Today, we’ll add another chapter to the saga of the 4 Physicians. We’ve already explored the benefits of Dr. Anderson continuing to work beyond attaining FI. In today’s remix, we’ll revisit Dr. A and see how things might pan out if she were to work part-time.
To recap, Dr. A was relatively frugal when compared to her colleagues, spending $80,000 a year on a $300,000 household income, which gave her a gross savings rate of nearly 50 percent.
Content to drive her Honda, live in a nice if not extraordinary home, and send her children to well regarded public schools, Dr. A thought perhaps she was putting in too much time at work. Working 50 to 60 hours a week for about 10 years was one way for her to become financially independent, but it couldn’t be the only way.
Could she make it happen without sacrificing so much time while her children were young? Could she cut her hours and stave off the physician burnout that was starting to gnaw at her well-being and affecting her more experienced coworkers more noticeably?
The Impact of Part Time Work at Different Times
Let’s take a look at the financial ramifications of Dr. A taking a part-time job with half the pay, while keeping her annual spending constant. Dr. A could go part time from day 1, or decide to go part time after some years of full-time work, let’s say four or eight years. This gives us four scenarios:
- Dr. A starts her career working part time.
- Dr. A goes part time after four years full time.
- Dr. A goes part time after eight years full time.
- Dr. A goes part time after she has achieved FI.
As in other exercises, the assumed real return was 4% real until our Doctor decided to enact change. When Dr. A works part-time from day one, she more than doubles the length of time to FI, as compared to full-time work. She is looking at a 20 to 29 year path to FI with real returns of 2% to 6%.
Working just four years full time first time gives her a shorter route, shaving six to eight years off her path to FI.
Allow me to repeat that: working the first 4 years full-time rather than half-time can shorten her working career by six to eight years. And those four years of full-time work come when she is young and used to working harder as a resident. I would take that trade-off 11 times out of 10.
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Full Time Work Has Its Advantages
If she works eight years full-time before going part time, she’s already got a $1.5 million dollar nest egg. An additional three to six years of part time work will get her to FI.
As she approaches her FI goal, going part time has a lesser effect. It will delay FI certainly, because she is only contributing 1/3 of what she could when working full time. But the difference is more linear. One year of full time work is roughly equal to two years at half time. Some of the heavy lifting is being done by her $1.5 million portfolio bulit up over the first eight years of her career.
It’s worth noting a couple more differences in the part-time versus full-time scenarios. Note that at part-time pay, Dr. A doesn’t have money left over to contribute to a taxable account or a backdoor Roth IRA. These are investments that are very useful for an early retiree.
Also, she is contributing less to the 529 accounts for her children. In this exercise, we are looking at a $150,000 income as a part-time income. The math would be identical if we were comparing two different specialties or jobs where the income differential was 2:1, illustrating the financial benefit of a higher paying position / specialty.
The Benefit of a Working Spouse
In the first set of scenarios, we assumed that Dr. A was the sole provider (not to be confused with the Soul Provider). How might the different scenarios change if her spouse was working full time?
Keeping household income the same at $300,000, we’ll assume Dr. A’s full time pay in a primary care postion is $220,000, while her spouse earns $80,000 and maxes out a 401(k).
With a gainfully employed spouse earning $80,000 and Dr. A in a part-time position paying $110,000, their household income is $190,000, compared to $150,000 in the first round of number crunching. As a couple, they will achieve FI in a maximum of 20 years in the “worst-case scenario” provided, which is Dr. A working part time from day one and 20 years of 2% real returns.
Notable differences from the “sole provider” scenarios stem from the extra $40,000 in salary. The couple is able to fully fund a backdoor Roth IRA and contribute more to the 529s. Also, the 401(k) portion of the nest egg will be double, as each income earner can contribute the $18,000.
What did we learn from this exercise?
- Part-time work early in one’s career has a profound effect on delaying FI. No earths shattered with that revelation. Money needs time for compound interest to work its magic. Still, I was impressed with the difference that even a few years of full-time work can make.
- Taxes on a $150,000 income are surprisingly low. Plugging the numbers into TurboTax TaxCaster after reducing taxable income by $46,000 (deductible insurance, HSA, 401(k), and 457(b) contributions), with a spouse and two children, a mortgage and $5,000 in charitable giving leaves you with a 4-figure federal income tax. The progressive nature of our tax code is on display here.
- Going part time as I approach my financial goals before an early retirement may be a viable option. My competitive drive makes me want to keep the pedal to the metal, but in a few years, my portfolio should contribute nearly as much towards the target as my salary will. More importantly, working less could ease the transition to not working at all. The financial piece is easy to calculate, but there are myriad psychosocial aspects to ending a career that I probably won’t understand for myself until I start to experience them.
[Post-publication update: I have decided to be more like Dr. A, and have now dropped to a part-time position as of October 1, 2017. For details into my decision-making process, and the surprising math behind the tax code that makes it worth my while to work less, see my post entitled So Long, Full Time Employment.]
Interested in reading more about part-time work as a physician? I”ve got you covered.
What did you learn from our analysis of Dr. A today? Do you work part-time, or are you considering it as an option prior to retirement? Commence commenting!
15 thoughts on “4 Physicians Revisited: Dr. A & the Impact of Part-Time Work”
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I was looking at it a little differently. Say someone is close to FI but doesn’t want to fully retire and wants to work part time till 65. They know that at 3% or 4% they may not be as happy or may want more money but can’t really pull that out safely for over 40 years. So instead they work part time for the next 15 years and pull out 2% for rest. At that pace they should be able to increase their withdraw amount to 4% when they fully retire at 65 and using social security along with it continue to maintain the same lifestyle. Off course after a certain age they may not even need all that money.
You raise several excellent points that are often ignored, SFI. Spending does tend to decrease for many sometime around age 80, when travel slows down and spending on luxuries declines. Part-time work to supplement or completely cover spending is a great way to allow the nest egg to grow while enjoying a life less harried. Doing so will allow one’s investments to grow until the 3% or 4% can completely cover necessary and discretionary spending in a full retirement.
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What is considered FI? One million, two million, three?
It depends on how much you spend annually. Explained here, but based on a safe withdrawal rate of 4% per year dictates having 25x your annual spending saved up to be considered financially independent. If you (and your family) can live on $40,000 a year, it’s $1 million. If you spend $80,000 a year, then $2 million. Spending of $200,000 a year requires $5 million. If you’re more comfortable with a 3% withdrawal rate, increase your number accordingly.
I’d like to go back to working part time as my kids are getting older. I’m working out what I want to do however.
I started working part-time at 56. The transition is psychologically hard. I could not agree more that saving early in your career is what gives you options later in life. If you do go part-time get ready for the envy and questions that your fellow docs will have.
I’m curious as to how the transition was difficult psychologically. I would guess it would be easier than quitting cold turkey. I also assume the difficulty is tied to how much of your identity is tied to your career. The more interconnected they are, the tougher to let go.
Interesting that colleagues would have the envy and questions. Envy seems misplaced; the sentiment should be admiration or respect. You can refer them to this site for further explanation of how such an outrageous move could be possible. 😉
Another great illustration.
The breathtaking progressiveness of the tax code never fails to amaze me. This has in part influenced my decision to work like a dog in my first 5-10 years (extra shifts. moonlighting, etc…), and put away as much as possible into my defined benefit plan on top of maxing my 401k/PSP, HSA, backdoor Roths, and 529s. It is more tax efficient to work harder and supersave into a DB plan in the early years and then relax and work part time later in one’s career. This not only lowers my career effective tax rate but increases my investment compounding time.
I figure (hope) the upfront savings and pain will be more than made up by the later years of part time work, earlier retirement, and/or increased estate to my children.
Of course, there are limits to everything to remain happy. I try to do mostly extra night shifts so I can continue to coach my kids soccer games, always be home for dinner and bedtime, and be a part of everything in their life, but occasionally I do take a break when I feel burnout or feel like I’m too tired to be at my best on the weekends. My wife probably bears more of the brunt of the extra shifts.
As physicians though we are trained for hard work and sleep deprivation, and hard work now pays off many fold down the road. Just takes comittment and will power.
Good feedback, Gipper! It’s clear that you’ve got an excellent plan and the work ethic to make it work for you and your family.
I worked a lot of extra shifts and volunteered for plenty of extra call in the first 5 years of my career. It really paid off well, with the markets being kind to me in the 4 or 5 years that followed. Best -PoF
Are we assuming she finishes residency with no student loans? Or pays them off with the income left over?
That’s a great question / point to bring up. The average debt of a med school grad is about $180,000, and only about 15% of graduates have 0 debt. There is such a wide variation from 0 to $400,000 or more. In the original 4 physicians post, I established a baseline that these physicians were debt free but hadn’t started saving for retirement yet. The assumption being that they were among the 15% that graduated debt free, or that we are picking up their story after they had worked a few years and put all free money towards retiring that debt. It’s not necessarily the most realistic, but gave me a starting point where the physicians were on equal footing with spending being the only variable.