[Editor's Note: This is a post by Physician on FIRE, a WCI Network partner blogger. The original post ran here. This is a great post as it discusses the dramatic difference ongoing earned income can make financially even after reaching financial independence.]

In the Tale of 4 Physicians, we analyzed the impact of different spending budgets on wealth creation.  Each of our 4 physicians was married with 2 kids and had a household income of $300,000.

I’d like to revisit one of these physicians, crunch some more numbers, and learn what might happen to her nest egg if she were to continue working by choice after achieving financial independence (FI).

The Budget of a Frugal Physician

Dr. Anderson was the most frugal of our 4 physicians.  Dr. A had household spending of $80,000 a year.  She had a net savings rate of 64% and was on track to be FI in about 10 years, give or take a year.  Let’s have another look at her numbers.

Physician Budget

Hitting Financial Independence

OK, fast forward 11 years.  Dr. Anderson has stayed the course, her index funds have given her market returns, which haven’t been stellar, but have outpaced inflation by 4%.  She’s got a nest egg with the purchasing power of about $2 million in today’s dollars (she’s got closer to $2.5 million but inflation has eroded the purchasing power).

She doesn’t love every aspect of her workday, but finds fulfillment in providing care to her patients.  She knows that she could retire today, and likely have enough money to support her and her family indefinitely with a 4% withdrawal rate.

But there are many uncertainties.  She won’t be eligible for Medicare for more than 20 years and she has no idea how our health care system might change in the meantime.  She and her husband may live another 50 years or more.  From her reading, she knows that the 4% withdrawal rate was considered safe for a 30-year retirement.  She recently read an article that convinced her that 3% might be safer.

She can’t imagine retiring in her early forties after all the sacrifices she has made to practice medicine, which she still feels is her calling.  She is not ready to hang up the stethoscope and she wonders how her financial picture might change if she chooses to work another 5 or 10 years.

Running The Numbers

Allow me to channel my inner mathlete and work some numbers for Dr. A.  To keep things simple, we’ll use real (inflation-adjusted) returns, rather than nominal returns.  That will keep us looking at dollar amounts in terms of their purchasing power today.

We’ll also assume that she’ll maintain a budget equal to $80,000, even after the mortgage is paid off and the 529s are fully funded.  Perhaps she’ll use that money to travel more or for charitable causes.

We’ll look at her future nest egg balance if she were to

  • retire now
  • retire in 5 years
  • retire in 10 years
  • retire in 20 years

and consider the following real rates of return:

  • 0%,
  • 2%
  • 4%
  • 6%

Retiring Now

What if Dr. Anderson retired right now?
Retiring Now

If Dr. A retires now and maintains her current level of spending, the equivalent of $80,000 today, she’s got a good shot at making her money last.  If she earns 4% real, her nest egg will remain steady.  A better return will allow her nest egg to slowly grow while she lives out a long, comfortable retirement.

If her baseline spending exceeds her returns, she will watch that nest egg shrink over time.  If it only keeps up with inflation, a 0% real return, she will run out of money in 25 years.  Doh!

Can Dr. A avoid catastrophe in the case of a long-term sluggish market?  Sure.  She should expect to have a social security check coming her way eventually, having contributed the max for 11 years.  She’ll be able to cut back on expenses in lean years, more easily after the mortgage debt is gone.

What are the odds of 25 years of 0% real return?  If she has a diversified portfolio, I would say it’s quite slim.  Even the best case scenario offered, a 6% real return, is below what the stock market has given in the modern era.

Retiring in 5 Years

What if Dr. A decides to continue working and retire in 5 years?

Retiring in 5 Years

Dang!  Even in the worst given scenario, she’s doing alright.  The odds of running out of money have been minimized.  In the best case scenario, with a 6% real return, she’s sitting on a massive 8-figure portfolio 25 years after her retirement, 30 years after she attained FI.  That’s more than double what she might have had given the same 6% rate of return had she retired 5 years earlier.

Retiring in 10 Years

What if Dr. A worked another 10 years beyond attaining FI?

Retiring in 10 Years

At the 10 year mark from her original FI / potential retirement date, she’s got darn near triple what she would have had if she had quit back then.  She can expect to be a millionaire the rest of her life, and she can now focus her energies on how to best utilize her oversized nest egg.  She is accustomed to a comfortable, but not outlandish lifestyle.  But she can easily upgrade from the Ramada to Ritz Carlton without concern.  She’s in great shape.

Working A Full Career

What if she doesn’t retire early?

Working a full career

Holy Schnikes! Time to contact the alma mater and look into getting your name on a building or two. The Anderson Center for Financial Awesomeness sounds about right.  By spending more than most Americans, but less than most physician colleagues, Dr. Anderson can expect to have 20 million dollars or more in her early 70s, after retiring in her early 60s.  Simply amazing!

The Take Home Message

I think a dozen people could look at the data and come up with 13 opinions.  Some will wonder why she didn’t retire a year ago, since she’s got a decent shot at making retirement last under the circumstances. Others will pick their jaw up off the floor after seeing a potential net worth north of 20 million and wonder why anyone in their right mind wouldn’t strive for that.

Personally, I expect to be in Dr. A’s position in a year or two.  Looking at the numbers, another five years or more seems totally worthwhile.  Unless I’m experiencing total burnout, I will gladly continue practicing medicine to better ensure a comfortable future where the likelihood of retirement failure and regret all but disappear.

Would I consider another 20 years?  I’ll Never Say Never, but the likelihood is pretty darned low.  An absurd net worth is quite possible, but I don’t know what I would do with all that money (besides pay a boatload in taxes).

*Accounting for inflation can be complex and I’m striving for simplicity here.  For example, a 4% real return could represent a 5% return with 1% inflation or a 7% return with 3% inflation.  The final values in absolute and today’s dollars will be a bit different with different scenarios.

To see the effects of different rates of return and inflation on compound savings, see this Investment Inflation Calculator

Other calculators used in the projections above:

Compound Interest Calculator

Regular Withdrawal Calculator

**Another factor that will skew the numbers is the sequence of returns.  My simulation assumes a steady growth rate that doesn’t vary, which is not how the markets work.  Negative returns late in one’s career are more detrimental than negative returns at the end of one’s retirement, when the nest egg has grown quite large.  Again, I’m trying to keep it simple here. Please understand that returns will vary.

What do you think? How about you? What would you do in Dr. Anderson’s situation? Retire now? Work indefinitely? Learn how to spend more and retire somewhere in between? Work part-time? Comment below!