Financial Planning
New Blended Retirement System
Here are some resources that discuss the new blended retirement system that is coming our way in 2018:
FAQ for Blended Retirement System
Military.com – What the Blended Retirement Means to You
Military Times – Retirement Changes Mean Tough Choice for Troops…Eventually
DoD Releases 2016 Basic Allowance for Housing Rates
Here is a DoD news release about the 2016 BAH rates:
The Department of Defense has released the 2016 Basic Allowance for Housing rates. Basic Allowance for Housing rates will increase an average of 3.4 percent when the new rates take effect on January 1, 2016. An estimated $21 billion will be paid to approximately one million Service members. On average, Basic Allowance for Housing rates will increase approximately $54 per month.
Continuing to slow the growth in compensation costs, the 2016 Basic Allowance for Housing Program expands the member cost-sharing element (out-of-pocket expense). Based on the authority provided in the FY 2016 National Defense Authorization Act, the cost-sharing element was increased to two percent. The cost-sharing amounts incorporated in the 2016 Basic Allowance for Housing rates vary by grade and dependency status and range from $24 to $57 monthly. This means for 2016, a typical member will need to absorb two percent of the national average housing cost by pay grade. This rate computation change slows the growth of certain military pay and benefits in a fair, responsible, and sustainable way. Even with these nominal changes, the overall military pay and benefits package remains robust and healthy.
Housing cost data are collected annually for over 300 Military Housing Areas in the United States, including Alaska and Hawaii. An important part of the Basic Allowance for Housing process is the cooperation from the Services and local military housing offices in the data collection effort. Input from local commands is used to determine in what neighborhoods data is collected and to direct the data collection effort towards adequate apartment complexes and individual housing units.
Median current market rent and average utilities (including electricity, heat, and water/sewer) comprise the total housing cost for each military housing area and are included in the Basic Allowance for Housing computation. Total housing costs are developed for six housing profiles (based on dwelling type and number of bedrooms) in each military housing area. Basic Allowance for Housing rates are then calculated for each pay grade, both with and without dependents.
An integral part of the Basic Allowance for Housing program is the provision of individual rate protection to all members. No matter what happens to measured housing costs – including the out-of-pocket cost sharing adjustment noted above, an individual member who maintains uninterrupted Basic Allowance for Housing eligibility in a given location will not see his/her Basic Allowance for Housing rate decrease. This ensures that members who have made long-term commitments in the form of a lease or contract are not penalized if the area’s housing costs decrease.
The Department is committed to the preservation of a compensation and benefit structure that provides members with a suitable and secure standard of living to sustain a trained, experienced, and ready force now and in the future.
For more information on Basic Allowance for Housing, including the 2016 Basic Allowance for Housing rates and 2016 Basic Allowance for Housing rate component breakdown, visit https://www.defensetravel.dod.mil/site/bah.cfm. Service members can calculate their BAH payment by using the Basic Allowance for Housing calculator at: http://www.defensetravel.dod.mil/site/bahCalc.cfm.
4th Step to Financial Freedom – Contribute Maximally to Your Tax-Favored Retirement Accounts
The benefits of tax-favored retirement plans like the Thrift Savings Plan or an Individual Retirement Account (IRA) are too great to ignore, and over the span of your career sheltering your investment earnings from the taxman will benefit you tremendously. For example, assume that you make a $4,000 annual contribution for 45 years and earn an 8% annual return. Here is how much you would have if you invested in a taxable investment account versus a tax-deferred account:
- Taxable investment total – $604,407
- Tax-deferred investment total – $1,669,670
As you can see, the power of keeping your investment returns and not paying taxes on them can lead to huge differences in the amount of investment growth you will experience.
The primary tax-favored investment account that is available to us is the Thrift Savings Plan (TSP). If possible, you should always contribute the maximum amount each year, which is $18,000/year in 2015 and 2016 ($24,000/year if you are over 50). You may be able to contribute more if you are deployed in a combat zone. See this TSP Annual Limit on Elective Deferrals PDF to read about the details.
After you fill your TSP, open an IRA and, again, contribute the maximum amount each year. The contribution limits for 2015 and 2016 are $5,500/year ($6,500/year if you are over 50).
For both the TSP and IRA you’ll face the decision of whether to contribute to a Roth or traditional version. Roth contributions are taxed now, meaning you make after tax contributions and future withdrawals are tax free. Traditional contributions are taxed when you withdraw, meaning you make pre-tax contributions now and pay taxes later. For younger or military people, the Roth is usually more advantageous because your tax rate is lower than it will be in the future, but there are many on-line calculators to help you decide which option is best for you, including:
https://www.tsp.gov/PlanningTools/Calculators/contributionComparison.html
http://www.bankrate.com/calculators/retirement/roth-traditional-ira-calculator.aspx
Here is a great comparison chart from Vanguard:
https://investor.vanguard.com/ira/roth-vs-traditional-ira
The Roth IRA does require an adjusted gross income of less than $117,000/year (single) or $184,000/year (married) in 2016 to fully contribute, but there is a way around this called a “backdoor” Roth IRA. For a tutorial on how to do this, go to:
http://whitecoatinvestor.com/backdoor-roth-ira-tutorial/
If you moonlight as an independent contractor (you’ll know because you will be paid with a Form 1099), you will have other tax-favored options available to you, including a SEP-IRA or Solo 401k. In these accounts you can often contribute a lot more money. For a full discussion of them see:
http://whitecoatinvestor.com/sep-ira-vs-solo-401k/
The bottom line is that to maximize your net worth you need to maximize your contributions to all tax-favored retirement accounts you have available to you. Hiding your investment earnings from the taxman will allow you to accumulate a lot more for retirement.
3rd Step to Financial Freedom – Debt Management
“Annual income, twenty pounds; annual expenditure, nineteen pounds; result, happiness. Annual income, twenty pounds; annual expenditure, twenty-one pounds; result, misery.” – Wilkins Micawber in David Copperfield
Debt has a bad reputation. It is prevalent, no one wants it, and everyone who has it wants to get rid of it. Everyone wants to be debt free.
There is, however, another way to look at debt. Debt is a financial tool to meet your personal and financial goals. For example, according to the Association of American Medical Colleges the median level of medical student debt was $180,000 in 2014. While we’d all agree that this level of debt is high, when necessary it has allowed most of us to meet our personal goal of becoming a physician.
Dealing with Debt Wisely
Banks and financial institutions see physicians as low-risk and are willing to loan us a lot of money, which can be good or bad. You can probably get a loan to buy a $100,000 luxury car, and while this might be fun, it is probably not wise. The same thing goes for a jumbo mortgage.
Every time you are considering a loan, you should ask yourself if what you are about to purchase is worth it. Will that fancy car or extra large house truly bring you happiness? Or does it just bring a ton of overhead, increased expenses, and four extra rooms you’ll need to buy furniture for.
The book The Millionaire Next Door by Stanley and Danko was a longitudinal study of millionaires. This study showed that most millionaires don’t drive expensive cars. In fact, most drive “normal” cars or buy them used. In addition, most don’t live in large houses in expensive neighborhoods. Their study showed that physicians are notorious for buying these items to live up to society’s expectations. Doctors are supposed to drive luxury cars and live in expensive neighborhoods, right? This is also why they found that physicians under accumulate wealth and have much a lower net worth than their income would predict.
Do yourself a favor and buy a smaller house, drive a less expensive car, and avoid a boat. You don’t want to own the boat, you want to be best friends with the owner of the boat. Skip the vacation home. You can probably rent an equivalent home for much less than it would cost to buy it, and in 2013 the Nobel Prize in Economics was given to Robert J. Shiller, who showed that housing prices barely outpace inflation over the long haul, making real estate a less attractive investment.
While the ultimate goal is to get to the point where you can pay cash for cars and other major purchases, you will likely take out loans for some period of time when a major need arises. Here are some financial rules of thumb to keep you from getting in debt beyond what you can handle:
- Monthly debt payments (excluding your mortgage) should be <20% of your monthly income.
- Your housing costs should be <30% of your income.
No matter what debt you accumulate, make sure you always make your payments on time. The #1 factor that goes into calculating your credit score is your ability to make timely payments on your debt, and your credit score will determine the interest rate you are charged on nearly every loan you ever take. One late $50 payment could cost you thousands of dollars on a mortgage, for example.
Credit Cards
“Keeping a balance on your credit card is about the worst financial move you can make.” – Burton G. Malkiel, Chair of Economics, Princeton University, Author of A Random Walk Down Wall Street
The quote above says it all. If you are going to use a credit card for the convenience, always pay off the entire balance every month because the interest rates they charge can be very high. If you can’t control your credit card debt, cut them up, cancel them, or only have one that you use in special circumstances. If you have to keep credit card debt, make sure you ask your credit card company to lower the rate or transfer the debt to a low rate card. Check credit.com, cardtrak.com, or lowcards.com for a list of low rate cards.
Good Debt?
In addition to helping you achieve financial goals that are important to you, debt can be used to limit the amount of your own investments that must be in cash equivalents. Having easy access to credit can provide a nice backstop in case of a sudden need for cash.
If you have equity in your home, a home equity line of credit can serve this purpose. Their interest rates are usually low and the interest is often tax deductible, further lowering the cost of borrowing. Home equity lines of credit (and other lines of credit as well) should be set up in advance, not after you or your spouse/partner loses their job and you are a credit risk. Beware of fees your lender may charge and see if you can find one that will waive them for a slightly higher interest rate. A slightly higher interest rate isn’t that big of a deal as you hope to never use this line of credit anyway.
Student Loans
Despite the HPSP program and USUHS, many readers will have significant student loans. Since I never had student loans, I will admit that this is a weak area in my financial knowledge. By far the best source for information on student loans, paying them off, getting them forgiven, and refinancing them is The White Coat Investor. I would STRONGLY ENCOURAGE anyone, especially those with student loans, to check out this resource. It is unparalleled and the most useful financial site for physicians on the web.
Probably the most important step that residents can take to pay off their student loans is to avoid jumping straight into the “doctor lifestyle” as soon as they graduate residency. If you continue to live like a resident until your student loans are paid off, it shouldn’t take more than a few years to get rid of them, after which you can splurge a little and enjoy your income free of student loans. This is easy to type and hard to do, but just a few years of “roughing it” can wipe out your student loans.
Paying Off Debt
When you pay off debt, you are earning an after-tax return equivalent to the interest rate you are being charged. For example, if you pay off credit card debt with an 18% interest rate, this is the equivalent of earning a guaranteed 18% return on your investment tax-free. With the long-term rate of return for the stock market averaging just under 10%, you can see that paying off high-rate debt is often a better move than investing in the stock market. In other words, it makes no sense to pay the minimum on high-interest debt like credit cards while investing in the stock market. Pay off your high interest debt first.
The one exception to this is if you get an employer match on your retirement account contributions. If you get a 50% match, that is an immediate 50% return on your investment, so contribute to your retirement account up to the maximum that your employer matches, then pay off high interest debt. Unfortunately, military physicians don’t get any match right now.
If you have multiple loans, pay off the one with the highest interest rate first. In addition, see if you can stretch out the payments for your low interest loans over a longer period of time, lowering your monthly payments and freeing up cash to pay off your higher interest debts faster. For example, if you have credit card debt with a 14% interest rate, a car loan with an 8% rate, and a mortgage with a 5% rate, pay off the credit card first, then the car loan, and then the mortgage.
Keep in mind that it often doesn’t make sense to pay off debt when the interest rate is lower than the after-tax rate you could earn on an investment. If you want a number, I would pay off high-interest debt (rates greater than 6-8%) such as credit cards, car loans, and private educational loans. If the rate is less than 6%, as with most mortgages nowadays, it probably makes more sense to invest the money in mutual funds and pay off the debt as slowly as possible.
Another move to consider is to take out a home equity loan to pay off high interest debt. You get a lump sum with a fixed interest rate that is often lower than your current debt and pay it off over 5-15 years. In most cases the interest you pay is tax deductible. Keep in mind that you could lose your house if you default on this type of loan, and beware of any up front fees that you need to factor into your calculations.
Conclusion
Don’t wait until a crisis hits (divorce, job loss, disability, or a lawsuit) to get your debt in order. If you have major problems with debt and need help, seek a fee-only financial planner with experience with high-income individuals who can help you restructure and manage your debt.
2nd Step to Financial Freedom – Get Properly Insured
Having adequate insurance is a fundamental part of your overall financial plan and the 2nd step to financial freedom after establishing an emergency fund (perhaps it should even be 1st). It is also something that most people struggle with, as there are innumerable types of insurance with many options to choose from. At it’s most basic, insurance is a method to transfer risk from you to an insurance company, and you should only pay to transfer risks that you are not willing or able to shoulder. While insurance companies are happy to insure everyone and everything, in general you should only insure against large losses. Below is one man’s attempt to treat insurance with a “KISS” (keep it simple, stupid) approach. This post will discuss insurance that you probably need, insurance you might need, and that which you probably don’t need.
TYPES OF INSURANCE YOU PROBABLY NEED
If you cannot afford the costs involved in any life scenario, then you should probably insure yourself against it.
Disability Insurance
While an emergency fund and the Navy’s disability policy can “self-insure” you against short-term disability, you may need help in the event of a long-term disability unless you are wealthy enough that you can make up the difference between your military pay, including all physician bonuses, and your disability payments, which will not reflect the higher pay of a physician. Most physicians probably rely on their higher pay, and would be pretty disappointed with the Navy and VA payments in the event of 100% disability, in which case you’d get approximately your annual/monthly basic pay.
Typically, you should obtain enough coverage to replace 60-70% of your income up to the age of 65 in the event of total disability. Ideally, the policy will cover your specific specialty as a physician, what is called “own occupation,” and will not rely on you finding alternative means of employment, such as working in a different specialty. You will also want coverage if you can only work part-time. Key components of the ideal policy include:
- Non-cancelable – they can’t cancel your policy or raise your premiums
- Guaranteed renewable – no medical exam is required to renew
- Residual benefit protection – pay you part of your benefit, or “residual benefits” if you are partially disabled
- Cost-of-living allowance – the amount you are paid is adjusted for inflation
If you think the Navy/VA disability payments would be inadequate, look for a private policy, which may be expensive and difficult to find as an active duty physician. After years of searching, I was able to get up to $2500/month of supplemental coverage from the American Medical Association. In addition, a private company called DI4MDs.com was able to get me the level of coverage I needed, although it was pretty expensive (but not as expensive as being under-insured in the event I’m disabled).
Try to reduce the expense by lengthening your “waiting” or “elimination” period. The waiting/elimination period is the amount of time you have to wait after becoming disabled until your disability payments begin. If you have a substantial emergency fund, you can lengthen your waiting/elimination period and lower your premiums. In addition, I figured it would take at least a year for the Navy to separate me if I was significantly disabled. If you don’t have a large emergency fund or you feel the Navy will move fast in the event you are disabled, you may need a shorter waiting/elimination period and will likely pay higher premiums.
Homeowner’s Insurance
You need homeowner’s insurance to protect the structure of your house, its contents, and to insure against injuries to other people or damage to other people’s property. Make sure that the contents of your home are covered for “replacement cost” and not “actual cash value.” For example, replacement cost coverage will give you $800 to replace the 3 year old laptop that was damaged, while actual cash value would only give you the $200 it is worth after 3 years. In addition, you will likely have to purchase a “floater” to cover any high-value items, such as jewelry or expensive art.
Renter’s Insurance
If you rent, you’ll need renter’s insurance to protect your belongings, but it also offers liability protection, similar to homeowner’s insurance.
Auto Insurance
You need auto insurance in case you have a serious accident and damage your car, injure yourself or others, or damage someone else’s property. Lower your rates by having a deductible on the policy that is as high as you can comfortably afford, and carefully evaluate how much collision and comprehensive coverage you need. If you are driving an older vehicle that is not worth a lot of money, paying for this coverage may not make sense.
Umbrella Liability Insurance
Umbrella liability insurance protects you in case you get sued and adds liability coverage on top of your homeowner’s, renter’s, and auto insurance. It will come in handy if your dog bites someone and they develop necrotizing fasciitis, the mailman slips and falls on your front porch and can no longer work, or a neighborhood child drowns in your pool. It is typically sold in $1 million increments and is relatively inexpensive. A $1 million dollar policy will typically run $150-300 per year. As a physician, you should have AT LEAST $1 million of coverage, and should consider up to twice your net worth.
What if you are early in your career and have very few assets? You should still have umbrella liability insurance as future wages can be garnished in some judgments against you.
TYPES OF INSURANCE YOU MIGHT NEED
Professional Liability Insurance
If you are practicing medicine outside of the Navy (moonlighting), you need professional liability insurance. (If you don’t moonlight, you don’t need it.) This insurance will cover attorney fees, expert witnesses, court costs, costs of gathering evidence, and settlements in the event you are sued.
There are two types of policies, “occurrence” and “claims-made.” Claims-made policies only cover your liability if a claim is made before the policy ends. With this type of insurance, when you leave a job you need to purchase “tail coverage” that extends your liability. Tail coverage can be expensive, and before you take a job moonlighting you need to make sure you know who is going to “pay the tail.” Occurrence policies are more expensive (and therefore less commonly offered) because they cover your liability in perpetuity and do not require a tail.
Life Insurance
“More money is wasted on life insurance than probably any other insurance product…It cannot be overemphasized that cash-value life insurance is probably one of the biggest scams around.” – Paul Sutherland in the AMA Physician’s Guide to Financial Planning (2008)
If you were to die, would anyone suffer financially? If the answer is “no,” then you don’t need life insurance. If the answer is “yes,” then you need life insurance, and probably a lot of it until you build your investment portfolio.
There are two types of life insurance. First, there are products that combine insurance with an investment account, often referred to as “cash-value” or “permanent” life insurance. Many insurance agents and companies (including USAA in my experience) will try to sell this, but it is probably not the kind of insurance you need. It does have some tax advantages, but the downside of these policies is that the insurance agent/company who sells them collects high fees. In addition, early premiums go mainly toward sales commissions and other expenses and not into your investment account.
The second type of life insurance is “term” insurance. It provides a death benefit only and does not build any cash value or serve as an investment. This is likely the only kind of life insurance that you need, and this is the type that Servicemembers Group Life Insurance or SGLI is. To quote again from the AMA’s financial planning guide, “I cannot emphasize enough the importance of sticking to simple, unencumbered term life insurance – it fits 99% of insurance needs.” It is less expensive than cash-value/permanent policies and you can take the difference and invest it in a retirement account or other low-cost investment vehicle. You don’t need an insurance agent to purchase this and should simply try term4sale.com, selectquote.com, accuterm.com, insure.com, or other similar websites. Both USAA and Navy Mutual Aid Association (and other companies you can find in Navy Times) offer military-focused term life policies.
When you buy term insurance, ensure that it is renewable without a medical examination. You can also consider decreasing term insurance, where the death benefit progressively decreases. As you age, the need for life insurance typically declines as dependents age and your investment portfolio grows. Eventually you will need no life insurance at all, which is why many arguments for “permanent” life insurance should fall on deaf ears.
Long-Term Care Insurance
Sometimes called “nursing home insurance,” this is usually purchased by people over the age of 50 to pay for nursing or at-home care. If you are under 50, you should probably purchase disability insurance instead of long-term care insurance.
The rates and terms of these policies are highly variable, and whether you want to get one is an individual decision. The earlier you purchase it, the cheaper it is, but the total money you’ll pay out over the life of the policy is obviously higher. If you are a successful investor, as a physician you will probably have enough assets to self-insure in the event you need prolonged care, so I would suggest that most will not need this, but circumstances and goals obviously vary, so it is something to consider. If it is important to you that your nest egg is passed to your heirs, you may want to consider this insurance so it is not passed to a nursing home instead.
Flood Insurance
Homeowner’s and renter’s insurance do not cover flood damage. To find out if your home is at risk of a flood, go to floodsmart.gov. There you can also find out information about the government’s low-cost flood insurance programs.
Earthquake Insurance
If you live in an area at risk for earthquakes, you’ll need earthquake insurance in addition to your homeowner’s insurance. California’s earthquake website, earthquakeauthority.com, is a good place to start.
TYPES OF INSURANCE YOU PROBABLY DON’T NEED
Supplemental Medical/Health Insurance
TRICARE has got you covered here, and there is no need to consider supplemental insurance until you retire.
Life Insurance for Children
While you will be sad if one of your children dies, you do not rely on his/her income; therefore you are unlikely to need life insurance for children. The same thing is likely true for a spouse/partner who does not have a job, unless you would need money to replace the childcare he/she provides.
Rental Car Collision Insurance (Loss Damage Waiver)
They always ask if you want collision insurance or a “loss damage waiver” when you rent a car, but a lot of auto insurance policies automatically cover your rental cars. In addition, some credit cards provide this too if you use their card to pay for the rental car, which is one reason you have to use your government credit card for officially authorized rental cars. Make sure you find out if your policy or credit cards have this before you step up to the rental car counter and are put on the spot.
Flight Accident Insurance
If you need life insurance, buy it. Don’t buy insurance on a whim when purchasing tickets in the off chance that your plane goes down.
Travel Insurance
This is a common credit card benefit when you use them to pay for your trip, so check with your credit card company. Even if you don’t have it, it is unlikely to be worth your money for domestic flights.
Credit Protection Insurance
This is designed to protect your credit by insuring your credit card or mortgage payments in the event you become unemployed, disabled, or dead. If you have life or disability insurance, this is probably unnecessary.
Extended Warranties
Most products that offer extended warranties are not costly enough to insure with an extended warranty. If the new TV happens to break shortly after the warranty expires, you’ll probably be able to afford a new one. Most of these offers are a waste of your money.
GENERAL INSURANCE ADVICE
Insurance companies occasionally go under, so you want to make sure that you only get insurance from quality companies with strong financials and that you diversify your larger policies. You can find information on the finances of insurance companies from AMBest.com, FitchRatings.com, Moodys.com, and StandardAndPoors.com (NOTE: most of the sites require you to register to access their ratings). For example, if you need $2 million in life insurance, you should strongly consider diversifying and getting 2-3 different policies from various companies.
1st Step to Financial Freedom – Establishing an Emergency Fund
Bad things happen to good people. Houses burn down or flood. Cars get totaled. Physicians are served unexpected divorce papers. Extended family members get huge medical bills that they can’t pay. You need to prepare for these unlikely but unanticipated events by keeping 3-6 months of living expenses in conservative investments that you can access in an emergency.
While most people recommend you accumulate an emergency fund, nothing is ever straightforward in the world of finance, and even something as bread-and-butter as an emergency fund can be controversial. Below are the aggressive and conservative approaches to establishing an emergency fund.
The Conservative Approach
There are many places you can park your emergency cushion. Savings or checking accounts are Federal Deposit Insurance Corporation (FDIC) insured and offer immediate access to your money, even via ATMs. The downside is that the historic yield on these investments usually does not keep up with inflation, so you lose purchasing power over the long haul. Money market mutual funds are the most recommended place to park your emergency reserves as they offer higher returns and allow you to write checks above certain amounts (commonly $250 or $500), giving you immediate access to the funds when you need them. Unfortunately, the yields on money funds are at a historical low and not consistent with their approximate 3% historical average that would normally keep pace with inflation. Keeping emergency money in certificates of deposit is probably not a great idea, as you’ll pay a penalty if you access the money early.
Not all savings accounts or money funds are the same, and if you shop around you can find a better deal. For accounts offered by banks, check bankrate.com. As I write this, the yield on savings and money market accounts ranges from 0.05% to 1.01%. For money market mutual funds, which are not FDIC insured but are almost as safe, check mutual fund companies. Commonly recommended company websites include fidelity.com, schwab.com, tiaa-cref.com, troweprice.com, or vanguard.com (my favorite). Important things to look for are the minimum initial investment, the smallest amount you can write a check for, and the expense ratio (the lower the better). If you find yourself in a higher tax bracket, usually 33% or higher, it may make sense to use a tax-exempt money market fund that invests in tax-free state and municipal bonds. These tax-exempt funds may offer a higher after tax return, and some are targeted to the residents of particular states and offer state tax benefits as well. The mutual fund companies can usually help you decide which of their products is best for you.
The Aggressive Approach
The aggressive approach is to keep a smaller amount in reserve, 1-3 months of living expenses for example, and invest it more aggressively. You could keep 1/3rd of it in a money market fund, but the other 2/3rds could be invested in a stock or bond fund or some combination of the two that will yield a higher return. This will allow your emergency fund to grow as your income grows, possibly reaching the recommended 6 months of living expenses or more. If you need more cash than what is in your emergency fund, a physician can usually borrow the money by using a home equity loan, for example, or a credit card. Credit cards, obviously, have higher interest rates, but this is an aggressive approach and you probably won’t have to borrow any money at all.
What Should You Actually Do?
Only you can decide what is right for you. For example, as Navy physicians we all have full medical insurance for our whole family through Tricare, and have as much job security as any physician can have. I’m not getting fired (or at least I don’t think I am). As a result, my emergency fund usually resides in the low end of the 3-6 month range, as there are very few emergencies I expect to have to deal with. On the other hand, if I was a civilian and worked as an independent contractor, provided my own health insurance, and felt that my contract could be reduced or eliminated at any time, I’d probably have 6 months of living expenses (and maybe more) providing a more substantial cushion.
Whether you take a conservative or aggressive approach or somewhere in between, what is clear beyond a doubt is that you and your significant others need to come up with a plan for emergencies that makes sense for you and allows you to sleep at night.
Retirement Planning – The Easy Way
Here is the latest of my financial planning articles from one of our specialty society newsletters:
Retirement Planning – The Easy Way
Here is the text as well:
The previous installment of “Dollars & Sense” reviewed the principles of investing for retirement, and this article discusses an easy way for physicians to plan for retirement. It isn’t necessarily the best way and certainly isn’t the only way, but it is a plan that will likely lead to a very successful and potentially even early retirement.
Step 1 – Calculate How Much You Need to Save for Retirement
Total up your household’s gross (pre-tax) income for the year. Include all sources of income, literally all the money you make from anywhere. Multiply that number by 20%. That is how much you need to save annually for retirement. While the traditional recommendation is that you save 10-15% of your income for retirement, saving 20% (or more if you can) will ensure you save enough and have the option of an earlier retirement or the freedom to cut back on your workload at some point.
As an example, let’s pretend your household makes $300,000 annually before taxes. Multiple that by 20% and you’ll see that you need to save $60,000/year for retirement.
Step 2 – First Fill All Your Tax-Advantaged Retirement Accounts
You likely have many different retirement accounts available, so here is the order in which you should invest. Start with the first action and move down the list.
1. Contribute to any employer-provided retirement account up to the maximum that your employer will match. This is free money you can’t afford to leave on the table.
2. Maximally fund any tax-deferred retirement accounts you have, like your 401k or 403b. If you are self-employed you may have other options like a SEP-IRA or individual 401k.
3. Fund an IRA for both you and your spouse/partner, if applicable. If your income renders you ineligible to contribute to a Roth IRA but you still wish to do so, use the “backdoor” Roth IRA approach.(https://personal.vanguard.com/us/insights/video/2505-Exc2)
4. Put any remaining retirement funds into a taxable mutual fund.
You may have other options, such as funding a Health Savings Account as a “stealth IRA.” Some believe in using life insurance as an investment, but I don’t recommend that. In general, after you’ve maxed out the contributions to all of your tax-advantaged accounts, you’ll have to put the rest in a regular, taxable investment account.
For some of the options above you’ll have to decide whether to pursue a Roth option (pay taxes now) or use the traditional tax-deferred approach (pay taxes when you withdraw the money in retirement). That decision will depend on your individual financial situation, current and anticipated future tax brackets, and what options your employer offers. There are many on-line calculators to help you decide this.
Using our $60,000 example from above, you would contribute $18,000 to your 403b, and then fund $5500 toward an IRA for both you and your spouse, leaving $31,000 to put into a taxable investment account. If your employer contributes to your retirement, you could also count that amount toward your $60,000 total contribution.
Step 3 – Invest Your Retirement Savings in Low Cost, No Load, Index Mutual Funds
You will have to take a look at the investments offered by your various plans and select from that menu. The principles that should guide you:
1. Favor index funds over actively managed funds. You’re investing for the long term, and over that time frame almost no actively managed funds will beat index funds. In addition, because past performance does not predict future performance, there is no way to predict which funds will beat their indexes.
2. Favor mutual funds with low expense ratios that do not charge a load. The expense ratio should be less than 1.0, preferably less than 0.5, and optimally less than 0.25. If you want to keep this really easy, just invest in Vanguard index funds as all of them meet these criteria.
3. Realize that in order to beat inflation over the long haul, you’ll likely need to invest some of your portfolio in stock index funds. What percentage you invest in stocks will depend on your time horizon, risk tolerance, and individual situation. A number of guidelines from trusted references are below:
- Malkiel & Ellis suggest this as a conservative asset allocation:
| AGE GROUP | PERCENT IN STOCKS | PERCENT IN BONDS |
| 20-30s | 75-90 | 25-10 |
| 40-50s | 65-75 | 35-25 |
| 60s | 45-65 | 55-35 |
| 70s | 35-50 | 65-50 |
| 80s+ | 20-40 | 80-60 |
- They suggest this as a more aggressive asset allocation, which is my personal favorite due to the security offered by my inflation-adjusted military pension:
| AGE GROUP | PERCENT IN STOCKS | PERCENT IN BONDS |
| 20-30s | 100 | 0 |
| 40s | 90-100 | 10-0 |
| 50s | 75-85 | 25-15 |
| 60s | 70-80 | 30-20 |
| 70s | 40-60 | 60-40 |
| 80s+ | 30-50 | 70-50 |
- John Bogle suggests, as a conservative asset allocation rule, that your percentage of assets in bonds should equal your age. In other words, at age 30 you should have 70% in stocks and 30% in bonds. A more aggressive version is to subtract 10 from your age, so at age 30 you’d have 80% in stocks and 20% in bonds.
One very easy way to let someone else make this decision for you is to pick a target date retirement fund as your investment vehicle. Many investment companies offer these. You just pick the approximate year you plan to retire – that year will likely be in the name of the fund (Target Retirement 2035, for example) – and invest in that fund. Your investments will gradually get more conservative as you age without any action on your part. Just make sure that the target date funds you have access to are composed of index funds with low expense ratios. Again, using Vanguard funds makes this a no-brainer. A target date retirement fund composed of actively managed funds with expense ratios greater than 1.0 is a target retirement fund to avoid.
To close out our running example, for your 403b you invest in the target retirement 2040 fund offered by your employer’s investment firm. For both of your IRAs and your taxable account you apply the KISS (keep it simple stupid) principle, open all of them with Vanguard, and select their Target Retirement 2040 funds for all three accounts.
A simple approach like this should set you up well for retirement, and is easy enough that you can use the time you would have spent trying to manage your finances to play a little golf every now and then.
- References
Bogle, John C. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. Hoboken: John Wiley & Sons, Inc., 2007.
Malkiel, Burton and Charles Ellis. The Elements of Investing: Easy Lessons for Every Investor. Hoboken: John Wiley & Sons, Inc., 2013.
Moonlighting in the Navy
It’s July and a whole new crop of recent residency graduates can now moonlight for the first time in their Naval careers, so here is a video podcast and blog post that discusses some of the basics of moonlighting.
Should You Moonlight?
I think the answer to this question depends on a lot of things. First, do you envision yourself working clinically when you leave the Navy? For most physicians, the answer to this question is yes, and depending on your specialty you may need to moonlight to maintain your clinical skills. We don’t always get exposed to the full scope of our specialty in the Navy. My wife is a pediatrician, and when she was on active duty I thought she had a full scope pediatric practice and did not need to moonlight to maintain her skills. As an emergency physician, though, it is rare to get exposed to the full breadth of emergency medicine in a Navy emergency department. You have to make an honest assessment of your specialty, the breadth of your Naval practice, and whether you need to moonlight to maintain your skills.
In addition, you need to figure out your motivation for moonlighting. A common motivation is to earn extra money, and that is a fine motivation, but you never want to make decisions that make you dependent on the money. You may deploy, your CO could take away your moonlighting privileges, or you could PCS somewhere where you can’t moonlight. You don’t want to be the bankrupt doctor because you bought a house you can’t afford without moonlighting.
The Navy’s Moonlighting Rules
In order to moonlight you have to get permission from your command. It is a privilege, not a right, and you can lose this privilege if you fail a PFA, don’t stay up-to-date on your training/readiness requirements, or don’t produce academically when required.
If you are going to moonlight somewhere outside of a 2 hour drive, you need to take leave. If you are flying anywhere, no matter the distance, you need to take leave. You can’t moonlight more than 16 hours/week and you need to have 6 hours of time off between clinical periods for your moonlighting job and your Naval duties. You’ll need to complete an annual attestation that says you are aware of these policies and compliant with them.
Where Should You Moonlight?
If you moonlight locally you don’t need to take leave. If you can find a clinical setting you think you’d like after your time in the Navy is complete, you can even start working toward partnership.
If you work locum tenens, you can travel and sometimes chase “the big money.” If you work enough, the locum companies will cover all of your expenses, DEA, state licenses, travel, hotel, expenses, and malpractice insurance. Because you are likely traveling to a location more than a 2 hour drive away, you’ll need to take leave.
Basic Financial Planning for Moonlighters
Moonlighting allows you to put more money in tax advantaged retirement accounts. If you’re a non-moonlighter, you’d be limited to putting $18,000/year in the TSP and $5,500/year in your IRA (based on 2015 limits). If you moonlight and get paid on a 1099 as an independent contractor, you can fund a SEP IRA or solo 401k up to $53,000/year. It is rare that you’ll hit this maximum because you can’t moonlight enough to earn the amount required to do it, but you will be able to put more away than a non-moonlighter. A SEP IRA is easier to set up than a solo 401k, but a Solo 401k allows more money to be contributed at an equivalent salary. For a great discussion on these two options, go to:
http://whitecoatinvestor.com/sep-ira-vs-solo-401k/
Finally, moonlighters often want to incorporate because they think it provides malpractice protection, but that is a myth. Although there may be some tax advantages to incorporating, it doesn’t protect you from professional liability or malpractice.
Contract Pitfalls
If you are going to sign a contract, you are going to need to get some professional help. You should hire a healthcare or contract attorney to review any contract you are considering. There are many issues you need to understand, including:
- Due process or termination clauses – For what reasons can they terminate you? Are you entitled to a hearing with the medical staff before your privileges are removed or restricted?
- Tail coverage – Does your malpractice insurance require tail coverage? If so, who is paying for it? Tail coverage is malpractice insurance that covers you after you stop working for that employer, and it can be VERY EXPENSIVE so you will want to know who is paying for it.
- TRICARE or VA eligible patients – You can’t bill these patients as they are already entitled to your services. This is spelled out very well in the moonlighting paperwork you will file with your command, but make sure your employer understands this.
Here are the Powerpoint slides for the video podcast below:
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