When Can You Afford to Cut Back at Work? Rethinking Financial Independence for Physicians
As a financial advisor and host of The Second Shift podcast, where we talk a lot about career transitions, I’ve had many conversations with physicians who are contemplating or have already transitioned away from full-time clinical work. Burnout rates in medicine remain high—nearly half of physicians. I don’t think that means half of doctors regret becoming physicians. Rather, many of us experience some degree of moral injury as we feel increasingly constrained by a system that makes it difficult to practice medicine the way we want to.
I experienced it myself. In my early 50s, as an emergency medicine physician, I realized that the excitement, fast pace, great saves, and honed skills that once carried me through difficult shifts were no longer enough to overcome the negatives.
In economics, there is a concept called the law of diminishing marginal utility: satisfaction decreases with each additional unit consumed. That's how my medical career began to feel. The things that had once provided great satisfaction were becoming less satisfying, while the things that bothered me stayed the same or got worse.
Eventually, I decided it was time to find something else that energized me and could reignite some of the passion that had been missing. I realized that as much as being burned out, I felt stagnant. I found that renewed spark in personal finance and investing, which ultimately led to my encore career.
But I didn't do it all at once. By then, I was nearing financial independence and had already reduced both my shifts and my savings rate. I knew I no longer needed a full-time physician salary to maintain a successful financial plan. That freedom allowed me to explore and gradually build an alternative.
I didn’t immediately retire from clinical medicine. I phased out. In doing so, I strengthened my financial plan far beyond what it might have been had I gutted it out for a few more years and then retired completely.
That's the idea behind this post: retirement doesn't have to be an all-or-none decision. It can happen in stages. Many of the successful retirees I've spoken with have done exactly that, and not only for financial reasons. Full retirement also brings emotional, behavioral, and identity challenges that you may not yet be prepared for, even if you have enough money.
Financial independence is a spectrum
Many people are familiar with the 4% rule. It suggests that you can retire when your portfolio is large enough to support an initial withdrawal of 4%, with that amount subsequently adjusted for inflation. Another way to think about it is to multiply your annual spending by 25. That gives you a “retirement number.”
Many people, my former self included, become overly fixated on that number: “I just need to hit that number, and then I can be done working.”
The FIRE movement—Financial Independence, Retire Early—grew largely around this idea. But increasingly, I think the emphasis belongs on the FI rather than the RE. Early retirement doesn't automatically create a fulfilling life. The better goal is building a life that aligns with your values. And for many of us, meaningful work is one of those values.
I don't think financial independence has to mean the moment when you have enough money that you never need to work again. I prefer to think of it as the point when money is no longer a significant constraint on your options.
That's when you can begin thinking about working differently: working less, finding a better schedule, changing jobs, or even pursuing an entirely different career. That optionality creates space to rediscover what gives you passion and purpose.
Decades into a career, we aren't the same people we were when we chose it. It's natural for our interests, priorities, and sense of purpose to change. Making good financial choices along the way gives us the freedom to allow our lives to change with them.
Start with the life you want, not your retirement number
This is why identifying your life goals and values is such an important part of a comprehensive financial plan.
How do you envision your ideal life? Is work a part of it? Would you still enjoy being a doctor if you knew that you could walk away?
What parts of your current job would you eliminate if you could? What would you keep? Could you work fewer days? Pay someone to take your night shifts? Reduce your patient volume? Say no to certain administrative tasks? And would you be willing to accept a lower income to make those changes possible?
You might be surprised by how much negotiating leverage you have when you know you could walk away. I have met many physicians who have rediscovered the joy of being a doctor simply by modifying their work environment, albeit with a hit to their paycheck.
The point is, once you reach this kind of financial independence, that hit to your paycheck doesn’t carry the same weight. Money is no longer a significant constraint on your options. You no longer need to maximize your income; you have the freedom to decide how much income is enough for the life you want.
This is essentially lifestyle-first financial planning. And the good news is that if you don’t retire completely and continue to earn even a substantially reduced paycheck, your “retirement number” may be much lower than you think.
Calculate your “Freedom Gap”
If you continue to earn income, even at a substantially reduced level, it can significantly improve your long-term financial picture.
Imagine that you expect to spend $150,000 per year in retirement. Using the 4% rule, you would need a portfolio of $3,750,000 to support that spending entirely from your investments.
But what if you continue working part-time and earn enough to provide $100,000 of after-tax income? That's not unreasonable for many physicians. Now the gap between your spending and earned income is only $50,000 per year. Using the same 4% calculation, you would need $1,250,000 to cover that gap.
Think of that as your Freedom Number. You don't yet have enough to fund your entire lifestyle without working, but you have enough that full-time work is no longer necessary.
Better yet, perhaps your portfolio is large enough that you don't need to withdraw the full 4%. A smaller withdrawal gives the portfolio more opportunity to continue growing, potentially strengthening your financial position for the day when you decide to stop working altogether.
You may feel emotionally ready to leave medicine but aren’t quite there financially. Going part-time can be a great solution. You may discover that you have years left in the tank when you're no longer working at the same pace. And even if you begin drawing from your investments, a relatively small withdrawal may allow your portfolio to continue growing while your reduced workload provides the time and flexibility you're looking for.
The beauty of this approach is that you don't have to choose between working full-time and retiring completely. Your Freedom Number tells you when you've earned the ability to choose something in between.
Dial in your new expense calculation
Your Freedom Number is only as good as the assumptions behind it, so it is critical to accurately estimate what your new lifestyle will cost. Remember that some expenses currently covered by your employer may become your responsibility when you cut back.
Cutting back can affect:
Health insurance
Employer retirement contributions or match
Disability and life insurance
CME and professional expenses
Payroll taxes
Other employee benefits
And if cutting back means becoming a 1099 contractor rather than a W-2 employee, there are additional costs—and opportunities—to consider. Make sure you understand all of these before making the leap.
On the other hand, some expenses may decrease or disappear once you reach financial independence. Perhaps you no longer need as much life or disability insurance because you have enough assets to self-insure. Maybe you can practice some geographic arbitrage and move to a less expensive area. You may spend less on commuting, clothing, meals at work, and wear and tear on your vehicle.
Your tax burden may also fall substantially. Earning less can move some of your income into lower tax brackets, meaning the reduction in your take-home pay may be considerably smaller than the reduction in your gross income.
Then again, newfound free time can create new expenses. You might eat out more, take more vacations, travel to see family, or spend more exploring hobbies you previously didn't have time for.
All of this needs to be factored into the cost of your new lifestyle. The goal isn't to create a perfect budget. It's to develop a realistic picture of everything coming in and everything going out so you know how much freedom you can actually afford.
Taxes can make cutting back cheaper than you think
It is worth spending another minute on taxes. Gross income doesn’t translate linearly into spendable income. Because we have a marginal tax system, higher portions of your income are generally taxed at higher rates. For a high-income professional, that means the after-tax income from your last shift of the month may be considerably less than from your first.
As you work less and your taxable income falls, your effective tax rate will generally fall as well. A larger percentage of each dollar you earn may end up in your pocket. So don’t simply carry your current tax rate forward when estimating how much income you’ll need after going part-time.
Lower income can create other planning opportunities as well. Depending on your MAGI, you may once again qualify for direct Roth IRA contributions. Lower income may eventually reduce Medicare IRMAA surcharges, although IRMAA generally uses income from two years earlier. And perhaps most importantly, lower-income years can create an opportunity to deliberately fill lower tax brackets with Roth conversions.
There can be tradeoffs. Working less may mean smaller retirement plan contributions or the loss of other deductions and tax benefits associated with your employment.
The lesson is that a 50% reduction in gross income does not necessarily mean a 50% reduction in spendable income. When deciding how much you can afford to cut back, it's the after-tax numbers that matter.
Your portfolio has to change jobs
During your accumulation years, your investments primarily have one job: to grow. Once you begin drawing from your portfolio to support a reduced work schedule, they take on another job: providing dependable liquidity.
That means your investment allocation and positioning may need to change.
Once you start taking withdrawals, a significant market downturn early in the process can have an outsized impact on your long-term results. If you have to sell investments while they are down, those dollars are no longer there to participate in the eventual recovery. This is known as sequence-of-returns risk.
One way to protect against this risk is to create a cushion of conservative investments that are less likely to lose value during a market downturn.
This is where cash becomes particularly valuable. Cash isn't going to make you rich through investment growth, but it provides money you can spend without having to sell stocks during a bear market. Keeping one to three years of your expected spending gap in cash or cash equivalents can provide a useful buffer. That money can still earn interest in vehicles such as money market funds, high-yield savings accounts, or Treasury bills.
But there is also a risk in becoming too conservative. If you're cutting back in your 50s, your portfolio may need to support you for another 30 or 40 years. Holding too little in growth assets can increase longevity risk—the risk of eventually outliving your money.
That's why money you aren't likely to need for many years should generally remain invested for long-term growth. For most investors, that means maintaining a meaningful allocation to stocks despite beginning portfolio withdrawals.
The remainder can be invested across stocks, bonds, and other appropriate assets to balance growth, stability, and liquidity. The goal isn't to eliminate investment risk. It's to make sure you aren't dependent on selling volatile investments at the wrong time just to pay your bills.
Account access can be the hidden problem
One problem many of us haven't considered is that having a sizeable retirement portfolio doesn't necessarily mean you have easy access to all of it. If you want to cut back or retire before age 59½, where you have saved your money can become almost as important as how much you have saved.
Withdrawals from tax-deferred retirement accounts such as 401(k)s, 403(b)s, and traditional IRAs generally face a 10% additional tax if taken before age 59½. Fortunately, there are several ways to bridge that gap.
1. Taxable accounts. In other articles, I have discussed the three basic tax buckets for retirement savings: taxable, tax-deferred, and tax-free (Roth). A taxable brokerage account provides tremendous flexibility for an early retirement because the money is accessible at any age without an early-withdrawal penalty. Selling investments may generate capital gains, but long-term capital gains are often taxed at lower rates than ordinary income.
Roth IRAs can provide another source of flexibility because your direct contributions can generally be withdrawn tax- and penalty-free at any time. However, using those dollars early sacrifices some of their valuable future tax-free growth.
Having money available in different tax buckets gives you options. Deciding which account to draw from, and when, can become an important part of your tax strategy.
2. Rule of 55. If you separate from an employer during or after the calendar year in which you turn 55, distributions from that employer's qualified retirement plan may be exempt from the 10% early-distribution penalty. This exception does not generally extend to IRAs or retirement accounts left with previous employers, and the plan must allow the distributions you want to take. Check with your plan administrator before relying on this strategy.
3. Rule 72(t)/Substantially Equal Periodic Payments. IRS rules also allow you to take a series of substantially equal periodic payments from certain retirement accounts without the 10% additional tax. The payments generally must continue for at least five years or until you reach age 59½, whichever is later. Because changing the payment stream prematurely can create significant tax consequences, this strategy requires careful planning.
4. 457(b) plans. Governmental 457(b) plans have a particularly useful feature for early retirees: distributions after separation from service generally aren't subject to the 10% early-distribution penalty. Nongovernmental 457(b) plans are different and have their own distribution rules, so you'll want to understand the specific terms of your plan.
The larger lesson is that net worth and accessible wealth aren't always the same thing. If early retirement or part-time work is even a possibility, building flexibility into where you save can make the eventual transition much easier.
Run the worst-case scenarios before cutting back
One reason to consider cutting back to part-time initially rather than leaving the workforce altogether is that it allows you to maintain your skills and stay involved in your industry or specialty. If you later need—or choose—to work more, you haven't completely closed that door. Particularly in medicine, this can make the decision feel less irreversible.
With that in mind, it is important to consider what could go wrong. This isn't about being a doomsayer. It's about making sure your plan is resilient enough to handle some bad luck.
What happens if:
The market drops 30% shortly after you reduce your workload?
Inflation stays elevated?
Healthcare costs are higher than expected?
You decide you never want to return to full-time medicine?
Your reduced-work position disappears?
An unexpected family expense arises?
The point isn't to imagine every possible catastrophe or scare yourself away from making a change that is right for you. It's to make sure you've built enough flexibility into your plan to roll with the punches. Life has a way of delivering them when you least expect it.
Then consider what levers you could pull. Could you temporarily work more? Reduce discretionary spending? Delay portfolio withdrawals? Adjust the timing of Social Security or other retirement income? A plan with several available levers doesn't have to predict the future perfectly.
Financial resilience is more important than financial perfection.
Don't ignore what you're buying
Early in our careers, the money we invest can feel almost like Monopoly money. Its value isn't very tangible because the time when we expect to use it seems so far away.
But once you reach a level of financial independence where cutting back becomes an option, think about what that money can actually buy. Focus less on the income you are giving up and more on what you are getting in return.
You are buying back your time.
In my own career transition, cutting back purchased a consistent sleep schedule; shorter workdays; evenings, weekends, and holidays; a new career that I can sustain for another decade or longer if I choose; renewed energy; new relationships; and new expertise. I could go on.
At this point, I don't feel like I gave up anything of great importance. But I gained a ton.
Simply stated, my life is in much better harmony with how I want to be spending it at this stage.
The goal isn't retirement. It's optionality.
Bringing it back, when we focus only on early retirement as the motivation for financial independence, I think we may be missing the boat. Just as a number on a spreadsheet shouldn't be the goal, retirement isn't necessarily the endpoint either. Some people arrive there expecting retirement itself to create happiness, only to find that their post-retirement life feels empty and unfulfilling.
The real goal should be aligning your time with your values and passions. Financial independence is the tool that makes that possible because it gives you options:
Work because you want to.
Work differently.
Work less.
Try something new.
Or stop altogether.
And remember, you don't have to wait until the end to start creating that alignment. With good planning—not limited to the financial kind—you can begin building optionality much earlier in your career. You don't have to wait until you have enough money to permanently walk away before you start exercising some of those options.
Allow the good choices you've made with your money to start improving your life as soon as possible.
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Disclaimer: the material in this blog post is intended for general educational purposes only and should not be considered specific financial advice. You should always consult with your personal financial advisor to see how it might fit within your personalized financial plan.
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