[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! It’s a discussion of just how much increased income can speed up your journey to financial independence. Enjoy!]
4 Physicians Revisited: Dr. C & the Impact of Increased Income
It’s time to revisit another of our 4 physicians. We’ve seen what might happen if Dr. Anderson keeps working while FI, and the consequences when Dr. Benson upped his spending. It’s Dr. Carlson’s turn to undergo a life-altering event. Let’s make it a good one.
Dr. C now lives the life she used to daydream about when she was an overworked intern. At least, she spends the money she used to dream about spending. The life, well, it’s pretty good, but when she looked at the PoF‘s projections of a 25 to 30-year career to reach financial independence, she wasn’t so sure this was the dream life.
Sure, she enjoyed being a physician, but as she was stuck in the 40-minute commute home to her cushy suburban enclave of Joneses, she now daydreamed of being home for dinner on a regular basis, having her weekends free, and attending all her childrens’ piano recitals, parent-teacher conferences, soccer and hockey games.
Dr. C Boosts Her Physician Income
Dr. C was smart enough to know that her best bet would be to increase her annual savings and work towards FI. There are 2 sides to the savings equation, income and spending. While she would like to decrease spending, her family had become accustomed to the good life and they loved their 4500 square foot home, which happened to be in the best school district in the region according to all her neighbors.
Dr. C decided to work on the income side. She considered picking up some locum tenens work, but that would further reduce her time for herself and her family. Hopefully, there’s a better option for her.
Many hours into a recent happy hour, Sometime Around Midnight, Dr. C’s good friend and former residency colleague confided in her about an impending retirement in her private group at the suburban hospital not far from Dr. C’s home. Dr. C had stayed in academics because she loved teaching and research, but the clinical demands were increasing every year, leaving little time for the good stuff. Her job looked and felt like private practice, but with academic pay.
Dr. Carlson decided to make a career change. She jumped ship from the University of Tertiarycare to join her buddy in private practice at Our Lady of Suburbia. With an improved payor mix on the outskirts of the metro, Dr. Carlson was able to work fewer hours, have a shorter commute, and earn an additional $100,000 a year.
How will the raise affect Dr. C’s financial future? To be consistent, we’ll assume Dr. C made this change 11 years after we first met our 4 physicians, the point at which Dr. A achieved financial independence.
Without the raise, Dr. C was looking at another 14 to 23 years before FI, a career spanning 25 to 34 years. With the $100k per year raise, she can shave off 3 to 7 years from her working career, assuming she continues her rather spendy ways with an annual $160,000 budget. In 10 to 15 years, she will have the $4 million she needs to be FI with this level of spending. Taxes ate up $39,000 of her raise, but she was able to increase her taxable investments by $61,000 a year, increasing her overall savings rate substantially.
Dr. C Can Also Make a Lifestyle Change
What if she also worked on the spending side of the equation? After a family get together with the Bensons, Dr. C and her family decide they can be comfortable and happy with a $120,000 a year budget like Dr. B and his family has. How do the numbers play out?
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By lowering her annual spending, Dr. C needs “only” $3 million to call herself FI. This fact, along with increased contributions to her taxable investment account, will shave another 4 to 7 years off of her working career. By increasing her income and decreasing her spending, she is in shape to retire 7 to 14 years earlier compared to maintaining the status quo. That’s about a 60% reduction in years left to FI, or about 10 years more of carefree living at an age where Dr. C is fully able to enjoy her new found freedom.
In this exercise, we saw a nearly identical effect when Dr. C got a $100,000 raise as we did when she cut her annual spending by $40,000. Why? With the big raise, nearly 40% of the raise was withheld for federal and state income taxes. In the case of decreased spending, not only was she saving more, but she also had an FI target that was $1 million lower. Changing 2 of the 3 variables in the FI equation has a dramatic effect.
Of course, neither of these changes come easy. A $100,000 raise won’t be out there for many, but remember we are looking at household income. Perhaps some of the increase could come from a spouse returning to work now that the kids are in school. And it doesn’t have to be a six-figure raise. Any increase in savings will alter the equation in your favor.
Similarly, a 25% reduction in spending isn’t likely to happen overnight. But it could. Dr. C had a $48,000 mortgage. When the last mortgage payment is made, she’s looking at a 30% reduction overnight. If we were to look at our budgets, we should all be able to find some low hanging fruit. Of course, trimming the budget isn’t required. It’s just one tool in the belt to help us achieve financial independence and the fringe benefits that go along with it.
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What do you think? What would you do if you were in Dr. Carlson’s shoes? Increase income? Decrease spending? Or perhaps both or nothing at all? Comment below!
Our Lady of Suburbia! Worth the entire read right there. Wondering what POF and WCI like as their favorite budget tools/apps.
My budget predates apps. We still use Excel.
I use Mint.com to track spending (admittedly only started shortly before I started a blog — mostly to prove to myself I was truly FI). Personal Capital tracks my balances in investment accounts, but I also update a spreadsheet.
I have a chance at a substantial raise in income: Recently, I was offered a job with an increase in salary from $262K to $300K with an additional $20K signing bonus.
The new job has a 401K, but my current job has a 5% match pension (yearly $13140 of mine goes in as does $13140 of theirs, with “their money vesting 25% in 2018, 50% in 2019, full vesting is not likely as I plan to move in two years).
The current job also has a 457 that I max at $24,000. So in the job offered, I can only put the 401K max in, and lose a $13000 above the line deduction.
Also, I will get a COLA of 2.5% in 10/2017, and 10/2018, making the salary difference smaller ($263K becomes 269K, then 276K in 2018).
The new job offered five more vacation days, but my current job will match this.
So, if I stay where I am, I get to put away more money and keep about $28K if their money by July 2018. If I leave I lose this match, but get about 30K more in salary and, and a $20K sign on.
I also lose the 457 but it is replaced by a 401K, so that’s a wash. If the jobs are otherwise equal, which financial situation is better over two years time?
Uhhh….pretty hard to compare apples to oranges there. Sounds like they’re about the same, so I would choose based on the non-financial aspects. I guess if I had to choose I’d take the extra $50K.
They are roughly equal. One company is a subcontractor of the other. Same hours and same patient population, same EMR, same commute. The only difference is financial as my current employer matched the 30 days vacation and 11 paid holidays.
I like the boss with the offer. I’ve worked for him before (2011-2013). He knows what he is getting. As you say, 50k is hard to pass up.
For the scenario above, I am assuming the raise and bonus is an extra 54K income in year one, then extra ~ $28K income in year two with the October COLA’s at 2.5%.
Another assumption is that I would use a roughly 39% tax rate on the extra salary and bonus and pay off at $7000 college loan of my daughters at 3.5% and create a backdoor Roth with $5500 of it… or can you ask the employer to put the whole 20,000 into the 401(k)?
You’ll have to check with the employer/HR as to whether you can put the bonus money in the 401(k) and how much you can put in there.
I took the job with the nice boss, $signing bonus, and paid off my daughters Discover student loan (was @3.75% interest).
I found out that a 457 plan (where I am now) and a 401K plan (at the new job) do NOT have to top out at $24,000 total in 2017, and that I can put $24,000 in both (assuming I can afford to). This negates the loss of the last third of the 2017 and all of 2018 above the line 5% pension contribution.
I also found out I can take my HSA with me but will need to know if the new employer will take future contributions out of payroll for me.
Thanks for your site. I learn new things every month!
You can still take the HSA with you and still make contributions to it (assuming your only coverage is a HDHP) even if your new employer won’t do it through payroll.
In the latter stages of your career, compounding interest takes over to increase your net worth. The amount you add to these accounts begins to mean less and less. Consideration for a part time gig that fulfills their desire for more family time. There are plenty of part time jobs for physicians willing to be self-employed and think outside the box. It might require re-training or a perspective change. The “private practice” model in the USA is a dead end. Stop thinking you have to be “employed.”
Get a handle on your taxes…I bet you are paying a lot. Read books on taxes.
Mark C, can you provide a couple of examples of the “plenty of part-time jobs for physicians willing to be self-employed…” and the re-training that might be required.
I’d like to learn.
That’s where I’m at. I don’t want to quit cold turkey, so I’m transitioning into a part-time position this fall, as outlined here: http://www.physicianonfire.com/solong/
I won’t be self-employed, but that is an option once I leave my employer. I was an independent contractor for the first 5+ years of my careers, with the first two spent exclusively as a locums doc.
Cheers!
-PoF
Classic post and good to reread it. The power of decreased spending is like compound interest. The gains are exponential on the path to FI.
How can you make the 3 million for financial independence reflect the number needed when figuring in inflation.
If the doctor commits to a lifestyle of $120k, the amount required to reach financial independence is $3.0M. That is based on a 4% withdrawal rate which is a general “rule” for financial planning.
However, if the good doctor was cutting lifestyle and she was asking my advice, I would base the financial independence on her current spending of $160. Asking a person to cut spending from $160k to $120k is like asking a patient to lose 60 pounds. There are a lot of expectations that have to be changed and a lot of choices to be made. Assuming that everything will be accomplished is VERY optimistic.
Nonsense. I cut my spending by 20% a couple of months ago and it was far easier than losing 60 lbs. In fact, it didn’t hurt a bit. Monday’s post will reveal why, and it applies to many FIRE types. This post explains why many docs spend MUCH less in retirement without feeling any pinch.
https://www.whitecoatinvestor.com/percentage-of-current-income-needed-in-retirement/
Multiply $3,000,000 by (1+r)^n, where “r” is the rate of inflation, and “n” is the number of years between now and retirement.
For example, if the rate of inflation is 3% (.03) and you are 10 years from retirement, then you’ll need:
3,000,000*1.03^10, or $4,031,749, in order to have $3M in real terms when quit work.
Either just use “real” (after-inflation) numbers throughout the calculation or add in a figure at the end. This video may help:
https://www.youtube.com/watch?v=YSU8pMuKGRM
I used real returns, a.k.a. inflation-adjusted returns of 2% to 6% in my assumptions. Of course, that could end up being what we see in nominal returns over the next ten to twenty years, but historically, we’ve done quite a bit better than that.
To look at it differently, use the Rule of 72 to decide what you’ll need in the future. at 2% to 3% inflation, your dollar’s buying power will be cut in half in 24 to 36 years.
Excellent, excellent post. For new readers, you should read the entire post, then re-read it….you need to understand the meaning and significance of every line in those spreadsheets. i.e. if you don’t know what “457(b)” means and why the number is $18,000, you should Google that. What does “Real” mean after the numbers 2% and 4% etc.? See if you can reproduce all the calculations yourself in the example, then do it for your own income and net worth. If you go through that exercise and understand every line you just gave yourself a pretty significant education in financial planning.
Thanks, RadDoc.
I don’t spend a lot of time on the basics — those are covered very well in many places online (here on WCI for example) and in plenty of books. I like to apply the basics to hypothetical or real life examples to see how the numbers play out.
Best,
-PoF
The numbers a great illustration. My biggest fixed costs are mortgage and daycare. The latter will go away on its own, but not for a few years. The former will go away faster once daycare is gone. But for the next few years, unless I want to force us into frugality that my wife won’t tolerate, I have to focus more on the income increase.
I’m at University of Tertiary/Quaternary Care right now — I can make a lot more in private (not $100k though), but I am concerned about loss of job satisfaction. It’s a tough call.
You assumed Dr. C would need $4M in retirement assets to retire. Is that because 4% of $4M is $160k, which is the spending level that her family is accustomed to?
If so, then I’m afraid you made a large omission from the calculations: that $160k of retirement income that she can withdraw according to the 4% rule is pre-tax, but her $160k spending level is post-tax. She needs more than $4M so she can also pay income taxes during retirement.
She will probably also need even more money to pay for health insurance now that she’s unemployed.
It’s actually possible to spend $160k in retirement without paying federal income tax (http://www.physicianonfire.com/the-taxman-leaveth-taxes-in-early-retirement/), but it’s very likely that Dr. C will owe some tax based on how her portfolio is structured, but probably no more than about $10,000 or so, which she should easily be able to find in that budget.
Once the kids are on their own, her expenses will go down. Also, the mortgage, which currently comprises $48,000 of her annual spending, will drop to 0 at some point. Spending in retirement could be closer to $100,000 a year.
Best,
-PoF
The benefits of self-employment are “TNTC” in lab parlance.
What parts of Medicine do you enjoy? Diagnosis? Administration? Case management ? Teaching? Look for part time gigs in any or all of these areas. You don’t have to schlep to an office for 8 hours a day and see patients for the Insurance companies. You don’t need an employer to get Health or disability insurance.
Heck, sell teacups on Ebay…anything to get SE income.
Attend a SEAK non-clinical careers seminar. Take a colleague in an interesting field out to lunch.
Partial list of part time Primary care gigs:
Jail/Prison Med
Disability/ Life insurance review.
Occupational Med
Telemedicine
Suboxone Clinic
Wound Management
University Health
VA Disability Evaluator
Extra income is great, but if it means increasing your hours to something untenable like 80 hours per week then it may not be worth it especially in light of the higher tax bracket. Personally I think the best balance is to find a way to work part time, perhaps 30 hours per week, making 150 to 200K. That way you have plenty of free time to enjoy your family and other interests, but are not getting killed with taxes.
Enjoyed your post. I think this is a very common scenario for a lot of docs (me included). Agree with Live Free above that there is a point in the curve where hustling for more income reaches a point where the returns are not worth it (less time at home, more taxes taken out etc). Definitely a balance in the work/family life and it looks a bit different for each person. Personally I think I make “enough” and spend “enough” time at work that I am working at cutting my spending (or at least trying to control it) I think you get more bang for your buck with cutting spending, but can definitely super charge it by increasing your income a bit. On a similar journey to FI and planning on knocking out my mortgage in a couple years. Enjoying your blog. Keep up the nice posts!
Some questions on the spreadsheet
-Regarding all contributions, how did you get 77K?
I see 41K + 26K (pre and post-tax)=67K. Is the additional 10K from profit sharing/match?
-How do you arrive at the Max Contribution Number?
-When you use Real return rates, how do you account for this when your actual savings/brokerage accounts give you nominal amounts (don’t account for inflation)?
Thanks.