[Editor's Note: This article was written by Physician on FIRE and originally published almost two years ago as he went part-time. In this article he talks about the cold, hard numbers involved in cutting back and what it really looks like. Given his success with it the last couple of years and especially as he moves toward a full, very early, retirement, this post serves as a blueprint for those who wish to cut back at work significantly.]Hello, part time position.
Feeling fairly fraudulent as a financially independent full timer, I wrote a post about a fictional Dr. Findley last summer. In that post, I came up with a somewhat convincing argument for the good doctor to consider working part time.
Trust me. The doctor considered it. His family discussed it. They evaluated the numbers and decided they weren’t quite ready. The math at the time showed them they would reach their financial goals in 2.9 to 4.5 years working full time at 2% to 8% real returns, or 4.3 to 9.4 years working half time.
*Note: the health and dental insurance is subsidized by his employer.
A Casual Conversation Becomes Serious
A while back, I was working the concessions stand at the curling club with one of my teammates. He also happens to be one of my partners in a small anesthesia group. Precisely 40% of our city’s anesthesiologists were busy slinging beers to thirsty curlers on a frigid Tuesday evening, and no, neither of us was on call.
Not wanting to blindside my four partners someday, I’ve been dropping hints about my desire for part-time or no-time work for a couple of years now. On this particular evening, I mentioned that I would be ready to go part-time anytime another partner was willing to share a job with me, not thinking that was likely anytime soon.
To my surprise, my colleague had thought this through more thoroughly than I had. He knew that at least a couple of the docs in our group, including him, would be willing to pick up some shifts if I wanted to drop some. In fact, he figured two could each pick up 20% of my shifts, allowing me to drop 40% of my current workload.
I liked the sound of that. I ran the numbers. I talked to my wife. I talked more with my group. We came up with a plan. The plan was presented to our employer, and they have now signed off. Woo Hoo!
I’ll soon be working a 0.6 full time equivalent (FTE) job, while each of my partners will be working 10% more, or a 1.1 FTE position.
I see it as a win-win, and I believe my partners do, too. Several of them still have student loans and other large ongoing expenses. I’ve got Enough to consider myself financially independent and am closing in on financial freedom. What I’m lacking more than anything is time.
The New Schedule
My current schedule, which I’ll be working for another five-plus months, is actually rather favorable compared to many physician jobs. I worked a much more demanding schedule in my first full time position, when I took call every third night and weekend, and very rarely had a post-call day off.
A month’s work at full time now consists of an average of 16 or 17 units, with a unit being roughly equivalent to a 12-hour shift. A surgery center shift is one unit; a 24-hour hospital shift/call is two units. My new schedule, which starts in October, will average 10 units a month.
In one very busy stretch, I can get a month’s worth of work done in seven days — four days at the surgery center followed by a three-day weekend at the hospital. That works out to about a 110-hour workweek, with a portion of it being home call. It sounds brutal, but it’s not much different from some weeks in residency, and I prefer to bunch my work together rather than spread it out. I may not be able to get that schedule every month, but I hope to have stretches of three to four weeks off at a time on a regular basis.
The New Numbers
Naturally, my 40% cut in hours will come with a concomitant 40% cut in pay. Perhaps I shouldn’t use the term “naturally.” Many physicians would see their income drop by a higher proportion. Those in private practice with significant overhead might have a negative income if they dropped 40% of their clinical workload. Fortunately, that’s not the case for an employed anesthesiologist.
What about benefits? Will they be cut 40%? Nope, full benefits. I’ll get the same 401(k) match, health insurance, HSA contributions, etc… that I get right now. My locker will be the same size; I won’t be downgraded to one of those waist-high, half-height lockers. Thank goodness.
The 40% I’m giving up? That’s the 40% of my salary that gets taxed the heaviest at both the state and federal level. On an after-tax basis, those are the hours for which I am reimbursed the least.
Based on a $400,000 salary, which is not my exact salary but will suffice for today’s exercise, my salary drops by $160,000, but my take-home pay drops by $92,000. I’m dropping the portion of my pay that is taxed at approximately 42.5%.
Increased Work = Diminishing Returns
The $240,000 salary results in $56,000 in income taxes after all deductions and exemptions, for a new effective tax rate of 23.3%. This was calculated using Turbotax Taxcaster for a one-income family of four, married filing jointly, in a high-tax state with $43,000 in tax-deferred investments in a 401(k), 457(b), and HSA.
Working full time, post-tax compensation (after-tax income + match / profit sharing is $298,000 per year, or $24,833 per month. Working an average of 16.5 units per month, I am compensated an average of $1,505 per unit ( ~ 12 hour shift) after taxes are paid.
Working part time, post-tax compensation is $204,000, or $17,000 per month, which works out to $1,700 per unit. In other words, I’ll be keeping an extra $200 per surgery center shift, or $400 per 24-hour hospital shift by working part time. When extrapolated over the course of a year, the 6.5 additional units worked per month as a full time employee result in an extra $7,833 in after-tax compensation, or $1,205 per unit. Compared to the first ten units worked in a month, the final 6.5 units are compensated at nearly $500 less after tax. That’s $500 lower after-tax compensation per surgery center shift, or $1,000 less per hospital shift for those shifts that bridge the gap from 0.6 FTE to 1.0 FTE.
Of course, the tax system is more gradually progressive, but I’m simply comparing two salaries. The math for the year would work out the same for someone working only the first 60% or last 60% of the year, or taking 4.8 months off in the middle.
Why wouldn’t I want to do that? Can you say “disincentive to work more”? I can.
[Post-publication update: After half a year of working this schedule, I published a six-month life and update, sharing more numbers that demonstrate the substantial tax savings and better after-tax pay per hour on this schedule.]
What Has Changed
Last summer, we rejected the part-time plan. Now, we’ve embraced it with a bear hug. Why the change of heart?
We have more money now. According to Personal Capital, our portfolio has returned 7.77% since I published that first half time post. I’ve also had 9 months of accumulation, and we are financially independent with a 3.33% withdrawal rate, spending $80,000 per year.
We are also within one year of reaching the financial freedom goal of $2,500,000, even with the part-time schedule.
We moved the goal posts. I assigned a goal of 40x expenses or $3,200,000 for Dr. Findley. Nine months of reading, writing, and contemplation have convinced me that an excessive goal is, well… excessive. We’re good to go right now with a 3.33% withdrawal rate, and a 3% withdrawal rate is within reach in a year or two.
We have new “passive” income. I’m referring to the money that the blog earns or is capable of earning. It would be disingenuous to completely ignore it for a couple of reasons. For one, it is anything but passive, and doing it well takes a lot of time. Also, while I will be donating half my profits, I will be keeping the other half, and that could make living without my physician income easier, even if it is money I shouldn’t need based on any retirement calculator.
Our friends at Our Next Life pointed out the “elephant in the room” for those of us who write about FIRE while monetizing a blog. It seems appropriate to acknowledge it rather than the 800-pound gorilla doesn’t exist. Or was it an elephant? Does it matter? A bear market could set us back (elephants, gorillaz, and bears, oh my!). An immediate drop of more than 20% would set us back to a non-FI status at the $80,000 a year allowance (although we only spent $62,000 in 2016 and $61,000 in 2017).
Such a drop wouldn’t be disastrous. I’ll still be working, investing at discounted valuations compared to today, and I could continue to work beyond 2019 if our financial situation calls for it.
Besides, I don’t believe that a bear market can take away your financial independence. The 4% Rule studies account for exactly that scenario of a poor sequence of returns. That’s why it’s not the 6% or 8% Rule.
[Post-Publication Update #2: The markets have been kind enough to us and I plan to leave my clinical job late summer, 2019]
Walking the Walk
In the Dr. Findley post, I described Dr. F as talking the FI talk, but failing to walk the walk. In other words, he was touting the benefits of financial independence, but not taking advantage of them himself.
Technically, I’m not going to be living more. If anything, I’ll be sleeping a little bit more, awake a little bit less, and continuing to live precisely 168 hours a week. But I will do more interesting things with my time.
A couple of weeks ago, my wife and I sat down with our boys’ elementary school principal to nail down just how much school the boys could miss while remaining enrolled in good standing. To our surprise, there was not necessarily a number of days that would make them truants.
As long as we remain connected and engaged with the school, and getting some schoolwork done while away, he saw no problem with them missing a few weeks each trimester.
Let the family slow travel begin!
What do you think? Have you going part time or have you considered it? Why or why not? Comment below!
An excellent post about the transition and the progressive tax system that can affect one’s incentive to pursue marginal dollars. Once you add in social security and self employment taxes, Medicare and surtax, state taxes, and local taxes …they can easily break $100,000.
After selling the big house, and paying off the retirement cabin, MONTHLY expenses with no mortgage, no water bill, no yard care and snow removal fees, at the paid off mountaintop cabin on 25 acres. With two kids at home per month:
Property taxes $250
Electric. $250
Groceries $800
Internet. $120
Gas. $200
Cell phones. $300
Insurance-home $100
Car insurance. $300
Car maintenance/repairs $100
House maintenance/repairs $300 (~1%/year).
Life insurance. $100 (drops out at 60).
Entertainment. $800 (dining out, etc.)
Vacations. $800
Misc. $500
Health insurance provided by employer if working or purchased for $1500 a month until Medicare at 65.
Note this includes $10000 a year for entertainment and $10000 a year for vacations and $6000 a year for miscellaneous. This is about $6000 per month in expenses plus taxes.
So $100,000 a year in income – $8739 in federal taxes and $7650 in social security and Medicare (7.65%) taxes and $4025 in NC state tax (5.75%) = about $80,000 after tax = about $6500 per month (and gives a $6000 buffer). With my pension of $25,000 a month, I only need to “make or pull” $75,000.
The main difference is about $100,000 less in taxes, no mortgages, and a downsized job and home. The place where I work now will likely allow my to see some patients via telepsychiatry and I can make enough to run this budget working very part time with minimal withdrawals from retirement accounts as I also have a small pension that I can take at age 60.
I’ll be living on less than what I pay in taxes per year now…
If you want to have another ~3k of wiggle room in your budget, you should look into changing cell phone providers. Look into mint mobile and/or red pockets. Family of 4 should be able to cut that bill down to ~$60/ month without any compromises assuming you own your phones outside of any contracts.
And don’t need coverage in wilderness areas.
VerizonFamily plan with 5 phones
Oldest pays me $50 for hers so it’s $280
Still on purchase plan for 4 phones ($120/month)
When the phones are paid off, it will drop $120
I need Verizon on the mountain.
Your in luck! For $19/month per line, you can use Verizon towers, get unlimited talk and text and 2gb of LTE.
Use redpockets but get the Sim card through the redpockets eBay store for the lowest rates (purchase 12 months at a time)
The only caveat is that you can’t use mobile hotspot function with your data allowance
That’s a major caveat for me. But I also get to pay for most of my internet and cell phone bill with pre-tax dollars.
This post briefly mentioned an important caveat for private practice physicians in regards to FI and cutting back—it doesn’t work well, especially for small groups. Let’s assume a practice overhead of 60% gross revenue with 5 equal partners. Each generates $1,000,000 in revenue from clinical practice. So practice overhead is $3,000,000, which, depending on the specialty, is mostly fixed expenses (they won’t change if someone starts working less). So let’s say one of these partners wants to cut back 40%—start working 3 days a week instead of 5. That partner’s revenue will decrease to $600,000, which is equal to his expenses! So the only two outcomes this leaves is for a) the partner to work part time for no income (not feasible) or b) for his partners to all take a pay cut by taking on part of his overhead (how do you think they will feel about this?). These remaining partners would much rather have a new partner working full time than to subsidize the current one’s lifestyle. So outside of a rare scenario where it is worth it to the remaining partners to at least have some work covered by this part time partner, as soon as they can replace him with a full time partner, they will.
On a more global level, this brings up a downside to the FIRE movement. While it’s great to put physicians back in a position of power by generating the ability to walk away from less than desirable employment positions, it really does damage to private practice partnerships to have a new generation of physicians who only want to work full time for 10-15 years when the current partners are on 30-year full time tracks. Economies of scale/low relative overhead allow hospitals and hospital-based groups (EM, Anesthesia) to accommodate “take it or I’m gone” part time demands, but many private practices, especially small ones with large overhead ratios, simply cannot do it.
I wouldn’t worry about that. What percentage of docs do you suppose are in a position to FIRE in 10-15 years? I’ll give you a hint, it’s a single digit number not a “generation.”
Great points. I think there’s definitely a role for locum tenens in situations like these.
Locums works better in some specialties than others, of course, but locums could help fill the gap for the 0.4 or 0.5 FTE the doc wants go give up.
If that’s not an option, the doc can be replace with a full-timer and she / he can work locums part-time.
I am fortunate in that it worked out the way it did in my group.
Cheers!
-PoF
What’s really interesting what changed in the calculation over the past year – tax reform
2018 Tax Rates – Standard Deduction $24,000 2017 Tax Rates – Standard Deduction $12,700
10% 0 to $19,050 10% 0 to $18,650
12% $19,050 to $77,400 15% $18,650 to $75,900
22% $77,400 to $165,000 25% $75,900 to $153,100
24% $165,000 to $315,000 28% $153,100 to $233,350
32% $315,000 to $400,000 33% $233,350 to $416,700
-In the old way, OP needed to drop $200,000 to save 5% effective. Today, OP only needs to drop $90,000 to get to 24% bracket for a 9% effective savings.
It’s a strange phenomena and do wonder if more mid-career high earning docs who’ve made it to FI with the significant Bull run aren’t all thinking the same.
Being in primary care, we still saw a good chunk of tax relief from the top 80K drop 9%. without changing anything. — that effective improved of savings potential (though we blew it on the Tesla 3 :0)
Exactly.
They put in a hard break that makes a late career doc almost want to make less….
How do you calculate the maximum possible contribution?
Salary + Profit Sharing – taxes – health insurance.
For what?
On the chart above under”Saving % Calculation” there is row labeled “Maximum possible contribution” – so I was wondering what that referred to and how to calculate that value
Thanks!
Maximum amount of money that could be saved for FIRE each year.
Inspiring and informative.
I went part-time over a year ago.
It has been wonderful. It allowed me to have more “life” in my life. I don’t battle wRVU production and exhaustion. I spend more time on my hobbies, with my family, on my health, and investing. Banking and shopping are so much easier during the weekday.
The change added tons of enrichment with minimal financial impact. As this post notes, the lost dollars at the top are the least valuable, mostly because of the higher taxes.
Congratulations! I have never worked full time.
There is a great return on happiness with free time.