4 Physicians Revisited: Dr. A & the Impact of Part-Time Work
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.
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 postions 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.]
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!