Today, we’ll investigate the ramifications of a completely different scenario: taking a break.
As we have done in our other revisits to our 4 physicians, we will alter their fate at a point 11 years after we were first introduced to them, the point where Dr. A became financially independent.
Dr. C Takes a Sabbatical
So Dr. Carlson has been making a good living, working hard, and starting to feel that 11-year itch. Symptoms of burnout are beginning to manifest. She is struggling to find joy in the day-to-day grind. Dr. C decides to take an extended timeout from her career.
After some discussion, Dr. C is able to negotiate a 1-year absence from her job. For 12 months, she will have no earned income. Intelligently, Dr. C plans to take her sabbatical from July to June in order to earn a half year’s income in each of two calendar years. By doing so, she will be able to continue contributing to tax deferred retirement accounts each year, while paying a much lower tax bill in two consecutive years.
To keep things interesting, we can compare the outcome with a choice to take a full calendar year off from January to December. An additional comparison can be made by having Dr. C begin her career one year later, showing us the cost of deferring for a year prior to beginning medical school, or requiring an additional year to gain acceptance.
I can’t tell you how Dr. Carlson plans to spend her year off. I can think of a whole lot of fun and relaxing ways to spend that time, but I’m not Dr. C. Maybe she sails around the world, from one Island In The Sun to another.
Perhaps she never leaves the county, and volunteers at the local free clinic to keep up her skills. Hopefully, she will take advantage of the sabbatical to find time for personal growth, travel, sleeping in, and connecting with family and friends.
The Cost of a Sabbatical
I do know that Dr. C has some fixed expenses and she’ll find ways to spend money with her newfound free time. To keep the calculations simple, we’re going to assume that her family’s expenses remain the same throughout her year off. That is, the budget will remain steady at $160,000 per year in our calculations.
In the July to June year off, Dr. C has taxable income each year and is able to contribute to tax-deferred retirement plans. To cover her costs though, she must sell some from her post-tax accounts each year to make up for a $74,500 shortage. I say post-tax accounts, rather than taxable account, because the taxable account won’t be quite enough to cover the $149,000 she needs. Thankfully, Roth contributions (but not earnings) can be withdrawn tax-free and penalty-free.
In the January to December calendar year off, she is unable to invest any money with no taxable income (although her already sizable investments will continue to grow). To cover her spending and health insurance, she’ll have to come up with $165,000 from her post-tax accounts.
Is $5,000 realistic for health insurance for a family of 4? Probably not, but I’m keeping the number consistent, assuming she has an HDHP with HSA, and being a few thousand off means little when we’re looking at spending of $160,000 a year and a nest egg in the millions. If health insurance costs her $15,000, she should be able to trim $10,000 from her fat $160,000 budget to cover it.
Here’s a look at what these years might look like for Dr. C. The first column is without a sabbatical. The next two columns represent two six-month intervals in a sabbatical spanning two calendar years. The final column has Dr. C taking one calendar year off.
It’s incredible to see how much taxes decrease with a lower salary, as we saw when looking at Dr. A going part-time. Of course, taxes are even lower when you have zero salary coming in, a situation exists when taking a January to December calendar year off.
There would be some long-term capital gains realized when selling off the taxable account, but not enough to push her out of the 15% tax bracket, so she won’t pay any taxes on those gains (or qualified dividends), a fact emphasized in one of my favorite posts, The Taxman Leaveth.
How will the year off affect her nest egg in the coming years? The following table shows us its value at our starting point, 11 years into her career (or 10 with the 1-year delayed start), at 13 years (after the sabbatical), 20 years, and finally when realizing FI after a 28 to 30-year career.
As we know from the original 4 physicians, maintaining the status quo will allow Dr. C achieve her FI goal of $4 million after about 28 years, most likely approaching age 60.
The Timing of a Sabbatical Matters
Taking the June to July sabbatical makes her $214,000 less wealthy at the 13-year mark (shortly after completing the sabbatical), and $283,000 less wealthy at the 20-year mark. Her FI target of $4 million is achieved a few months shy of a 29-year career. In other words, the 12 months off delayed her potential to retire with the same nest egg by about 20 months.
The January to December sabbatical costs her a bit more, because she is unable to spread her income out over two calendar years and take advantage of lower tax brackets in those years. She is also unable to make any tax-deferred retirement contributions or receive a match in her year off. That difference ends up costing her an additional $73,000 after 29 years, adding about 3.5 months to her time to FI when compared to the June to July sabbatical. In this scenario, the 12-month sabbatical extended her time to FI by 23.5 months.
For the sake of this comparison, I’m assuming her year off in her early twenties was a break-even year. No savings, no debt, just a year of coasting, most likely with at least a part-time job. Therefore, FI is delayed by exactly one year, and she will always be one year behind where she would have been if she had not hit the brakes for a year before starting down the path towards becoming a physician.
In essence, future Dr. C borrowed one year from retirement and used it early in life. During deferral, she has youth and health on her side, but very little money. Foregoing deferral, she will be able to retire a year earlier, but won’t have youth, and may not have the health she enjoyed in her twenties. She will have plenty of money, though!
Having looked at the numbers, does a sabbatical appeal to you? Would you take a mid-career sabbatical over a deferral year? Sound off in the comments section below.
14 thoughts on “4 Physicians Revisited: Dr. C & the Impact of a Sabbatical”
Stumbled across this while on my gap-year before medical school! Love the site, definitely inspiring me to start saving young and reaching FI before my peers. I’d be interested in that gap year calculation you did, and might challenge some of your assumptions. Depending on the person of course, I have a hunch that it doesn’t translate into 1 year off – 1 year increase, but is actually closer to 1 year off 8 month increase. It could even decrease time to FI.
First, most students now work full time during their gap year, and saving money can shave quite a bit off of medical school debt. Second, gap years tend to strengthen applications. Friends of mine with similar applications before my gap year had far fewer choices in schools than I had, and I was offered a very substantial scholarship (75% tuition!) to my dream school because of my work. Through these factors a gap year could substantially decrease the cost of medical school, increasing ability to save in residency and in the first few years as an attending, possibly leading to a younger age of FI than if someone had gone straight through!
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Just stumbled across this while sitting in an airport lounge in Singapore, 12 months into a 15 month sabbatical around the world with my family of 4 (kids 8 and 10). I’m 7 years into attending as a hospitalist. What made it work for us, without significantly effecting our early retirement plans are 1) a bunch of accrued paid leave (from the government) 2) renting our house on AirBnB for a significant profit above mortgage (which is why we are gone for 15 months- to capture two lucrative summers of renting) 3) traveling to parts of the world that are cheaper 4) the tax savings mentioned in this article. Our travel costs have been about $200 per day of mixed, not very frugal, travel which is significantly less than our budget at home (including kids school costs). I’d highly recommend it to anyone thinking about doing it!
I don’t know how much of the site you’ve discovered, but we plan to do something similar next years when our boys are 8 and 10 years old. I’ll be 13 years into my career, and we’re calling it a sabbatical, but it may be a permanent one.
I need to hit you up for a guest post. Would love to hear and feature more of your story.
I’m really glad you retweeted this post. It was in my mind for the past few months after I recently decided to leave attendinghood (4 yrs in) for a July to July fellowship in a sub sub surgery specialty. We won’t make more money with this training but I hope to increase the enjoyment and quality of life while I practice. It is either the best or worst decision of my career! It will be a 90% pay cut and we will hopefully bookend 3 -6 month total on each side to travel/missions and/or locums. Fortunately, our fixed expenses are very low and we are not *planning* to dip into the brokerage account.
Best of luck to you on the new venture! Not an easy decision, I’m sure, but you seem to understand that money isn’t everything.
Happy to have stumbled upon this post! My husband and I are thinking of taking a sabbatical in about 2 years. Both physicians and will be in about year 8-9 of attendingship by then. One of the main reason for the timing is our daughter will be in the year just before kindergarten and would likely be the last year we can easily take her out of the school system. I’m Chinese and we are hoping for her to gain some fluency and cultural revelance. This post helps us to understand the financial implications (outside of merely the job security aspect). However, the experience to be gained doing this as a young family (rather than an older couple without a kid after we reach FI), would be completely different and irreplaceable in the future. Perhaps the financial impact can be lessened if we were to save and invest extra during the year before and after the sabbatical.
FYI, I also took a delay year between residency and fellowship and traveled for 6 months solo around the world (less than 20K spent total and saved up for this during residency). Remains one of the best decisions I have ever made and changes my outlook in life. We talk about opportunity cost financially, but if all living is delayed into after FI, there is an opportunity cost in terms of personal growth as well. Happiness and widsom from some experiences also compound like money over time.
Good evening, CH!
I’m glad to hear you have experienced one excellent sabbatical, and I agree that the timing sounds just about right for another. Compound happiness and compound wisdom — sounds amazing!
Our current plan is to take an extended sabbatical in 2018 and determine within a year whether or not to make it more permanent.
BTDT, $650/month family of four HDHP plan. Our monthly budget $5k-$5500/month. $2400/month rent. Pretty much same lifestyle as pre-sabbatical except our mortgage was higher and other expenses were higher but we moved from HCOLA to lower COLA. And our dog got sick and needed chemo so his expenses blew some of our budget out of the water. He’s still alive and well.
We very consciously did this sabbatical for DH to change careers. Did I mention he also during this year did a bootcamp and spend $16k on tuition? We’re in it for the journey. We’re fine and he felt like he was missing out on the kids early years working while I stayed at home. This way he got to enjoy them and so what if he works at extra year at the end?
My goal is he stops working at 50. I am not sure what his goal is? I know he’ll be able to stop in less than 5 years if he chooses, but he won’t. Type A personality. He’s not even about spending money and driving fancy cars or vacations. He just wants to be able to do work he finds interesting. We’ve decided the money isn’t for FIRE it’s for FU so he can pick and choose jobs.
I’d like to go back part-time and do something to fill the time.
Muy bueno, OmWfT! When your sabbatical is dollar neutral, you are simply borrowing years from your much older self and giving them to your much younger self. Most older selves will tell you it is a great trade to make.
Living on 1/6th of your current salary, you will be FI in short order. Keep up the great work!
“Most older selves will tell you it is a great trade to make.”
You are correct, sir. I did this and I am now a much older self.
Great article! While I’m not a physician and I don’t make 300K/year I can relate to the 1 year delay. I myself took 3 years post undergraduate to learn spanish, travel and work part time before going to graduate school to be come a PharmD. Although I delayed my earnings, I neither saved a ton nor created consumer debt. Those experiences were worth so much more than the now 350K in debt I now have after obtaining my degree. Now, I’m happily making a mere 150K and living on 25K on my way to FIRE.
Wow… can you post some numbers on a 6 month sabbatical? Looks like I might want to look into this in a few years!
Hello, MM. The numbers would vary based on a couple variables. A 6-month sabbatical that spans 2 calendar years would probably put you in a better tax situation than taking 6 months off in one calendar year. Also, it depends how close to the end of your career you are. The further you are from retirement, the greater the opportunity cost of not adding to the nest egg (and drawing from it) for those 6 months.
A rough estimate based on what we learned from the full year sabbatical, is that a 6 month sabbatical taken mid-career would add about 9 to 12 months to the time it would take to reach a target dollar amount, such as the amount required to call yourself FI (25x expenses).