[Editor’s Note: This is a republished post from Physician on FIRE, a member of The White Coat Investor Network. The original post ran here, but if you missed it the first time, it’s new to you! This one is about the impact of part time work on your quest for financial independence. Enjoy!]
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 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.
Alternatively, two to three years of full time work at that point will get her the same $2 million dollar nest egg required.
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 built 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
Keeping household income the same at $300,000, we’ll assume Dr. A’s full time pay in a primary care position 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.
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If Dr. A works full time the first four years, they will be FI around five years earlier. The longer she works full time, the less impact each additional year has. Extending her full-time work from 4 to 8 years only shaves off one to four years in this scenario. Not such a great trade-off at this point.
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 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 worthy my while to work less, see my post entitled So Long, Full Time Employment.
What did you learn from the analysis of Dr. A today? Do you work part-time, or are you considering it as an option prior to retirement? Commence commenting!
I’m not sure of the math here. Take the scenario in which Dr. A retires after 8 years: her portfolio of $1.491M returns almost $60,000/year at 4% real. If she invests that and an additional $51,000 in new funds, how could it take her 12 years to reach her savings goal of an additional $508,000? It seems to me that with compounding that actual time should be closer to 4-5 years to reach a total portfolio value of $2M.
Correct. It’s 4.2 additional years to be exact. She works full time for 8 years and part time for 4.2 years for a total of 12.2 years in that scenario.
The numbers at the bottom are the total number of years worked, not just the part time years.
Best,
-PoF
Good to read this (again in my case).
It is surprising to see the gross and net savings rate are similar at the lower income levels. They are VERY different in my world.
I prefer pre-loading the 529 plans. I think you get more benefit in the long run rather than an annual contribution. I have a friend who puts $100K into each child’s fund as soon as they get a social security number. That plan has worked well for him.
Maybe I didn’t read these carefully enough PoF, but are you currently like Dr. A (post FI, part-time) or like Dr. F (part-time with high income?)
For those of use who don’t yet have kids (but soon will in my case) could you elaborate on the concept of “pre-loading” the 529 plans…is this allowed in all states, how do you do it, what are the pros/cons etc.? Thanks!
Yes, allowed in all states. In general, wait until the kid is born (although you can open it in your name or a nephew or something and then change the beneficiary when the kid is born) and then put in $14K for you + 14K for your spouse x 5 years ($140K) that first year. You can’t contribute again for 5 more years.
Thank you, wealthy doc. Personally, we didn’t front load the 529s because we had our boys when I was just starting my career and didn’t have the spare $100,000 to do it. Also, we could get a state tax deduction on up to $10,000 of 529 contributions, so that’s what we started with.
I suppose I resemble Dr. A & Dr. F (https://www.physicianonfire.com/halftime/) but I wrote the latter with myself in mind. It took 9 months from writing that post to actually deciding to cut back. I’m now working 40% less for a 0.6 FTE position and loving it.
Cheers!
-PoF
Granted. My friend that I mentioned happened to be an orthopedic spine surgeon so he just took his bonus from that month!
Great comparison. In my case, when I reached FI I worked part time for 3 years before stopping medicine. It’s amazing how much better off I was after those 3 extra years of part time work. 3 years to leave things growing makes a huge bump in the nest egg.
The decision to work part time is not all numbers. Free time and flexibility are invaluable in maintaining job satisfaction and combating burnout. In fact, working less may actually make you WANT to keep working longer! Also, keep in mind “full time” for many physicians is actually overtime for most workers.
Good point. Full time in the normal world is 2000 hours. I hope to cut back to 2 of 3 weeks but that will still be 2000 hours.
I couldn’t agree more KM.
I enjoy work so much more after a few days off. With plenty of rest in between some of those things that used to bother me don’t affect me to much.
Hey thanks for the great posts…. quick question.
How are the “all contributions” and “max contributions” categories calculated?
I’m making my own spreadsheet, and can’t seem to make the numbers line up. Thanks!
You can download the Excel sheet to dissect it from here: https://www.physicianonfire.com/calculators/
I might not have used the best descriptors, but didn’t want to take up too much space — they’re the numbers I use to calculate savings rates.
Best,
-PoF
Thanks for sharing!!
Love this idea – above – working part time also delays pulling out money from accounts and provides some health insurance options if you can buy from employers. I am planning on this strategy – I am working 60+ hour weeks now and could see dropping down to 20ish when college is paid for x 2 offspring.
Sounds like a great plan. I’m doing that now since retirement and college are both fairly well funded, even if college for our oldest is nearly 10 years away.
Cheers!
-PoF