Curbside Consult – November 2017
Have a question that’s keeping you up at night? Well, on today’s show I’ll be answering 5 listener questions ranging from saving for a down payment on a home to firing your current financial advisor. This is the first episode that I feature questions submitted by you, the listeners. To be honest, I am blown away that I have received over 30 questions in the past few weeks. Many amazing questions that I think will really help build a foundation of financial knowledge that will help you take control over your finances and set you down the right financial path. So, without further adieu, here’s your Curbside Consult!
Have a question you want answered? Ask your most important financial question right now and be featured on the show!
We’ve featured these callers with these questions to help them build a foundation of financial knowledge!
Should I pay off my home loan early?
There are a few factors to consider when approaching home mortgage. Do you have other types of debt, like student loans, with higher interest rates? It will also depend on the type of mortgage you have, fixed or an adjustable rate mortgage. I also like to factor in your feelings toward debt, because overall satisfaction in life is very important when considering financial decisions.
What are your recommendations on investing for retirement, putting away funds for kids college or general savings for your life goals when you have credit card debt?
Credit card debt is pretty much the worse form of debt that you can have (other than some horrid pay day loan). The interest rates are insane, 18% to 22% or more and there are not many investments out there that can keep up with that kind of return. Paying off the credit card debt is a must and it should be done as fast as possible.
What do I do with my 403b from my previous employer?
There are 4 options that you have when deciding to leave your current employer and join another practice, however, 1 option really stands out as the best choice. Rolling your 403b over into a traditional IRA at a large custodian (TD Ameritrade, Fidelity etc) will provide you with access to better investments and lower costs.
I’m saving for a home down payment, is it better to invest that money while saving or store it away in a savings account?
It would really depend on the timing of when you will be purchasing a home and your ability and desire to take risk. If you are looking at buying a home within 12 to 18 months, I wouldn’t be overly concerned with trying to invest the money, especially with a high allocation to stocks.
If you are looking to buy a home many years from now, let’s say in 3-5 years, I would be more likely to recommend that you look at investing a portion or all of that money into a taxable account.
How do you fire your advisor? What is the process of doing that and who will manage my investments and insurance policies after?
Firing an advisor is pretty easy actually, especially if they don’t manage money or are the agent of record for their insurance policies. Each advisor is different so you will need to look through the client agreement that you signed when you first signed on with the advisor to see how long they will require notice.
- The difference between fee only and fee-based financial planning
- How insurance agents get paid and the hidden fees you need to be aware of
- The four options you have with your 403b when you change jobs
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Full Transcript: Curbside Consult – November 2017
Have a question that’s keeping you up at night? Well, on today’s show, I’ll be answering five listener questions, ranging from saving for a down payment on a home, to firing your current financial advisor.
Hello everyone, and welcome. I am super excited today to bring you a different type of episode than the interview-based episodes we’ve had since show number one, where I talked about my journey and other reasons why I started this podcast. Over the past few episodes, I’ve asked you guys to go to FinancialResidency.com and click on the button about half way down the page that says, “Hey, record your question. Any question that’s keeping up you up at night or could be featured on our podcast.” Well, today, my friends, is the first episode that I feature questions submitted by you, the listeners.
To be honest, I’m really blown away. I’ve received over 30 questions in the past few weeks, and I’m really amazed at the quality of questions that have come out of all of you. I really think that some of the questions that have asked are going to help build a foundation of financial knowledge, that will help you take control over your finances, and help set you down the path, the right financial path, so to speak. And so, with that said, if you’d like to be featured on the show, make sure you get over to FinancialResidency.com and ask your question.
Today, we’re going to have five pretty different questions, ranging from investments inside your 403B and what to do with them after you leave, your current employer, to real estate, to firing your financial advisor. All great questions, and I thank each of the listeners for taking action, asking a questions, and I hope that you all learn from the answers.
Also, before today’s show, I want to make sure to announce this important disclaimer: I am a fee-only financial planner and a fiduciary for my clients. But, let’s be honest, I don’t know you or anything about you. This show is for educational purposes only, and shouldn’t be taken as legal or financial advice. Please consult your attorney, CPA, or your fee-only financial planner before you take any action or make any important financial decisions.
And now it’s time for the curbside consult.
Hello, I’m Alex. I’m a physician located in Los Angeles. My question is, what’s the best way to approach my home mortgage? I’m currently looking it out over 30 years, and that results in significantly more interest. My gut’s telling me to focus on paying it off as quickly as possible, so I would love to hear your insight.
Hey Alex. Thanks for your question. So, there’s a few factors to consider before approaching your home mortgage. First, I would say, is do you have any other types of debt? And if so, is the interest rate higher on those loans than it is on your home mortgage? If you do have interest that’s higher, I wouldn’t really be focusing on paying off the mortgage until that higher debt is paid off first. So, example, if you have student loan debts that won’t be forgiven, and you’re not going for public student loan forgiveness, those rates will almost always be higher for your student debt than it is for your mortgage. So, your mortgage would be less risky, from a lender’s point of view: it’s backed by something real, it’s something tangible, it’s an actually home, and generally that rate is going to be lower than your student debt.
Clearing all that up, if your mortgage is your only debt, then I’d be wanting to know: is it fixed, or is it an ARM, or an adjustable rate mortgage? If it is fixed and it’s under four percent, I wouldn’t be really excited to pay it off. I would be trying to invest the money for long-term. And, again, there’s lots of factors at play here: are you maxing out you 401K or 403B, depending on where you’re employed? Are you maxing our your IRAs and any other retirement accounts that you may have available to you? With the money that’s left over, are you investing in a taxable account? These are just some other questions that I’d have to really be able to give you some true insight on paying off your mortgage, if that’s the best decision.
You said that your gut feeling was to pay down the mortgage, and that signals to me that you’re more risk-adverse and that you’re not comfortable holding debt. And, if that’s the case, paying down the mortgage will likely give you peace of mind and probably increase your overall satisfaction in life, and that’s worth something. Quite a bit actually. I know that there’s lots of what-ifs and questions within this question and answer but, in summary, if you’re doing the other things right, and your maxing out retirement accounts and other investments, and you’re saving for upcoming goals, you’re not putting things on a credit card, you don’t have other forms of debt, or more expensive debt, then paying off your home might be a great idea. If you’re comfortable holding debt on your home, I would love to saving and investing that money in other investments but, again, it’s all based on your risk tolerance.
Money in your home, it’s also known as equity, I view it as essentially dead money. While a home can appreciate in value, the equity of your home isn’t producing any cashflow. It essentially takes the money and shifts it into from being able to work for you, and generating an income from itself via other types of investments, which also could still be real estate, into sitting idle, not really producing any cashflow other than savings and monthly payments after that debt is fully extinguished.
So, just lots of factors to consider but, in the end, it’s going to be dependent on how much you’re saving and, if you’re maxing everything out, and doing all the other things correct, then it boils down to risk tolerance. Hope that helps.
Hey Ryan. This is Curtis, and I’m calling in from North Carolina on behalf of the Dads Married to Doctors group via DMDLifestyle.com. My question for you is about debt, more specifically credit card debt. What are your recommendations about investing, or even saving for retirement when you still have credit card debt hanging over your head. So, to rephrase, should, or would you recommend, that we get rid of our credit card debt before we start investing into things to benefit us for the future, as well as retirement accounts, college funds for the kids, and so on, and so forth. So, what are your thoughts on credit card debt? Thank you so much. Curtis from North Caroline, calling on behalf of Dads Married to Doctors group via DMDLifestyle.com. Thanks so much for all you do.
Hey Curtis. Thank you so much for asking a question, man. First, I just want to give a big shout out to the Dads Married to Doctors group. It’s a really great group of guys sharing experiences and stories with each other, and I’m super happy to be part of that group, to have found that group. I’ve made some really great friends and looking forward to meeting many more in the upcoming years at our annua retreats. So, if you have kids, and you’re married to a doctor, or if you’re a doctor and you have kids, then you need to tell your husband to join this group on Facebook, it’s a great group, and to connect with all of us. Sorry for kind of nerding out on the DMD group real quick, but let’s get back to Curtis’ question.
So, here’s the deal, Curtis. Credit card debt is pretty much the wort form of debt that you can have, other than paying off some horrid payday loan. The interest rates are insane. 18, 20, 22%, and there’s not really many investments out there that can keep up with that kind of return. I say “return” because let’s say you have 10,000 in credit card debt at 20%, it’s going to take 21% return on your investment to come out ahead if you didn’t pay that credit card debt off aggressively. In any one year, that might happen with traditional investments, like investing in the stock market, or real estate, but that isn’t likely to continue many years in a row. Paying off credit card debt really is a must and it should be done as fast as possible. And I always think that interest is the eighth wonder of the world, and having it work in your favor is significantly better than having it work against you.
I’d like to throw a little bit more out here, though, on your question, and to ask how the credit card debt came to be? Because that’s usually a signal of a pattern of overspending, which is spending more than your family brings in each month. And while paying off this debt aggressively sounds great, if your family has a bad habit of spending more than you bring in, you’re going to have a hard time paying it down, and two, you’re more likely to end up in the same spot 12 to 24 months later if the patter of overspending isn’t corrected. And, if this is your situation, I’d really recommend having a real discussion with your spouse over you family spending. If you aren’t using some type of digital aggregator for expenses, Mint.com, Personal Capital, or if you work with an advisor, maybe it’s inside of their financial planning software, my first recommendation would be to start doing this. It’s going to make the process a whole lot easier than just digging through bank statements and trying to figure out where you’re actually spending money, and where the money’s actually going.
If you don’t have any idea where your money’s going every month, I definitely recommend going back at least three months and looking at all the expenses, and tracking where that money’s going. Pulling money out of the ATM is somewhat harder to do when you see those on your statements because it’ll just see “ATM Withdrawal” but try to estimate where that cash was being spent. Going forward, I would try to minimize using cash and to get it tracked digitally so you can really see where everything goes. Tally it all up, analyze it to understand where this cash is going, and then I would try to find ways of reducing your spending. And even if that means some short term pain and sacrifices just to get through it, do it. Just pay it down.
One caveat to this, it’s really for everyone else listening, is that if you just finished, or are just finishing up training, I know residency’s really tough on families, we’ve been through it, I get it. And the student debt low that you probably have is over six figures, and while you’re not necessarily making payments on those, you’re not making a ton of money while in training, I can understand how you could get into credit card debt in training. It’s not ideal, obviously, and having no debt coming out of training should be the goal. But I can understand how you could get in some credit card debt while in training. So, if this is debt that’s racked up through residency or fellowship, it might not necessarily mean that you have bad habits or overspending, it just might mean you’re having more tough of a time, especially if you have kids, while in training than someone’s who’s necessarily single, and maybe comparing your life to theirs, or your finances to theirs, aren’t exactly … you shouldn’t exactly do that.
The last part of it was, you were saying, I wouldn’t worry about the kids college, and investing, putting away funds for them. I really wouldn’t worry about the kids’ college funds and investing until, not only is your credit card debt paid down, but until you and your wife’s retirement is secure, and you guys are making sure you’re putting enough money away for that.
And the last thing that I want to mention, and this is probably going to be pretty controversial, is if you and your wife have a retirement plan that offers a match on contributions, I would actually look at contributing enough into that 401K or 403B to get the match, because oftentimes those are matched dollar for dollar, which basically is like a 100% on your investment, or if it’s 50 cents on the dollar, it’s still 50% return. I would be, basically, contributing enough and investing enough to get the match, and then everything else I would be doing is to get that debt paid down, that credit card debt paid down. Hopefully we aren’t talking about too much, but if it’s less than 25 or 30,000 in debt, and your spouse makes a decent income, you know, this can be taken care of in six months or less.
Hi, this is Carrie. I am at Integral Medicine, calling from Maryland. And my question is: I am graduating from residency, moving to a different institution, what do I do with my 403B from my old institution?
Hey Carrie. Thanks so much for the question, and it’s actually a really good question, one that I get asked quite frequently, actually.
There’s several things that you can do when leaving your current employer and switching to another job; whether you’re leaving training and going out to your first attending job, or just transferring jobs while you’re already out of training. There’s essentially four things that you can do, they’re definitely not created equally, and several of these I would not do, but just so you’re aware of all four options that are out there. And I was actually was quoted, and helped write an article on this that I’ll link in the show notes, for 403BWise.com, so that’ll be in the show notes, so check it out if you have maybe any further questions on this.
But essentially what you can do is, the first thing is, you can just leave it alone. You have access to the 403B at your current employer. When you leave, you’ll still continue to have access. You won’t be able to put additional money in there but the investments that you currently have are okay, and they’ll continue to be invested, and you actually will still be able to change investments inside there, but no additional funds will be allowed to contribute into there. This is a decent option if you’re lucky and you have some really amazing investment options that are inside the plan. Generally inside of 401Ks or 403Bs, they have a little bit higher expense ratios than if you were to go and implement this strategy in, let’s say, a traditional IRA or Roth IRA. But if you’re lucky enough that the employer has subsidized enough of this and that you’re expense ratios are extremely low, and you have great investment options that are highly diversified, index funds through Vanguard, or iShares, or DFA dimensional funds, then this can definitely be a good option for you.
The second option, which is probably the worst option possible, is to cash it out. So, you’re going to have access to the money now, but it’s going to cost you dearly, especially if you’re under 59 and a half, you’re going to not only be paying tax on everything that comes out, but you’re going to have a 10% penalty from the IRS. So, yeah, you get access to it now, but that money growing over a significant length of time, 20, 30 years, is going to be way outworthing the benefit of just pulling the money out and having money to spend now.
The third option is to roll it into your new employer’s plan. Not all employers allow this, but that’s something that you can do, and if you wanted to, and let’s say that your new employer had some really great investment options, this could be an option for you. The IRS doesn’t have any limits or prohibit rollover into a new plan, so even if your balance is greater than the contribution limit, so for 2017 it’s 18,000, even if it’s above that, you can still roll it in, no penalties, no taxes, no nothing. But, again, you’re going to be subject to your new exmployer and whatever investment options they have into there. And, generally, 401Ks or 403Bs have some high fees or just, again, limited investment options, so this might not be the best thing for you to do, but unless you had, again, really good investment options, I probably would not do this.
The thing that I would look for, and it’s the last one, is to roll all of the 403B into an IRA with your vendor of choice, or your custodian of choice. So, my first at Physician Wealth, we use TDM Air Trade, the institutional side there, so if I was going to roll my, or a client’s money out of their 403B, we would look at rolling it into a traditional or a Roth IRA, depending on what kind of 403B you had into basically a traditional Roth IRA. And once you do that, you basically open up your investment options considerably.
There’s ways to trade so you would have extremely low expense ratios, highly diversified investments, and it’s something that you would be able to … especially if you switch jobs regularly, you’d be able to take the money from all these other accounts, and instead of keeping them, let’s say you chose options one, just to keep it at your employer, if you switch jobs three or four times, now you’ve got three or four logins with three or four different types of investments, and it’s a little harder to keep track of. If you’re rolling it into an IRA, wherever it’s at, you can use it at Vanguard, or TD, or Schwab, Fidelity, there’s plenty of options out there, if you’re to do it there, then as you’re switching jobs, you’re not only going to take it from these subpar investment options, which is more than likely happening at your 403B, and you’re going to be able to roll them over into an IRA and have a ton of different investment options available, and be able to keep it all in one place. I’m a big fan of keeping it simple and having all your investments in one area; you will be more in tune with your investments and be able to make wiser, better decisions.
Hi. My name is Nick and I’m from Cincinnati, Ohio. I’m a pediatric oncologist. My question for you, Ryan, is in regards to saving for a house down payment. Is it better to invest that money while we’re saving or better to store it away in a savings account?
Hey Nick. Thanks for your question. And to answer your question directly, it’s really going to depend on a few things. One would be the timing of when you’d like to purchase the home, and the other would be your ability and your desire to take risk. So, I think I’m going to give you two scenarios here. The first would be if you’re looking to buy a home within the next 12 to 18 months. If that’s the case, I really wouldn’t be overly concerned with trying to invest the money as I would be … especially without a high allocation of stocks. I would be more looking at putting money into a high yield savings account and earning just a tiny bit of interest while keeping the money liquid, and continuing to add to the house fund.
So, a high yield savings account is basically a savings account at any bank that pays interest greater than, let’s say, the average savings account. So, personally, I’ll just relate it to me, personally I use Ally for my checking and savings accounts, and I believe their accounts pay somewhere around one point two percent. That’s nothing really to write home about, one point two percent feels like it’s next to nothing, it’s still higher than the traditional brick and mortar banks, Wells-Fargo, B of A, banks like that, that are paying one point zero one percent. Or point one percent if you’re lucky and you’re one of their private bankers, or something like that.
So, think of this as more like icing on the cake kind of concept than trying to go and find out what are the best ways to invest and maximize returns, I really wouldn’t be concerned with that right now if your timeframe is 12 to 18 months out. I’d really be looking at figuring out how much you need saved up for the home, and basically how long until you need that money. I’d be setting up auto transfers from the main checking account into that house account for the amount needed over that period of time, and so I’ll give you a quick example. For simplicity’s sake, let’s just say you needed 12,000 more dollars to buy the home, and you were going to buy the home in 12 months. It would come out to about $1,000 a month, and I would set up an auto transfer from your checking account to that high yield savings account for $1,000 a month. I’d also nickname that account as a home purchase account, or ‘Our Home’, or something like that, whatever you’d like to call it, that would put some emotion behind the money that’s going into that account.
So, this would potentially protect you and your spouse, if you have one, for ever reaching into that account for a short-term purchase. Associating that money with the primary goal of owning a home, will tie emotion into it and really help you not be tempted to steal from that home fund to buy the big screen TV or any other type of large purchase that might tempt you into spending the money. Because as that balance continues to go, and I know I used a real small example in my case, but as that balance continues to grow higher each month, you might be more and more tempted. So nickname it so it will tie some emotion there.
Let’s say the second scenario is, you’re looking to buy a home and it’s three to five years from now, or greater, I would more likely be recommending that you look at investing a portion of, or all of that money that gets auto transferred into the account. So, depending on your risk tolerance, basically what I’m talking about is your ability to take risk, and your need to take risk, I would be investing the money into a taxable account at one of the major custodians, TDM Air Trade, Fidelity, Schwab, Vanguard, and in there you can buy stocks or bonds. And I really don’t want to go too much into that as I don’t know your whole financial picture, but if you had a longer period of time to, say, need the money, I would be looking at putting the money into an investment account and actually investing it versus just a high yield savings account.
Hi Ryan. This is Theresa, I am the admin for the Facebook group called Physician Finance. I spend a lot of my time trying to help people differentiate between a good and a bad advisor, and sometimes, some of the members ask: how do they fire their advisor? And I wanted to ask your opinion: how would they go about firing their advisor? And then, the information afterwards is, who will manage their investments and insurance policies afterwards? Thanks Ryan.
Theresa, that’s a really interesting question and I appreciate you asking it. This might surprise you, but firing an advisor’s pretty easy, especially if they don’t manage money or they’re not the agent of record for your insurance policies. Each advisor’s different, so you’re going to need to take a look through the client agreement, which is the first agreement you signed when you ended up started working with the advisor, generally it’s about a 30 day notice but this does, again, range by advisor. And basically it’s as easy as writing an email telling the advisor, “Hey, I don’t want to work with you anymore.” A desire to end the relationship. And you don’t really need to tell them why, or what you’ll be doing, unless you choose to, and that’s all they really need to know: that you want to move on and you want to end the relationship.
Things get a little bit more difficult if the advisor manages money but not insurance policies. So, if the advisor manages money, in addition to this 30 day notice that you’re going to send into them via email, you’re going to also need to contact the custodian of which your money is being held at, and let them know that, “Hey, I’ve fired XYZ advisor, and I’d like my accounts to be transferred over to the retail side from the institutional side with you, the custodian.” And this really only works if your advisor has chosen to work with a custodian, one of the big institutions like TDM Air Trade, Fidelity, Schwab, ones like those that actually have a retail side, or retail component, to them, not just an institutional side. And if you’re not lucky enough to have one of those, there’s some other custodians that … they don’t have this available, and so there’s going to be some additional work involved.
But if your custodian does have this, let’s say you’re a TDM Air Trade, then it’s as simple as emailing TD or calling into TD and saying, “Hey, I’ve let go of this advisor, please transfer this over to the retail side.” If you’re not lucky, and the advisor you’re working with isn’t at one of these big custodians that has a retail side, there’s going to be a little bit more work that you’re going to need to do. You’re going to need to go to a new custodian and open up accounts as a retail client, just how I mentioned, at any one of the ones that I mentioned: TD, Fidelity, Schwab, you’ll be able to open up the account pretty easily and request a transfer to move the money and investments from where your advisor currently has them, to the new accounts that you just opened at the new institution. And the good news is that opening these accounts can be completed online, it’s pretty painless to set that up.
The bad news is that you’re likely going to have to sign and send in, either via email or mail, depending on the custodian, the transfer forms to move it from the old custodian to the new one. While this is done for your safety, so no-one else can move money without your knowledge, the technology at some of these institutions is super archaic, and they might require a notary signature or a medallion signature, which is from a bank, it’s just a higher form of a notary, basically. Once these signs have all been submitted, it’s going to take a couple of weeks for processing, to move your investments over, cost-basis and all that, additional money that was in maybe money markets. And make sure that in the written notice to your advisor that you’re going to tell them, “Hey, I’m going to be moving the money.” Generally, if you have a good relationship with them, they might actually help you out along the way. But this all kind of sounds like a huge pain, and I know it slightly is but, to be honest, this is why advisors … they know this, and it’s the reason why they say, “Hey, assets under management by an advisor’s called sticky assets.” It’s not an easy process to go through, especially if you work with a custodian that doesn’t have a retail component.
Things become even more difficult when you try to cut ties with an advisor that manages money and is the agent of record, or manages your insurance policies for you. Everything I just mentioned before still exists, except for now you have added tasks as removing them as the agent of record for the insurance policies that they have set up and have sold to you. So, everything that I just mentioned in addition to a few other things.
If you’re switching to another advisor that is fee-only, which hopefully you are, if that’s the case, they won’t be able to be the agent of record but they don’t accept commissions, right? Hopefully they will have someone, and they usually do, one or two agents that they typically have vetted and work with on a regular basis for their own clients. So, this isn’t a real big concern if you’re going from one advisor to another. If you’re deciding that you’re going to go from one advisor to no advisor and manage everything on your own, you’re either going to have to leave your policies with the current advisor that sold you the policies that you just fired, or you’re going to have to find another agent. And I can’t really give you recommendations on who to choose or not to choose, but just know that this process is going to take some time and you might be forced, almost, to keep it with the current advisor that you just fired, as the agent, just for simplicity’s sake.
It kind of reminds me, I just wrote an article on how advisors that are fee-based, which you know that they’re fee-based because they’re selling you insurance, or these insurance agents, and it’s all about how they’re compensated. I’ll make sure to link it in the show notes, and I actually have a whole podcast show on talking about the talking points of fee-only versus fee-based, and why fee-only advisors are the best option. So, I’ll make sure to link that in the show notes as well. But it really depends, when you’re firing an advisor, if they manage money, if they manage insurance, and the more things that the advisor does manage, the harder it will be to get rid of them and fire them, but anything is possible, it’s not as hard as it sounds, so I hope that helps.
So, that’s it for the show today. I know it’s a bit different from what I’ve done in the past, and I hope you enjoyed it. If you want to hear more of this type of content please let me know by joining our Facebook group, Financial Residency VIP Community, obviously on Facebook. Our community’s growing strong, there’s several hundred physicians in the group wanting to make a difference in their finances, and wanting to have clarity and control over their money. I encourage you to jump in the community and ask any questions that you have about anything that you’ve heard on any of the episodes.
Next week, I’m really excited to bring you an interview with a physician that is on fire. Take from that what you will, but that’s all I’m going to give for you for next week’s sneak peak. Have a great, safe, and holiday week. My family and I will be traveling out to visit my wife’s family in Kansas City, and hopefully, while we’re there, I’ll be able to sneak away and go see a Chiefs game on Sunday while we’re out there. I’m not sure how could it would be, but cross my fingers it won’t be too bad.
All right, I’m out of here. Safe travels and happy Thanksgiving.