For those wondering why there hasn’t been any new content posted in a while, I promise I have a valid excuse. I’m happy to announce that my wife and I just had our third child – another boy! He and Nicole are doing great, and his two older brothers are adjusting surprisingly well to all the changes. With that said, I’ve been in catch-up mode ever since, but I’m happy to be back in the swing of things and looking forward to answering more questions!
In the last article, we answered student loan questions from a group of local family medicine residents. Today, we will finish answering the rest of their questions that were submitted. Since most revolved around how to get started down the right financial path during and immediately following residency, that will be our main topic today. So let’s jump into your questions!
Q: When should I think about retirement?
I don’t think it’s ever too early to think about retirement, but I probably wouldn’t recommend this to be the primary financial concern within your plan. The financial industry likes to focus on this goal because it is the most profitable for them, but in reality, there are many equally important financial objectives that you’ll want to achieve along the way. If you focus on retirement and forget about enjoying the rest of your life, you’ll miss some amazing opportunities along the way. With that said, if the other foundational pieces of your retirement plan have been set in place, and you have additional income to start throwing towards your retirement strategy, it’s probably not a bad idea. Below is a graph showing two theoretical retirement accounts. As you can see, Mr. Brown started investing 10 years earlier than Mr. Green and even though they both contributed the same amount in total, Mr. Brown benefited tremendously from the extra years of growth.
Q: When to start paying student loans?
In the last article, we discussed many of the strategies for paying off debt and the utilization of some loan forgiveness programs that are offered. However, we didn’t talk much about where the debt payoff fits into the grand scheme of the financial plan, which is how I interpret this question. With loan forgiveness strategies aside, let’s consider whether it’s best to use our assets and income to pay off debt or to invest.
First, I can’t emphasize enough that the fact that you’ve dedicated some of your financial resources to either of these financial goals is far more important than choosing the correct place to allocate those resources. In other words, whether you choose to save or pay off debt (or a little of both) you’ve already won the biggest step of the battle. And the harder you push on either one of these, the better off you’ll be years down the road. However, if you do want to make sure you are making the right decision on which one to attack first, consider these things as part of your decision:
Does your debt cause you anxiety?
Regardless of what the numbers say, if your large student loan balance is causing you to lose sleep, then let’s make a plan to eliminate this demon from your life. I’m a firm believer that the numbers don’t always need to dictate your priorities.
What do the numbers say?
If you’re strictly concerned with the numbers and making sure you get the absolute most out of your money, then we need to dive into the math. Playing probabilities of expected returns versus the interest rate attached to your loan can require some advanced math. It’s not as simple as comparing interest rates of your debt to expected returns in an investment account. You need to factor in taxation and market risk among other things.
How do you value liquidity?
As I’ll mention again below, having the flexibility of a non-qualified investment account should add value to the tradeoff between investing and chunking off debt. Remember that when you throw money at your debt, you won’t be able to get it back if you need it (without taking out another loan.) For some people, this is a good thing!
Q: What should I do with the signing bonus?
One of the things that I always think about when it comes to financial decisions is how restricted will we be in how we can use the money. For example, if you use your entire signing bonus as a down payment for a home, you won’t be able to get to that money if you were to need it for something else. Now for some people, that’s a great move because it keeps them from spending it elsewhere, but you can see how that decision comes with restrictive parameters. Likewise, you should consider flexibility and liquidity as something that adds value (or reduces value if you’re the type of person who makes unwise decisions when cash is on hand!). In the case of a signing bonus, this obviously will be awarded to you as part of a new contract, which means that you’ve probably just started a new job – possibly in a new town, with new management, new colleagues, etc. Unless you’re 100% committed to seeing your contract through to the end, you’ll need to be prepared to pay back some of that money if you leave that employer before your contract ends. With that in mind, it’s often a good idea to set that money aside and invest it conservatively to protect the principal (in case you decide to leave your new employer) but still have some growth potential, so the money doesn’t end up doing nothing for years on end. If the contractual nature of your signing bonus differs from this scenario, then you’ll probably just want to refer to the question above about the relationship and tradeoffs between investing and paying off debt.
Q: What should I think about in terms of asset protection and reducing taxes?
Asset protection is one of the foundational pieces of a financial plan. If you haven’t protected the things that you already have, you could be setting yourself up for disaster somewhere down the road. When we talk about asset protection, however, most people assume we are only referring to investible assets (your money) and hard assets (your stuff). And while protecting these things are important, many young physicians (who haven’t yet made a lot of money or bought a lot of stuff) ignore their largest asset which is their future income. Disability income insurance (DI) is one of the most significant investments you can make to ensure that your income will continue even if you can’t work due to an accident or illness. Think about it, what would you do if you got in a car accident and could no longer carry out your duties within the scope of your specialty? If you’re thinking the chances of this happening are slim, consider the fact that 25% of people will become disabled and miss work for at least a year during their working lives. For more on DI, CLICK HERE to read my article on the topic and how it is especially important for physicians.
When it comes to reducing taxes, there are a number of ways that this can be achieved, but like Ben Franklin said, paying taxes is as inevitable as death. Though we can count on paying a significant amount to Uncle Sam over the course of our working career, if we can alleviate some of that burden by using tax efficient strategies along the way, it will only help us achieve our life’s ambitions over time. In a recent article, I talked about some tactics we often incorporate within the scope of a financial plan that may help answer this question on a more detailed basis, so to avoid beating a dead horse, let’s shift to an important concept that you should know when it comes to factoring your tax burden into your financial plan.
Whenever you talk investments, you must understand the difference between a qualified and non-qualified account. For purposes of this conversation, let’s focus on the non-qualified (or taxable) accounts. Remembering that these accounts can accrue capital gains taxes along the way if securities (like stocks, bonds, mutual funds, etc.) are being bought and sold inside your account. Without diving into too much detail, it’s important to understand the concept of “Tax Equivalent Return” – that is, what your profits will be after you pay taxes on those profits. As an example, if you make $10,000 of short-term capital gains on a $100,000 investment, then your gross return will be 10%. But if your marginal tax bracket is 24%, then you’ll have to pay $2,400 of that profit back to the federal government at tax time. That only leaves you with $7,600 of profit left or a tax equivalent return of 7.6%. Thinking about what your true net return will be on an investment is important to maximizing your bottom line. Understanding and capitalizing on the nuances of the tax code is one of the most important things we do for clients.
For those who submitted their questions, I hope you found the answers you needed. Of course, if you have further questions or would like to sit down to review your financial situation, all you need to do is click on the big yellow button at the bottom of the page and you can book a meeting or phone call directly to my calendar. And since it’s a free service that I offer, there really isn’t a reason not to take advantage! Hope to speak with you soon!
Thanks for reading! For more articles geared toward young physicians and their money, click here or check out The Money Malpractice Podcast on any of the major platforms.
Until next time…KEEP SAVING LIVES AND KEEP SAVING MONEY!
Disclosures
• RichMark Private Wealth Management. LLC is registered as an investment adviser with the State of Michigan, and only transacts business in states where it is properly registered, or is excluded or exempted from such requirements.
• Content should not be viewed at personalized investment advice. Market events and other factors may affect the reliability of the potential outcomes. Simulated growth is purely hypothetical and does not represent actual performance.
• Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio.