Author: Joel Schofer, MD, MBA, CPE
Navy Personnel Command Launching New Website; MyNavyHR.Navy.mil
This change tomorrow is probably going to jack up all of my links to the PERS website. I’ll slowly try to fix them, but if you find any that are broken feel free to contact me. Here’s the article:
https://www.dvidshub.net/news/388784/npc-launching-new-website-mynavyhrnavymil
SG Video – Support to Navajo Nation
Esteemed Colleagues,
Last week, Force Roberts and I had the honor of traveling to the Navajo Nation to see our Navy Medicine Rapid Rural Response Teams embedded and integrated with local medical facilities in three locations across Arizona and New Mexico. Our shipmates are doing a superb job supporting the DSCA mission as part of the whole-of-America response to the COVID pandemic. The Navajo caregiving teams they have joined praise their expertise, their can do spirit and their compassion. During my visit, I also saw first-hand the damage this virus is doing to people’s lives and families. This disease is deadly. When Sailors or Marines go into battle, they are armed. In this war against this vicious and unrelenting adversary in which we are on the front lines, getting vaccinated is our armor and our best offensive weapon. I recognize that getting the vaccine is an individual decision. If you have not gotten it, please reach out to your trusted medical professional and discuss your concerns so that you are making a fully informed decision. The life you save by becoming vaccinated may not only be your own, but that of your shipmates and those of your family members.
Please click on one of the links below to watch the video message, and as always, THANK YOU for all you do to project medical power be it for Naval superiority or on behalf of our fellow Americans.
Video Message:
— To watch the video on a Government Computer, click here: https://www.milsuite.mil/video/40266
— To watch the video on another electronic device (such as a cell phone or non-YouTube blocked computer), click here: https://youtu.be/037mm14ruSc
With my deep gratitude,
SG
Bruce L. Gillingham, MD, CPE, FAOA
RADM, MC, USN
Surgeon General, U.S. Navy
Chief, Bureau of Medicine and Surgery
Aim to be Debt-Free by Retirement
Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get (free) on his blog Humble Dollar. Here is one piece of advice from his site:
“AIM TO BE DEBT-FREE BY RETIREMENT. If you aren’t, you’ll have an added living cost to cover. That could necessitate larger IRA withdrawals or selling winning stocks in your taxable account. This extra income could, in turn, trigger taxes on your Social Security benefit and larger Medicare premiums. To avoid those pitfalls, pay off all debt before you quit the workforce.”
Confronting this issue, my friends, is where you decide if you are going to put on your big boy/girl pants and really set yourself up for success or not. As someone who is debt free, I can tell you that the feeling is like no other once you get there. If my life goes as planned, I will never borrow another dollar from anyone for anything. That is a major contributor to my status as financially independent.
A few years ago, I was having a conversation on Reddit with an active duty member that was asking what they should do with the 5 figure bonus they recently received. I suggested they pay off their car and never borrow money for a car again. Another person responded and said that my recommendation was stupid. If the interest rate is low enough, it makes sense to borrow money for a car.
To each his own, but since you can get from point A to B with a very reasonable car (like these), you should make it your goal to pay cash for whatever you are driving. You can read more about my take on used cars here – buy used.
Whether you realize it or not, you are trading your time (your most limited resource) for money. Getting to the point where you no longer have to do that takes dedication, and getting to the 20 year mark of a military career without any debt is a major ingredient to the recipe that leads to financial independence and possible retirement.
If you want to read a pretty good book about this very thing, you should get the book Your Money or Your Life.
Finance Friday Articles
- 20 Ways to Legally Lower Your Tax Bill
- A timetable for overcoming COVID-19
- Backdoor Roth IRA 2021: A Step by Step Guide with Fidelity
- Buying Your First Home: What You Need To Know
- Choosing a Financial Advisor: The Definitive Guide
- Estate Planning: 11 Ways to Avoid Probate
- I Owned Six Homes and Lost It All With Real Estate Investing
- Say No to FOMO
- The Pandemic as a Retirement Preview
- The Test of Time: Art as an Investment
- Value Investing is Just Resting
Throwback Thursday Classic Post – Do the TSP Target Date Funds Miss the Mark?
Blooom is an on-line financial advisory service that will manage your Thrift Savings Plan (TSP) and other retirement accounts for pretty low fees. On another blog I wrote an article about them and some readers got into a Twitter dialogue with them. During this dialogue it was suggested that an investor doesn’t need to pay for an advisor because you can always just use target date funds if you don’t want to manage your investments yourself. Blooom’s response pointed to a blog post of theirs about target date funds and all the problems associated with them. Let’s take a look at their post and see if the points they raise are valid when compared to the TSP’s target date funds, the Lifecycle Funds.
What’s a Target Date Fund?
According to Investopedia, a target date fund is:
A fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal. Target-date funds are usually named by the year in which the investor plans to begin utilizing the assets. The funds are structured to address a capital need at some date in the future, such as retirement. The asset allocation of a target-date fund is therefore a function of the specified timeframe available to meet the targeted investment objective. A target-date fund’s risk tolerance become more conservative as it approaches its objective target date.
The Lifecycle or L Funds are the TSP’s version of target date funds. You can read my deep dive on them if you like for more information.
Are the Lifecycle Funds Too Conservative?
They used to be too conservative when compared to other target date funds, but that was recently adjusted. In 2019, the most aggressive you could get with the L Funds was the L 2050, which was 82% stocks and 18% bonds. If you wanted less than 18% bonds, you couldn’t do that with any of the L funds, but now you can get as aggressive as 99% stocks and 1 % bonds with the L 2065 fund.
If you look at the L fund targeting the year you want to retire, though, and you think it is still too conservative for your liking, to compensate you can always just pick a L fund that targets a later year. For example, if you want to retire in or around 2030 you would normally pick the L 2030. Instead you could pick the L 2035 or L 2040 to get more aggressive.
Do the Lifecycle Funds have High Expense Ratios?
This is a definitive no. While other target date funds can have high expenses, the L funds are composed of funds with the lowest expenses you will find anywhere. You probably cannot find a target date fund with lower expenses than the TSP L Funds.
Do the Lifecycle Funds Lack Personalization?
Yes, they do. There’s no way around this one. You can personalize them a little bit by adjusting the target date you invest in, as described above, but they are by definition standard for all investors.
I would argue that these standard asset allocations are good enough for just about everyone to come up with a reasonable investment plan. If you want a personalized plan, though, you may have to get some help or use a financial advisor.
The Bottom Line – Do the L Funds Miss the Mark?
I think it depends. They are definitely low cost, so they hit the target there. They used to be too conservative, but that was fixed and you can also just adjust that by using a fund with a target date that is further off. They are definitely not personalized, but I don’t think they need to be. The asset allocations they use would do for 99% of the people investing, including myself.
3 Things Every Young Medical Student and Physician Needs to Know
I gave this talk at a national meeting in 2017, but here is a written summary of the three things every young medical student and physician needs to know.
1. You can’t control the investment markets, so focus on the two things you can control – investment costs and your asset allocation.
No one, and I mean no one, knows what is going to happen in the investment markets. Study after study have shown that the overwhelming majority of people who try to beat the markets fail. Because of this, you should forget about trying to predict the markets, and focus on things you can control – investment costs and your asset allocation.
All investments have costs, and the impact of these costs on your investment return compounds over time, taking a larger and larger bite out of your investment returns. If you invest $100K for 25 years and earn 6% per year, without costs you’d have $430K. With just a 2% annual cost you wind up with only $260K. That 2% annual cost consumed $170K, almost 40% of your potential investment! (Source: Vanguard.com)
In addition, because they have to overcome higher costs, investments with higher costs lag the performance of similar investments with lower costs. If you look at stock and bond mutual funds in the highest and lowest cost quartiles, you’ll see what I mean:
| Type of Fund | Highest Quartile of Cost | Lowest Quartile of Cost |
| Stock | 6.9% | 7.8% |
| Bond | 4.0% | 4.4% |
If you want to take one step that will guarantee that your costs are among the lowest in the industry no matter what you invest it, you should invest with Vanguard. Vanguard is actually owned by its own investors (you), and they leverage this corporate structure to provide the lowest investment costs across the board. With over $5 trillion (yes, trillion) under management, you can’t go wrong by just investing in Vanguard.
If you can’t invest with Vanguard, perhaps because your retirement plan doesn’t offer Vanguard investments, then you need to get into the weeds on your investment costs. While there are many different potential investment costs, the easiest one to look at is the expense ratio of your potential investments. According to Morningstar.com, the expense ratio is “the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.”
Wow. That was a mouthful. Bottom line…high expense ratio bad, low expense ratio good. You should be able to find your investments’ expense ratios on your investment website or Morningstar.com.
In addition to investment costs, the other things that you can control is your asset allocation. While there are many asset classes you can invest in, the two most basic are stocks and bonds. Here are some of the returns for stocks and bonds from 1926-2013 in commonly utilized portfolios:
| Annual Return | 50% Stocks & 50% Bonds | 60% Stocks & 40% Bonds | 80% Stocks & 20% Bonds | 100% Stocks & 0% Bonds |
| Highest | 32.3% | 36.7% | 45.4% | 54.2% |
| Average | 8.3% | 8.8% | 9.6% | 10.2% |
| Lowest | -22.5% | -26.6% | -34.9% | -43.1% |
As you can see, the higher your allocation to stocks over bonds, the more risk you are taking and the bumpier the ride. Along the way, though, you have historically been rewarded for this bumpy ride with a higher average annual return. Just like the extra 2% cost that was previously discussed compounds to make a huge difference, so will a small difference in your returns. In other words, the more risk you can take, the more money you will probably end up with.
The application of these principles is that you should take as much risk as you can. In other words, you should invest as much of your portfolio in stocks as you can while still sleeping at night and not lying awake worrying about the stock market’s ups and downs. There will be another market downturn, and when that occurs you need to keep buying stocks because they are on sale, not sell out because you can’t handle seeing your net worth and portfolio value decrease.
Invest as high a percentage of stocks as you can without making the critical mistake of selling stocks during the next market downturn. For me, that has been 100% stocks for the majority of my career, but for some people they’ll panic even at a much lower percentage of stocks. If a 50% stock and 50% bond portfolio is the only one that will keep you from selling during the next market downturn, then that is the right portfolio for you.
If you have been investing for long enough, look at your actual behavior during the 2007-2008 or early 2020 market downturn and what your asset allocation was at the time. In 2007-2008, mine was 100% stocks and I kept on buying. Your allocation and actions will tell you a lot about your own risk tolerance.
In summary, you can’t control the market, so focus on controlling investment costs and your asset allocation.
2. Your savings rate is the most important factor determining your eventual net worth, and it should be at least 20-30% of your gross income.
The most common recommendation you’ll find or hear when it comes to saving for retirement is to save 15% of your gross or pre-tax income for retirement. There is nothing wrong with this recommendation, but built into it is the standard mentality of working until age 65 and then retiring. If you want the freedom to retire early, work as much or as little as you want, and achieve financial freedom/independence, then you will need to save much more than 15%. I’ve saved 30% over most of my adult life, and that’s why I’m writing about personal finance.
If you want to take a look at various saving rates and how they impact your financial life, you’ll want to read the blog post “The Shockingly Simple Math Behind Early Retirement” at MrMoneyMustache.com. There you will find a chart that shows you how many years you will have to work until you can retire based on your savings rate. If you go with the standard 15% savings rate, you’ll have to work 43 years before you can retire. If you go with my 30% rate, you’ll work 28 years. If you manage to save 50%, you can retire in 17 years! The more you save, the earlier you reach financial independence and can work as much or as little as you want. And having a military pension will reduce this even further.
The other standard advice you’ll hear and read is that you’ll spend approximately 80% of your pre-retirement income during retirement. For a physician with a typical high income, that can be a lot of money! You have to realize that 80% is probably high for a physician because after you retire you’ll have greatly reduced expenses. This is because:
- You’ll be in a lower tax bracket.
- You’re no longer saving for retirement.
- You no longer need life or disability insurance.
- You’ve hopefully paid off your mortgage.
- Your kids are out of the house (if you had any).
- You have no more job-related expenses.
- You can give less to charity if you need to.
In the end, you can probably live off of 25-50% of your pre-retirement income, not the standard 80%. This fact can multiply the effect of a higher than normal savings rate.
3. You are your own financial worst enemy.
Unfortunately for us, we engage in self-defeating behaviors all the time, including:
- Assuming too much debt.
- Living above our means in order to keep up with the doctor lifestyle.
- Purchasing too large and expensive a house.
- Purchasing too expensive a car.
- Not maxing out our tax-advantaged retirement account contributions.
Luckily there are some simple rules that, if followed, can keep young physicians and medical students out of trouble. First, realize that anytime you assume debt you are simply borrowing from your future self for current gain. Sometimes that is a good idea, like when you borrow to pay for medical school, but pausing before you assume debt to purchase something can help you out greatly. Getting down to brass tacks, no one really cares what medical school you went to, so you should probably go to the cheapest one you can get into. In addition, no one really cares how large your house is or what kind of car you drive. You think they care, but they really don’t. Don’t try to impress other people.
If you have student debt, you need to get smart about ways to refinance it or get it forgiven with the Public Service Loan Forgiveness Program. Thanks to the Navy and your tax dollars, I never had student debt, so I’m not going to pretend to be the expert on it. If you have student debt, go to WhiteCoatInvestor.com and learn about options to refinance or get your loans forgiven.
When it comes to houses and cars, if you can’t afford the house you are purchasing on a 15-year fixed mortgage then you are probably buying too expensive of a house. Rent until you can put down a larger down payment or look at less expensive houses.
When it comes to cars, you should realize that you can buy a very reasonable used car that is 5-10 years old, plenty nice, and very reliable for much less than a new car will cost. You should make it your goal to pay cash for cars. If you can’t pay cash, then you should purchase a cheaper car. Low or no interest loans are tempting because people think they are getting “free money,” but using “free money” to pay for a depreciating asset (one that declines in value) is not a smart financial move. Your goal should be only to borrow money for appreciating assets (ones that increase in value), like businesses or real estate.
Finally, make sure you maximize your tax advantaged retirement contributions every year. It is one of the few legal ways to hide money from the IRS, and the compound growth year after year is an opportunity you don’t want to miss.
In summary, here are the three things every young physician or medical student needs to know:
1. You can’t control the investment markets, so focus on the two things you can control – investment costs and your asset allocation.
2. Your savings rate is the most important factor determining your eventual net worth, and it should be at least 20-30% of your gross income.
3. You are your own financial worst enemy.
Somebody out there is going to take this advice to heart and get rich. Is it going to be you?
Joel Schofer's Career Planning Blog 