student debt pslf refinance or save for retirement in 403b roth ira traditional ira

Curbside Consult – January 2018

Today’s show is another curbside consult but with a twist. Instead of hearing listener questions, you will be hearing some of the questions asked by physicians in the latest panel discussion that I was invited to be on. Remember, if you have a question keeping you up at night and would like to be featured on the podcast, record your most important financial question today.

I was honored to be an expert panelist for the NEJM Financial Planning 101 series. There were so many great questions that I decided to have today’s show highlighting 9 of the questions asked in the discussion.

Before we jump into the show, please help the Financial Residency podcast reach new listeners on iTunes by leaving a rating and review! It takes just 30 seconds. Really appreciate it, thanks!

Q. Should physicians pay off student debt or save for retirement?

A. Paying off student loans and saving for retirement are often two of the bigger stressors in doctor’s financial lives, however, I believe you can work towards both simultaneously.

While it’s not ideal, it’s typical to see residents finish training with some credit card debt. Before you do anything else, attack your high-interest debt first.

In the show, I outline 5 steps you could take to pay off student debt while saving for retirement.

Q. Do residents need life insurance? How do physicians buy life insurance?

A. Generally, most everyone needs some life insurance early in their career. If someone depends on your income, then you definitely need some amount of coverage. The amount of coverage you may need is specific to your financial situation.

Term insurance offers protection for a specific period of time. If you happen to die within the time period, the insurance company will pay the beneficiary the face value of the insurance policy. Term insurance is very affordable, especially when you are younger and in good health. As a resident, you are at your most vulnerable time with respects to your career and earning potential. Typically, residents have very little assets, significant debt and are at the highest earning potential in their careers.

What you do NOT need is whole life, variable or universal life insurance. Physicians are targets by insurance agents and sold these policies often. When my wife was in residency, she was being offered to buy one of these policies every few months. Be careful.

Find an independent agent who is able to sell you policies from many companies, that is familiar with the needs of physicians and who is an expert at finding out all the ways you can save when quoting out policies. Mr. Keller at Physician Financial Services has been a huge help to me recently with a few tough cases, that should be a good start.

 

Q. After maxing out a Roth IRA and employer-sponsored 401k/403b, what are the next most beneficial tax-efficient ways to save/invest money?

Contributing to your employer’s 401k/403b and maximizing your Roth IRA (direct or backdoor) are a great start for investing. If you are enrolled in a HDHP then you should have access to a Health Savings Account (HSA). An HSA, allows you to save money (and invest it) for medical expenses and is a triple tax advantage account. You get a tax break contributing the money, earnings are exempt from taxes and any money is taken out to pay for qualified medical expenses are not taxed. Contribution limits for 2018 are $3,450 single, $6,900 family per year.

You could also check and see if your employer offers a 457b plan. This is a tax-advantaged retirement plan that is available for government or tax-exempt organizations. The 457b plan works very similarly to a 401k/403b and if you are offered both of these, you can contribute the maximum to both plans. For 2018, this has been increased to $18,500, just like the 401k/403b contribution limits.

If there are no additional tax-deferred accounts that you can contribute to, you will need to either open a taxable account at your custodian of choice or pay down debt (if applicable).

 

Q. When is the right time to invest in life insurance?

A. Best thing to remember with respects to insurance. Insurance is insurance, investments are investments, never mix the two.

You are not “investing” when you are purchasing insurance. You are simply buying a product as protection of your assets, not to increase your assets. As a resident, you may be thinking that you don’t have a lot of assets, but future earnings is as an asset. That is something you have a significant amount of.

 

Q. What is an index fund? What are stocks? What are bonds?

There are a few definitions that you need to know when starting your investing career.
A stock is a buying an investment in a company in a small fractional way known as buying a share of stock in a public company. These shares entitle you to ownership benefits (voting, dividends etc.) and they can fluctuate in price based on MANY factors. Shares are traded on an exchange and the price can go up and down based on what others value the company. At its core, you are buying an investment in a company and a part owner in that company.

A bond is buying the debt of a company, not equity (stocks are on the equity side of the balance sheet). A company can issue a bond that an investor could buy that would entitle them to getting back their money plus interest. Not only do companies have debt but the government has debt that can be purchased/invested in. The value of the bonds can fluctuate in price depending on numerous factors as well.

Mutual fund – You may be familiar with mutual fund companies (like Vanguard) that create mutual funds. It’s a collection of stocks that the fund companies have purchased to achieve a certain goal. You are buying shares of the mutual fund, not the individual stock, but the mutual fund is the owner of the stocks that the fund company has purchased. This allows an investor to obtain a higher diversification (owning many stocks vs a few) for a much smaller investment than if they needed to go purchase all of the stocks on their own. Mutual funds give thousands of investors in the fund to essentially pool their investment capital together to achieve higher diversification than what they could do on their own.

An index fund is a type of fund that is designed to track the components of a market index. This could be the Dow, the S&P 500 or the entire market as a whole. These funds tend to be highly diversified, have low turnover within the fund and generally have significantly lower expense ratios compared to other funds. Index investing is a form of passive investing.

If you want to understand more, listen to the episode with Bobby Lee on the right way for physicians to invest.

 

Q. Should a resident physician buy or rent a home during residency?

This is a tough question to answer without knowing the financial situation that the resident is in. Looking back to when my wife was in residency, if we knew that we were going to stay in the area longer than 5 years, had ample reserves to cover any unforeseen expenses that come with homeownership, were in a position to pay the mortgage and all of our other fixed expense and it not be over half of our take-home pay then I would have considered it. The fact that none of those were true while we were in residency made the decision pretty easy for us.

If were did stretch to get into a house, the market would have rewarded us greatly, but the tradeoff could have been a feeling of being “house poor” and not allowed us to save for everything else that was just as, or more, important to us.

Don’t get me wrong, I’m a huge fan of real estate investing, but with little assets, little time and lots of debt, it makes it much tougher to justify buying a home unless the criteria I mentioned were met.

 

Q. What are the top 3 questions physicians should ask a financial planner at your first meeting?

1. How do you get paid?
Read their ADV2a and it will tell you everything you need to know about how they make money. Legally they are required to write their ADV2a in plain English and disclose all the ways they charge clients and any conflicts of interest they may have. Here is my firm’s, Physician Wealth Services, ADV2a if you want to see what one looks like.

2. Are you fee only?
Choose a fee-only advisor, period. If you find a flat fee only advisor that is even better. Fee-only advisors make up roughly 3% of any professional that calls themselves an advisor or planner. Flat fee only means that they only charge a flat fee (monthly or quarterly) to work with them and do not charge an asset under management (AUM) fee. Think of this as a retainer but includes management of your investments in addition to full comprehensive financial planning. Quite rare in the industry, but what is best for the client. Note: the quickest way to know if an advisor is fee-only or not is to ask if they sell insurance. If they “can help” with insurance, they are fee-based.

3. Why do you work with physicians and what percentage of your client base are physicians?
Work with someone who not only understands what you are going through but someone that provides guidance to the situations you are going through all day long. If they hold themselves out as specializing in working with physicians, why did they choose to work with physicians? They should know more about student loans than you do.

 

Q. How much should a resident physician keep in a savings account for emergencies?

What are the best places to start a savings account? Should a resident max his or her Roth IRA at the beginning of each year even if doing so requires dipping into a fraction of the emergency fund?

Generally, I’d be trying to get to 3 months of expenses into a savings account. You could use a high yield savings account, however, interest rates are still low on those accounts (ex: Ally at 1.25% vs Wells Fargo at 0.05%).

Don’t get in a habit of dipping into your emergency fund unless it’s a true emergency. Contribute whatever you can into the Roth at the start of the year, without draining your emergency savings. Then contribute monthly the remaining amount or save up and contribute later during the year in another lump sum. You could also set up automatic contributions of $458/mo into the Roth and use it as a way to dollar cost average into the market while contributing throughout the year and not dipping into emergency savings.

Q. In planning a budget as a soon to be new attending, what are the typical rule of thumb guidelines for spending?

A. Look at expenses and savings as two separate buckets. In the expense bucket, this is your fixed expenses and your variable expenses.

Fixed expenses tend to cost the same amount each month. These expenses are usually paid on a regular basis and are difficult to change. Some examples include: your rent or mortgage, your student loan payments, insurance premiums and utilities. When you look to “cut spending” making a change in your fixed expense will go much further than looking to cut a few smaller variable expenses. Generally, fixed expenses should not represent more than 50% of your take-home pay.

Variable expenses represent the daily expenses (purchases) that you make. Some examples include: dining out, entertainment and shopping. Generally, variable expenses should not represent more than 25% of your take-home pay.

That leaves 25% remaining which should be allocated to savings and retirement. Savings could be used to build up in emergency fund or down payment on a home. When I refer to retirement savings, this may be a bit confusing as we are talking about take-home pay. Contributions to your 401(k) or 403b are being contributed with pre-tax money. Retirement savings with take-home pay may include contributions to your IRA or funding an HSA.

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Ryan Inman