country club membership and Catholic school tuition.

    One house, one wife, pay for cars in cash, go on a ‘good enough’ vacation every year.

  • I would definitely spend less and work less. Working more at that tax rate must reach a rate of diminishing returns, where the extra money isn’t buying enough happiness to be worth it. Especially working half the weekends of a year-that’s rough. Earn $500k, spend $160k, and save/invest the rest.

  • DrG

    As an independent contractor would dr E be able to contribute to a 457b savings account?

    • Good catch — It should be 36,000 to the 401(k), 0 to the 457(b). It wouldn’t change the math, but I made some changes after I realized Dr. E was an independent contractor, and neglected to zero out the 457(b).

  • Hatton1

    As an independent contractor he could do a Sep-Ira (no back door Roth option) or a solo-k. I don’t know the rules for 457s and no time to look it up right now. He is a good saver so he needs to address spending. You really have to do both to become financially independent at a young age. He will burn out if he keeps working like he is doing. I know because I worked every other weekend for many years doing ob.

    • anonymous

      Hatton 1, this is Dr. E. I agree this isn’t a great schedule. I’m committed for this year, but the extra income is helping me pay down debt this year and next year I plan to work significantly less and focus on the highest paying moonlighting job.

      I have a solo 401k. Don’t want to have SEP-IRA to mess up the back-door Roth conversion.

      My wife and I discussed spending in December and we are aiming to spend $180k this year.

  • To my understanding, risk of burnout is high in the medical field. Working that many hours increases that risk and will be hard to sustain. Plus, with 3 kids, I would think reducing hours would be a priority. I would advise the route of working less and spending less.

  • GK

    If this were me, I’d cut spending. By a lot. In the higher tax brackets, that’s far more effective than putting in the effort to make more money just to hand over half to the federal treasury.

    But he probably won’t. I’ve observed with my own colleagues that once someone (and his family) gets accustomed to this type of lifestyle, it’s very difficult to roll it back. I have a co-worker who will likely never be able to retire despite having a combined household income of nearly a half million a year. Makes no difference when you spend all of it. The best solution is to never put yourself in this position in the first place, but it’s too late in this case.

    I make a little over a third of what Dr E makes, but I only spend about 50 grand a year total and live a happy and low stress life with lots of time off and barely any call (by choice). Life is too short to be wasted working all the time.

    • anonymous

      GK, this is Dr. E. I agree that cutting spending is much more effective that earning more money at my marginal tax rate.

      I’ve haven’t spent < $50k/yr since well residency, but there's no scenario where our spending will get that low. However, you underestimating me! For this year my wife and I are aiming to spend $180k rather than $200k. Maybe less in subsequent years? I'm not planning on working this much forever. In fact, in 2018 I plan on working less to focus on the moonlighting job that pays the best and to have more time for myself and family.

  • HospitalDoc

    I have question about 457B. In my current employer I have a 457B and would like to open a solo 401K from my Hospitalist locums job. I’m anticipating to earn 80 to90,000 dollars from this side job.

    Can I still contribute 18,000 dollars to this 401k on top of my 457B?

    I was thinking that 457B and 401k will be a different category.

    • picudoc

      The TOTAL maximum in personal contributions across all 401Ks is 18,000. While you can’t contribute a personal contribution of 18,000 to your solo 401k if you’ve already personally contributed 18K to another plan, you can do a profit share of up to 20% of your profits (up to $54,000 in 2017) into your solo 401k completely independently of your personal contribution to your 457B or any other 401K. Luckily the IRS website has a very concrete example of this.

      • HospitalDoc

        Thanks Picudoc! I was wondering if you can do it both as I can see it in the example above. It showed 401K and 457B contributions.

      • ENT Doc

        I’m not sure that’s accurate to say that the max annual contribution is $18k for both 401k and 457b. I don’t believe the 457 is included in the annual contribution limit for 401ks, 403s, etc. See the following from the IRS website:

        https://www.irs.gov/retirement-plans/how-much-salary-can-you-defer-if-you-re-eligible-for-more-than-one-retirement-plan

        It appears that you can contribute $18k to BOTH the 401k AND the 457. Please correct if I’m mistaken.

      • picudoc

        It is correct that if you are an employed physician, you can personally contribute $18K each to both your 401K and your 457b. IF you are also a contractor, you CANNOT personally also contribute $18K to a solo401K. You can however, contribute up to another $54K in profit sharing to your solo 401K (or 20% of your profits, whichever is less) completely independent of your employer’s 401K and 457b. For example, I contribute $18K annually to my employee 401K at hospital A where I am a part time employee and receive a W2. I also contribute $54K annually to my solo 401k from my profits from contracting work at hospital B.

        • HospitalDoc

          Thank you Picudoc for clarification! Did you use a third party to create your solo 401K? Thanks!

          • picudoc

            I simply opened up a solo 401K with Fidelity, since I already had all my investment accounts with them and have them managed by FutureAdvisor (reasonably happy overall). It’s pretty simple to open up a solo 401K with any such provider. As a sole proprietor, you can serve as the administrator for the solo 401k, writing the checks for contributions and then managing the investments within the account if you wish. As I’d mentioned above, I find it easier to have Future Advisor do it (there are plenty of other roboadvisors out there that also do a great job, but most require you to have funds in whatever company they have an agreement with, and FutureAdvisor works primarily with Fidelity).

    • anonymous

      Dr. E checking in. WCI had a nice post on multiple 401ks such as setting up a solo 401k if you also have a 401k or 403b through your main job: http://whitecoatinvestor.com/multiple-401k-rules/

      You may not have a 401k or 403b through your main job, but since you have a 457b maybe you do? If you do have a 401k or 403b, the WCI post is great. If you have a 403b make sure you take note of rule #7 at the bottom of the post and comments 36 and 37.

  • Great post. It’s a no-brainer: reduce the spending to the low $100s while working and below $100k while retired.
    This goes to show that beyond a certain annual consumption level, any further increases just feel like you’re on a hamster wheel: you’ll be taxed at ~50% earning the money, you’ll be taxed more withdrawing the money and you have to work longer.

    • anonymous

      ERN, this is Dr. E. With our current house I don’t think I can get spending down the low 100s for now, but we do plan on selling the place in 10 years or so as our kids get older. In the meantime, in order to make a change now we plan on spending $180k this year rather than $200k.

      I like your analogy to feeling like a hamster on a wheel. I don’t exactly feel like that, but this is definitely starting to feel inefficient when every extra dollar I earn is getting taxed at about a 50% marginal rate.

      I really liked your post on the Grand Canyon Rim to Rim hike: https://earlyretirementnow.com/2016/11/30/grand-canyon-rim-to-rim-hike/. I’m hoping to try this sometime if I get a good enough spot on the vacation list to get Christmas off so we can go out there as a family when the kids are out of school

  • I dig these comparison charts. Some of my favorite work from your early days …1 year ago.

    My old boss always said that a dollar saved is $4 earned. Here you say it is $2 earned. It is always better to save then earn, especially when thinking of the tax drag.

    I hope Dr. E (and no it is not me, though I live in a high taxed state and my first initial is E) can make the changes he needs to have a stress free future!

  • This case study reminded of the catch phrase from a comic of my youth: the poor little rich boy.

    Dr. E sounds money rich but life poor. I’m not judging the fact that he spends $200k. If he could spend $200k and never have to work a weekend, more power to him. But if the cost of that spending is missed opportunity to be around his family, I think eventually he will have a bag of regrets and of all things in life a bag of regrets should be avoided like the plague.

  • picudoc

    If Doc E can contract work in a no-income tax state like Texas or Washington, that would be huge. As everyone above has stated, spending less and saving more is always highly encouraged. If Dr E hasn’t already done this, a solo 401K would allow for socking away up to 54k in pretax contributions as profit sharing above and beyond any personal contributions to other plans. I see he’s listed as contributing to a 401K and 457B, which implies a W-2 employed status somewhere rather than pure contracting work.

    • Yup, the 457 contribution is artifact from the 4 physician posts, which were all employed docs. Dr. E could contribute $36,000 (up to $54,000 actually) to a solo 401(k) so the calculations remain unchanged.

      I agree on the no-tax state being a boon for Dr. E. Don’t forget about South Dakota!

      Cheers!
      -PoF

      • anonymous

        This is Dr. E. I actually didn’t realize that money earned in a no-tax state wouldn’t be subject to state income tax in your state of residence (or at least that seems to be the implication of these comments).

        All the work I’m doing is in my home state. I don’t really want to travel for now, but in the future as our kids get older and out of the house, moving to a state with lower taxes is definitely a consideration

  • JustStoppingBy

    I think your calculation is a bit off. Your pre-tax section should go before you calculate for taxes.

    • Thanks, JSB — taxes are calculated after the pre-tax deductions, but it would be more obvious if they were listed in a different order. The $228,000 is what Dr. E told me he paid in federal income, state income, and FICA last year. I didn’t ask him for the breakdown, but I’d bet my estimates are awfully close.

      Best,
      -PoF

  • PoF, thanks for another thoughtful and provocative post.

    I fear Dr. E is on a path described by noted economists Def Leppard: “It’s better to burn out than fade away.” This level of hustle, while admirable, is rarely sustainable.

    As mentioned by picudoc, the 54k limit is PER JOB, not per person. With 3 jobs, Dr. E could rock this legal loophole.

    Alternately, incorporating could increase savings and reduce taxable income via:
    – 401k ($18k)
    -a corporate profit-sharing plan ($36k)
    -a defined benefits plan (I’ve seen from $25k to $100k)
    -backdoor Roth (not possible for IC with a SEP IRA) ($11k)

    Read the critics (WCI) and run the numbers to decide if pros outweigh the cons.

    Finally, is Dr. E is paying an advisor or managing his own investments? Advisor costs plus loads could make all the difference between 4% and 6% real returns.

  • VagabondMD

    Great post, as always. I am, in some ways, a clone of Dr E(vil). High income (with two professional earners) and every other weekend call for 20+ years. My saving profile has generally been stronger than Dr. E, but I have had numerous large, one-time expenses (four over $40k) that most people do not have.

    Once you develop work patterns in medical careers, you do not just flip a switch and get things your way. My skill set is fairly specialized, and I can’t just drop into any old doctor job. I have been struggling for three years to create an arrangement for me to drop weekends and go part time, that do not require me to leave my family or my wife to dump a very good corporate legal job.

    It looks like I will finally have my wish, but it took more than waving a wand to make it happen.

    • anonymous

      Vagabond MD, this is Dr. E. Good luck with unloading some of those weekends next year!

      • VagabondMD

        DrE, thanks for sharing your story and dropping by to comment. Best of luck to you and your family. Take time to enjoy the kids when they are young.

  • EnjoyIt

    As an independent contractor Doc E has the option of creating a defined benefit plan for himself on top of the 401k contribution. He should easily be able to sock away $100k+ tax free and save an extra $25k+ in taxes each year. The defined benefit contribution limit is a function of age and time to retirement. Doc E is a perfect candidate for that option.

  • DrG

    EnjoyIt,

    I was thinking that too, but I was under the understanding that $54,000 is the maximum limit you can contribute to a solo 401k for 2017. How can Dr E contribute more pretax dollars than this per year, assuming he has also maxed out his HSA at $6750 for 2017. Asking the question a different way – how does an IC “max out” pretax contributions?

    • EnjoyIt

      a 401k is a defined contribution plan with a $54k limit
      I am talking about a defined benefit plan which is based on salary and can be added to a 401k. Only downside is that the 401k ends up with lower employer contribution limits to 6%. But, the defined benefit plan is designed to give an employee 80% of their income in retirement. Together contributions can be substantially higher than $54k

  • Working that much is pitiful. This may sound like a harsh opinion.
    There is no rule about how much one should work, but that much – SMH. 30 weekends.
    The time and opportunity lost will never come back.
    I know of a similar Physician who is old now and cries so his children would come visit him – he sends them first class tickets – he has a lot of money. And children, both Physicians, are busy, and can’t always visit him, first class or not. I read one of the daughters talk about how she doesn’t miss him because he was never there.

  • Dr. E is “killing it” financially, but he’s also killing himself. He has the perfect opportunity to cut back to around $80 of spending, sock away 300K per year, and be financially independent in around 6 years. Now THAT would be a killer life.

    • anonymous

      This is Dr. E. I am going to work somewhat less in 2018 and we plan on spending $180k this year. However, $80k/yr isn’t going to happen for now…

  • Like others have recommended, I would work less while also finding ways to spend less. In addition to hopefully preventing burnout, reducing your working hours allows more time to pursue and develop hobbies and spend more time with your family. This should also help you transition more easily towards your future retirement.

    I personally have tried to develop a retirement mindset while I’m still working (currently nearing my mid 30s) to help me better understand what I want my future retirement to feel like. Sort of like a practice run 🙂

    I’ve ended up making some significant changes to my daily life as a result and seem to be achieving a more sustainable work-life balance. And even during the weeks and sometimes months when that isn’t possible, I’ve noticed that I am still more successful at carving out little pockets of downtime each day.

    You can always earn more money, but never more time.

  • Dr.Joe

    Can Dr. E set up a defined benefit plan with his moonlighting income?
    If yes, than he can potentially put most of his moonlighting income in a tax deferred vehicle.

  • I really love this whole article. As someone in a high income earning field (private equity), with a few other irons in the fire (read: blogging, consulting, hustling), this is really encouraging!

    Thanks a million!

    -MS

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