At the 2019 Spring Residents Forum meeting, Anne M. Mills, MD, FCAP presented Financial Health for the Pathology Trainee. The topic of financial wellness continues at the 2019 Fall Residents Forum Meeting, where Lester D.R. Thompson, MD, FCAP will present on the Seven Steps to Financial Health.
In advance of his Residents Forum session, I summarized some of the high-yield points from Dr. Mills and looked ahead by posing some heavy-hitting questions to Dr. Thompson.
Dr. Mills demonstrated her financial prowess—she paid off $200,000 in student debt in 18 months, bolstered by an article in Archives as well as a blog she did at the invitation of the New-in-Practice Committee.
Recap of Financial Health for the Pathology Trainee
If you do not have a budget, it is time to get a budget. You have to be aware of your cash flow to make educated decisions. This knowledge will allow you as a resident to combat lifestyle creep and trying to keep up with the Joneses.
Do I Need a Financial Adviser?
You may or may not need a financial adviser, but if you decide to work with one make sure it is a fiduciary. Fiduciaries are legally bound to act in their client’s best interest and not all financial advisers are fiduciaries.
When Should I Start Investing for Retirement and Where?
Now is a great time to start funding a retirement account. Your employer likely has at least one retirement plan and many offer matching contributions. Along with your employer sponsored accounts there are individual retirement accounts or IRAs. These are relatively simple to set up and if you choose a target date fund, the account will automatically re-balance your asset allocation as you age. Traditional contributions are pre-tax and Roth contributions are post-tax. Roth contributions grow tax free, but have an income and contribution limits. There is a “back-door” Roth IRA that allows you to continue to contribute to Roth accounts even past the income limit. Roth accounts allow you to withdrawal contributions at any time without penalty, but to withdrawal earnings early without a penalty the use must fit into a defined scenario, like a first-time home purchase or medical expenses.
How Much Should I Contribute?
Dr. Mills recommends 20% of gross income as a rule of thumb. The 401k contributions limit does not allow a typical physician to use one account. You will need multiple additional accounts to reach 20% of your gross income. The most important thing you can do for you financial health according to Dr. Mills is begin maxing out all your retirement accounts on day 1 of your real job. It was pointed out that women are 27% more likely than men to have no retirement savings and half as likely to have savings >$200K. Dr. Mills recommends Miss Bonnie MD as a resource that is tailored specifically to women.
The lifestyle you were living for four (4) years as a resident should continue for 2-5 years of your attending life. Living like a resident on a salary of $250K, you can contribute 20% to retirement with ~$70K available to put towards debt.
The Public Service Loan Forgiveness Program (PSLF) is the most well-known forgiveness program. It forgives remaining loan balance after 120 qualifying payments. Documentation is very important and you must be in the correct repayment plan with a salary from a not-for-profit organization or the government. There is legislation attempting to modify this—saving a side fund may not be a bad idea.
When and How to Buy a Home?
Dr. Mills points out that you have a negative net worth. Many doctors purchase homes at the wrong time and at the wrong price. This is often due combination of delayed gratification and heavy marketing. The conservative approach is not buying a house until you can put down 20% on a 15-year mortgage AND are comfortably saving 20% for retirement. Dr. Mills recommended that house payments do not exceed 20% of your gross income and 20% of take home is safer.
The doctor’s loan prevents the need for private mortgage insurance, which is incurred for < 20% down payment. This loan may make sense if you are using the 20% down payment money to pay off loans or retirement contributions. You can be approved for far more house than you can afford and putting down zero on the house means, you are starting underwater.
If someone depends on your income you need life insurance. If there is a stay-at-home-parent life insurance is needed for them as well. Life insurance comes in two flavors term life and whole life. Term life insurance is fairly cheap (~$150/month) and pays out if the death occurs during the term, but if the death is after term (around retirement age) there is no pay out. Whole life insurance is expensive (~$4k/month) and combines a death payout with an investment. You are able to access the cash value while you are alive. The investment returns are lower than if you were to make the same investments on your own. A good rule of thumb for how much term life insurance to purchase is 7-10x your income, considering needs like paying off your house, putting kid(s) through college, replacing the deceased income, and funeral cost. A laddered plan can be set up so that the amount you are insured for decreases as your funds increase over time.
Compared to term life insurance disability insurance is expensive (~$500/month). Dr. Mills recommends buying some today. The cost will progressively increase as you age. Women should note that having children raises your rates dramatically.
If the rest of your financial life is in order there are a number of plans that you can invest in for college, however this is one of the least critical areas you should focus on. The most well-known plans are known as 529 plans. These savings go in tax-deferred and are not taxed if used for qualified educational expenses such as tuition, housing, required books, and computers.
Interview Dr. Lester D.R. Thompson
First, I would like to thank you for your service in the United States Navy and agreeing to give a financial presentation at the 2019 Fall Residents Forum Meeting in Orlando on September 21, 2019. I have a set of questions on how you became a voice on financial topics and a set of burning questions from residents.
We all are aware of Dr. Thompson, the pathologist from your presentations, textbooks, and countless articles. People may not be aware of your financial prowess. With that, I am aware that you give financial presentations to physicians which leads me to my first question.
How did you start doing financial presentations and what do they cover?
What I do is present financial updates for each physician group, there are 12 hospitals in the system. I am one of the retirement representatives, and in this particular role, I work with the retirement committee--we manage about $6.8 billion. I give an update on those particular monies and how they are being managed. Then I conclude with a 15-minute talk on a financial topic of interest I choose. I also give one to the new physicians starting.
Our experiences shape our perception of the world. Tell us a little bit about your upbringing and how this has affected your look on money.
The money thing always starts with your family, right? My dad gave my brother and an allowance. We are talking 1968, the first time I got an allowance in South Africa (a completely different currency, it’s the Rand). I would get 10 cents a month. I was definitely a spendaholic. I would spend it all in a very short time. My parents and my brother wanted to teach me to be a better saver. My brother said, “I will double what you save in a month.” The first month I saved like 2 cents and then he gave me the two cents. It was like, "Oh my god, I am actually doubling my money." The following month I did not spend anything. I kept the whole 10 cents and [my brother] had to give me all of his allowance, which was very disappointing for him. That was kind of my first experience with money where I did not do well initially but realized that saving money was actually useful.
So, Dr. Thompson you are solidly mid-career….
[groans] The declining phase. They say, "Do not turn a peak into a plateau." That’s where we are.
What is the current asset allocation by percentage?
Not including real estate and just including retirement savings. The place I work for, Kaiser Permanente here in California, has a defined benefit plan, which means they have the equivalent of a pension. Not many places have this in the world. The military does and some government institutions. I use the concept of the Kaiser pension as my bond portfolio, so I still have about 90% in stocks at this point. I am still super aggressive at this point because I have a block of money that is my defined benefit that I will get. Additionally, I worked in the navy for 20 years, so I have a navy retirement as well. So, this is a book of money I have that I am interpreting as a bond fund.
Do you have any thoughts on factor investing?
No, I do not. It is essentially trying to game the system for alpha (trying to get better returns on your investment), but I do have a bias towards value--companies that are undervalued because people do not understand them that well. They would really like to see them do better sometimes they are not in favor at that particular moment. I do not do anything with market timing and never do momentum trading. "Look it’s gone up for the last 75 days in a row lets jump on the bandwagon." I never do that. I am mutual funds exclusively at this point. I do not do individual stock investing. I do not have the time to track what it is doing, keep up with the conference calls they do every quarter. Having a broader approach to [investing] allows to mellow out in major highs or major lows.
Can you provide us with an example of a financial mistake and the lesson(s) learned?
Probably the worst thing ever dollar amount wise was when I purchased a company called CyNet. This was in the late 1990s, and the company was supposed to broadcast faxing to multiple different fax numbers. I purchased pre-IPO stock, which means I was buying the company before it was public. It took them three (3) years to go public. When they did, they were selling for $10 a share. I had purchased them for anywhere from 25 cents to 75 cents a share. I really should have made a killing on that, but I was greedy and decided that I would wait and see what happens. I was sure it would go higher. Anyway, I ended up selling the stock for 1 cent each, one year later. Basically, I lost my entire investment in that particular enterprise. It taught me the lesson that you do not know anything about the market for sure.
Questions from Residents
What is an appropriate asset allocation for residents?
You have your entire life ahead of you. Most residents are in their late 20s or 30s. If you consider 65 or 70 years old as a potential age of retirement, you have 40 years to wait out whatever is going to happen. I would have 90-95% in stocks at that point. I think having the bulk of savings in stock is the best thing you can do.
Is there any situation where residents should consider a tax-deferred account?
There are several Roth modalities. There is the Roth IRA and the Roth 401k. Both of these means you are paying taxes on the money before you put them in. It grows tax-deferred, and there are not any taxes when the money comes out. From 1900 to present, the tax rate looks like an EKG, it's all over with what is going on with it. I do not know what is going to happen with the taxes—maybe it will be lower, but maybe it will be even higher. You really do not know what is ever going to happen with the taxes, so from that perspective putting money into a Roth means it grows tax-deferred and comes out to you on the other end without having to pay taxes. I think that is a great idea if you consider social security, Keogh plans, and pensions are all going to be taxed. The Roth vehicle is the only one that is not going to be taxed. One of the things people do not think about with Roth is the inheritance factor associated with it. You can have [the Roth account] go to your heirs, children, or even your grandchildren. There is no minimum distribution required, which means you do not have to start taking money out it at 75 1/2. You can pass it on to a child, and that child can watch it grow for 40 or 50 years before they need to take money from it. It is great for tax and estate planning.
How do I find a fair, fiduciary adviser, at a fair price?
Most residents struggle with just obtaining the medical knowledge and to maintain the financial knowledge on top of that, most people look to advisers for these sort things.
You mentioned one very important point, the fiduciary aspect. In other words, fiduciary means they have your best interest at heart rather than someone else’s. They are not going to churn your account to try as to get as much into their pocket rather than your pockets. The fiduciary part is very important.
It is hard to say [referring to finding an adviser]. There are clear differences based on where you live and what the state is. Each state has different licensing requirements for these individuals, and that can be a bit of a challenging. It is probably a bit like residency-- you read; reading and trying to understand about finances in general. If I were to ask a group of residents who got actual finance training, probably two (2) hands will go up. I use the 80/20 rule. [The financial adviser] listens 80% of the time and talks 20% of the time. They need to understand where you are and what you are doing. There are robo-advisers where you put in your assets, and it will say this is what you should do. It is all computerized, as individuals we like to hear someone talk to us. What is going on, what your circumstances, how much do you have in medical school debt, and are you married or not. What’s going on with housing? Where do you want to live? Is there state tax? I think trying to choose someone licensed and in general a flat fee. In other words, [The financial adviser] is going to charge you $250 and you get an hour of [their] time or whatever the amount is going to be. Do not do a percent of assets. That is always dreadful; they have an incentive to charge you more and more as your assets begin to increase.
Loans are another big topic for residents. If you are not going for public loan forgiveness, we should probably refinance. How do you decide on fixed versus variable?
The consolidation aspect with any loan is a difficult one. The first factor is convenience. I am only going to pay one place. Do not do it for convenience; do it because the aggregated amount is going to be at a lower interest rate. I think trying to get a fixed rate is preferable. It is going to remain that way over time. Let us say you are talking about 20 years and it is 4.5%. With inflation at 3% in 10 years, you are still paying the same dollar amount every month, but the dollar value of what that could actually buy is now significantly less because of inflation. That means you a paying with reduced value dollars over time. By the time you get to the 19th year, and you are paying your $600 [….]. That $600 is worth $1400-1800 in [today’s dollars]. It is a much better idea of having a fixed rate.
One other topic you see when you go on these financial blogs for advice, they say you should have an emergency fund, but the amount of debt we are in is kind of an emergency. So how much of an emergency fund should we have?
The idea is that you should have three months squirreled away somewhere in a cash vehicle—something that is readily accessible; Something that is not invested. You may have to sell it potentially at a loss depending on what is going on in the market, and that would not be ideal. At least a three-month supply of: what are your bills, what are your payments, where are you going, how much do you spend every month. If you cannot have that squirreled away and set aside, what if something happens, what if you get sick and don’t have disability and it is not part of what is going on with the university. Now you are out. I think you do need to have that amount set aside. Maybe even preferentially over prepaying the loans at that point. If something goes wrong, you need to have something to pull from.
One of the other things that is kind of in the ether, if you will, is to live like a resident. Right after graduation, for like 2-5 years to get your retirement started, pay down loans. You get that big bump in salary, but if your living expenses do not go up with it, you have a lot of money you can move around.
Yes, the unfortunate part about that is taxes will go up too. It is death and taxes as they say. If your salary has gone from $60,000 as a resident and now is $300,000, you are still going to pay tax on the $300,000. When you talk about state and federal, social security and all of this 50% just magically disappears. I do hear you, live like a resident, in fact, that is what we did. My wife and I decided we wanted to try to get a much of the loans paid off as we could. We still lived in a very frugal fashion. We already purchased our house beforehand. We had that as a tax write off too. There was a little benefit to that at that point.
Is there anything you did with your wife or conversations, specifically that you had. We have spouses and significant others who have paid their dues and helped you get through this grind, and they are ready to reap some of the benefits. Is there anything you can give us to help us get through that part of it?
So maybe that is the 1% rule. I just made that up actually. My wife and I have allowances that we allow and give to one another. The reason behind it is that it is completely non-traceable money. This means she can do whatever she likes with her allowance, and I am never able to say anything about it. The same thing with mine. If I want to go out and buy potted plants, she cannot say, "we do not need potted plants." This is my money, and I am doing what I want to. So this is it. If you are talking about $300,000 a year as a potential salary 1% of that is $3,000 bucks, so maybe that’s enough to maybe compensate for life is now a little be easier, let’s still struggle, but let’s not struggle constantly.
Thank you for your time. Is there anything else you want us to know about before we see you in September?
If you want to read a book beforehand, there are several books that can be a fun read as opposed to something boring. The Millionaire Next Door is a fabulous book. It is old. It is a fun read. It tells you just because a person is driving a 2007 Prius does not mean to say they are not a millionaire. This particular book is super. Another one is Freakonomics. There have been three or four variants over time as well. It gives you such a unique perspective of what is going on with economics and how people approach money and why they do certain things. They are fun reads, and you can do it relatively quickly, and it is not bogged down in numbers, percentages, and equations. It does allow you time to have something that is fun to do.