Self Employment

[ndfmnlf]

Hi,

What's your view of self employment as a quicker route to early retirement? Do you achieve early retirement faster if you were your own boss as opposed to being employed by someone else? This is primarily in the context of self employment in a professional practice (i.e medicine, law, accounting etc). I am currently a self employed physician, but I have been offered an attractive job offer to join a multispecialty group in Sacramento CA. I'm still debating whether this move will hasten or delay my retirement, which I hope to attain in 10 years (I'm 41). I appreciate your inputs, especially from those who faced similiar quandaries in the past.

ndfmnlf

 

[kcowan]

Self-employment provides many perqs and writeoffs, whereas corporate employment provides long-term pensions and health care. Just one of these tends to lead to longer working life. But is you can get vesting of corporate benefits then you can have the best of both worlds.

I did corpoarate until vesting, then self-employment to FI.

 

[Terry]

Hi

I am self-employed. It is not something I would recommend unless you have a business that has a high return. I got laid off and I was able to pick up some clients quickly.

What I had going for me:

1. Equity in my home and a couple of rental properties.
2. A client load that allowed me to make more money that my current position. You have to make enough to cover taxes and health Insurance.
3. I already had all my equipment (PC and stuff) I did have to invest into buying some specialized software.
4. A home office area already set up.
5. The best thing is I can choose my clients. That can be a good thing.
6.
Myths:
1. Work shorter hours. Wrong!!! You no longer have the corp support system. If you make a mistake that cost’s your client $$$ You have to eat it. I am just finishing up an 11K lunch! I work more hours (l love what I do and my kids are older).
2. It is easier. Wrong!!! It is just as challenging as my old job.
3. You can get rich fast. Wrong!!! It is hard work and requires a lot of time. Do not open any email that even smells like a

get rich quick

or

I discovered the SECRET to wealth on the internet

. The

SECRET

is getting you to part with your $47.00 (they all in $7).
Get a lot of advice, be patient.

I know this is more than what may have asked for but I felt like writing.

Build a business around your passion!

 

[pfpelican]

Build a business around your passion!

Is this spam? Advertising? Smells like it.

 

[Terry]

Sorry about the link. Won't happen again.

 

[Meadbh]

Hi,

What's your view of self employment as a quicker route to early retirement?

I am currently a self employed physician, but I have been offered an attractive job offer to join a multispecialty group in Sacramento CA. I'm still debating whether this move will hasten or delay my retirement, which I hope to attain in 10 years (I'm 41).

ndfmnlf

It depends! So I have questions, but no answers.

First, what is your level of job satisfaction in private practice? Are you comfortable with your ability to deliver the best care and service to your patients? Are there any risks or benefits associated with your solo status, e.g. difficulty arranging coverage, patient safety issues, liability? Does the group have a competent business manager? Only you know the answer to this. My own opinion is that joining a well managed team with well structured coverage and protocols is safer for your patients and, by the way, less likely to lead to loss of your retirement savings in a lawsuit.

Financially, you need to compare revenues and costs. How will you be paid by the group? What are the fixed and variable costs? What benefit package is the speciality group offering? What is the comparative percentage of overhead? Will you be obliged to buy into a partnership? How will you get out of it when you RE? Do you have corporate status? Very relevant for taxation, at least in my neck of the woods.

Meadbh, MD, MBA

 

[Meadbh]

Hi,

What's your view of self employment as a quicker route to early retirement?

I am currently a self employed physician, but I have been offered an attractive job offer to join a multispecialty group in Sacramento CA. I'm still debating whether this move will hasten or delay my retirement, which I hope to attain in 10 years (I'm 41).

ndfmnlf

It depends! So I have questions, but no answers.

First, what is your level of job satisfaction in private practice? Are you comfortable with your ability to deliver the best care and service to your patients? Are there any risks or benefits associated with your solo status, e.g. difficulty arranging coverage, patient safety issues, liability? Does the group have a competent business manager? Only you know the answer to this. My own opinion is that joining a well managed team with well structured coverage and protocols is safer for your patients and, by the way, less likely to lead to loss of your retirement savings in a lawsuit.

Financially, you need to compare revenues and costs. How will you be paid by the group? What are the fixed and variable costs? What benefit package is the speciality group offering? What is the comparative percentage of overhead? Will you be obliged to buy into a partnership? How will you get out of it when you RE? Do you have corporate status? Very relevant for taxation, at least in my neck of the woods.

 

[ndfmnlf]

First, what is your level of job satisfaction in private practice?

I'm satisfied with it in so far as autonomy is concerned. There's not much bureaucratic wrangling to deal with since we are only a 5 doctor group. There's a lot of scheduling flexibility.

We run a tight ship financially, and overhead expenses have never exceeded 50%, which is considered very good for internal medicine. Our annual earnings are better than the national median for our specialty.

Quality of care is up to par; we are audited regularly by HMOs we contract with and we have always met their quality of care measures. We have never been sued (knock on wood) which is partly due to our doctor-friendly, Republican-leaning community in rural Illinois, and largely due to (I hope) our excellent clinical skills.

The reasons I am thinking of relocating despite all these positives are two-fold: being a small practice, we can not afford to spend too much money on electronic medical records. We still use paper charts because we have a large panel of patients that converting all their charts into electronic records will be too burdensome financially. We can probably make do with paper charts, but it seems obvious that the regulatory climate will eventually push us into adopting electronic records. Small practices will have difficulty making this conversion, while large multispecialty groups in Northern California like Sutter or Mercy Medical Group (which is offering me the job) have the economies of scale to be able to afford it.

The other reason for my wanting to relocate is cultural: while the community where I live in right now is friendly, I still feel like I don't belong here. I'm a big city person, my wife is too.....and after having lived in rural Illinois for 10 years we feel the urge to return to our families and friends in California.

My gut tells me that moving to California will cause me to delay retirement since the cost of living there is high, and our ability to save will be curtailed (though still achievable). In Illinois I am able to stash 25-30% of my income for retirement, while in California, I may struggle with a 10-15% savings rate. Admittedly, this is still higher than most Americans can save, but I also want to retire early like most people on this forum. Medicine is a great career, but I don't want to be consumed by it.

BTW, since you asked, the compensation package Mercy is offering is OK ($175K/year with annual production bonuses and partnership buy-in after 2 years; most partners make between $200-250K). There's the usual 403b with 50% match, health, life, disability and malpractice insurance coverage. Sounds pretty liberal, but then again, this is California we're talking about (where median priced homes are $400-500K).

 

[Mach]

Hi,
What's your view of self employment as a quicker route to early retirement? Do you achieve early retirement faster if you were your own boss as opposed to being employed by someone else?
ndfmnlf

I'd say the primary factor here is only this:
Will the business you are running grow substantially?

If the answer is no, a little, or not likely, then it's really just "another job", except perhaps for some tax benefits that may or may not offset all the other perks of a salaried position.

If the answer is yes, then by far a business has the potential generate a higher income than a typical salaried position given similar category of service (doctor in your case).

If I were you I would attempt to make a rough guess at the impact to your retirement just based on cost of living/salary/benefits (all of which you can estimate well), and then you have a firm number to compare to. For instance, if it delayed your retirement on paper by 1 year, but you'd have 5 years of living in a place you prefer, with more perks at your job, and none of the headaches of self-employment, then it may become much easier to decide on.

-Mach

 

[Spanky]

The other reason for my wanting to relocate is cultural: while the community where I live in right now is friendly, I still feel like I don't belong here. I'm a big city person, my wife is too.....and after having lived in rural Illinois for 10 years we feel the urge to return to our families and friends in California.

Cost of living in CA is higher, but a sense of belonging and relationship with friends is priceless.

 

[Orchidflower]

Listen, I have been in your shoes totally, so I more than understand how you feel. But my vote goes to stay where you can stash the most money away and work is easier on you, which sounds like rural Illinois where you are now.
Stay there until the day you just cannot take it anymore, and that day WILL come, trust me. It may be 2 years away or 20, but one day you will walk in there and say, "that's all, folks!" The stashing rate of 25-30% is too good, so stick it out until you have had a bellyfull is my opinion.
And working for yourself is twice as difficult as working in a group or for a corporation. Trust me on this one as I have been where you are now.
In the interim, visit California...one reason God made planes is to go back and forth to visit your loved ones.
Just my humble opinion.

 

[ndfmnlf]

Thanks guys for all your insightful comments. It dawned on me that I may have mistakenly conflated "self employment" with "low cost of living" when these issues should really be separate from each other. The analysis really should go like this:

1. low cost of living (LCL) versus high cost of living (HCL) => there is probably little debate that LCL is more favorable to attaining early retirement than HCL

2. self-employment/entrepreneurship versus corporate employment => I'm not entirely sure whether self-employment is really a better path to wealth as people like Kiyosaki portray it to be.

My take is that self-employment is risky, and the success stories touted in the media are far fewer than the numerous failures. We remember the successes but forget the failures (i.e., survivorship bias). In my case, our practice succeeded because we managed to control overhead expenses over the past 10 years. I also had another cost advantage in that I didn't have student loans to contend with, thanks to my loving parents. Without these, we would not have been competitive.

But as I mentioned in my other post, the regulatory climate over the next 10 years doesn't bode well for health care...making small group private practice less appealing going forward.

And lastly, self-employment is akin IMO to investing a big chunk of my savings in a micro cap stock or a high yield bond.....something I would never do with my investment portfolio since I'm a market indexer.

On this tangential note, may I ask: is a job more analogous to a stock or a bond? I have always wondered about that. How would you "allocate" your job in your total asset allocation picture?

 

[Meadbh]

Thanks guys for all your insightful comments. It dawned on me that I may have mistakenly conflated "self employment" with "low cost of living" when these issues should really be separate from each other.

Now I remember your earlier post about rural versus urban life. Seems to me you are quite appropriately dissecting your Illinois-California decision from multiple angles. They are all different questions, and they will all weigh in on your ultimate satisfaction with your decision. Obviously your family's input is key.

You are doing very well financially in Illinois but you are obviously concerned that the gravy train will end if your practice is forced to implement the EHR. Perhaps, but efficiencies may also result.

On this tangential note, may I ask: is a job more analogous to a stock or a bond? I have always wondered about that. How would you "allocate" your job in your total asset allocation picture?

Very interesting question! I think being an employee would be analagous to buying bonds, with more predictability and moderate financial rewards, whereas being an entrepreneur is more like owning stocks. Riskier by far, but potential for big payoffs.

 

[ndfmnlf]

Very interesting question! I think being an employee would be analagous to buying bonds, with more predictability and moderate financial rewards, whereas being an entrepreneur is more like owning stocks. Riskier by far, but potential for big payoffs.

meadbh,

Hmmm....interesting. So if I'm an employee, then perhaps I should overweight stocks in my portfolio, but as an entrepreneur, I should be loading up on bonds....the idea being to diversify away the risk posed by the type of job I hold. Is this a correct application of this insight? Thanks for your input.

 

[Meadbh]

meadbh,

Hmmm....interesting. So if I'm an employee, then perhaps I should overweight stocks in my portfolio, but as an entrepreneur, I should be loading up on bonds....the idea being to diversify away the risk posed by the type of job I hold. Is this a correct application of this insight? Thanks for your input.

Aha, I see where you're going! But I wouldn't extend the analogy this far. Equities are associated with market risk to be sure, but overweighting fixed income is associated with excessive inflation risk. A balance is necessary to reach the efficiency frontier.

FWIW, I'm employed by a university but most of my earnings come from self employment. My portfolio is overweight equities, with a smattering of venture capital and real estate. I'm currently increasing diversification by country also.

 

[Mach]

. So if I'm an employee, then perhaps I should overweight stocks in my portfolio, but as an entrepreneur, I should be loading up on bonds....the idea being to diversify away the risk posed by the type of job I hold. Is this a correct application of this insight? Thanks for your input.

No, bad analogy. What differentiates them is the time/drive/knowledge of what they are doing.

An entrepreneur who has time to research investments, if not close to retirement, would likely do far better investing in stocks.
An employee who like working 9-5 and never thinking about work beyond that, and who doesn’t' want to think about investments beyond plunking down some money and watching it's ups/downs, should not invest in stocks as a rule of thumb (index/mutual funds instead.

Likewise, an entrepreneur who has no time to research investments should probably do some mutual funds or other diverse, passive strategy. A full-time employee, on the other hand, who has lots of free time and likes researching stocks/businesses, by all means should invest in researched stocks and not some passive investment.

Risk and diversification are not good terms to use unless they are in context. Let's see if this is a better example from someone woefully inadequate to discuss medicine

If diversification was the answer to doing well, we wouldn’t go to doctors. We'd look up statistics on the web and see that we have a 91% chance if it just being the flu. So what if 9% had a serious underlying condition?

No, instead, we have people that learn how the body works, learn the various forms of gathering evidence from the person, and attempt to fit the facts as best as they can to the known conditions. Do we throw darts at a medical chart? No! Do we check off 12 conditions and tell the patient that if they get treated for all 12 of these things, it's "probable" that they will be treating what they really have? heh. Fun, but no, I don't think we do that.
We weigh the risks, and take actions appropriately.

If you have the time/drive to either run and grow a business, or research and manage a stock portfolio, those are better options than working a typical 9-5 job, or investing in bonds or less risky investments.

If you don't have the time, you have less evidence to understand what is or is not risky, so you rightfully should play the odds and go with a diverse or less risky by design, investment strategy. If you don't have the time or drive to grow a business, likewise, you shouldn't attempt it, as it will be riskier on average than a 9-5.

At least that's how I understand it. That, and the time/effort to run a business or research stocks takes away some quality of life, so balance that out. I run a business, but invest passively right now, because I don't have the time/energy to invest actively...having that extra time for quality of life is necessary for me at this time.

-Mach

 

[Webzter]

2. self-employment/entrepreneurship versus corporate employment => I'm not entirely sure whether self-employment is really a better path to wealth as people like Kiyosaki portray it to be.

Everyone has a different path.

Paul Graham, a software entrepreneur turned prognosticator, puts it nicely, I think. To paraphrase, assume that you can either work 30 years for a corporation and retire or work 5 years for yourself and retire. However, assume the hours are roughly the same, it's just if your cramming them into a shorter timespan (hyperbole to some extent, but you get the idea).

I think that more talks to starting a business and trying to grow it, though. It's a completely different story if you're just running an S-corp and not trying to grow a practice beneath you. In that case, you're better off comparing things at an hourly rate (include any benefits from your current situation as well. For instance, if you're not paying the employer side of FICA now then include that)

In my field and in my market, I could probably consistantly bill $90/hr. In my situation, once I factor in employer taxes, 401k matches, 5 weeks of paid time off, 14 holiday days, and the fact that I barely work 40 hours a week, then a switch to move to be independant makes absolutely no sense at all. Everyone's sitation is different. And, I only cover salaried v. hourly. Trying to actually grow a business and being incented for scaling beyond what one person could do is much harder to monetize in Excel.