Podcasts
3 Financial Tips Every Young Doctor 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% |
Average yearly return from 2004-2014. (Source: Vanguard.com)
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 or the Thrift Savings Plan (TSP). 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 the exception of the TSP, which has even lower expenses.
If you can’t invest with Vanguard outside of your TSP, perhaps because your have access to a retirement plan that 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% |
(Source: Vanguard.com)
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 is 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 market downturn and what your asset allocation was at the time. Mine was 100% stocks and I kept on buying. Your allocation and actions will tell you a lot about your own risk tolerance.
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 a personal finance blog post.
If you want to take a look at various saving rates and how they impact your financial life, you’ll want to check out 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.
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 HPSP program, 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, like the TSP. 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:
- You can’t control the investment markets, so focus on the two things you can control – investment costs and your asset allocation.
- 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.
- 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?
I Paid Off My Mortgage – Should You?
(Here is a pdf of this article, one of my personal finance columns I write for a national Emergency Medicine newsletter. Find more of them here.)
I cut a check and paid off my mortgage in February, making me debt-free. It cut my living expenses by about a third and ensured that in four years, at the age of 45, I’ll be financially independent and eligible for military retirement. What a glorious feeling! Should you pay off your mortgage as soon as you can?
Benefits of Paying Off Your Mortgage
You have one less thing to worry about! You’ve got food. You’ve got water. Now you’ve locked in your shelter and may be debt-free on top of that. You can move from “safety” to “love and belonging” on Maslow’s hierarchy of needs.
It reduces your fixed monthly expenses, which goes a long way toward setting you up for retirement, fewer shifts, or even an alternative career path. Housing is usually a large percentage of your monthly expenses, and everyone who decides to purchase their primary domicile should make being mortgage-free a major goal by the time of retirement.
It saves you money, since you’ll likely save tens of thousands of dollars in interest you otherwise would have paid. In addition, if you no longer have a mortgage you should be able to reduce the amount of life and disability insurance you are paying for each month.
Without a mortgage, you can save and invest more money every month. Before I paid off my mortgage I saved 30% of my gross income. I’m not sure how much I’ll save now, but it’ll be more than 30%.
When you pay off your mortgage, you are getting a guaranteed rate of return on the investment. In my case, the rate on my mortgage was 3%. I’m usually in the 33% tax bracket, which means that every dollar I put toward paying off my mortgage earned me a guaranteed return of 2%. This is a remarkably similar return when compared to most low-risk bond yields in recent years. In fact, this is exactly why I paid off my mortgage. I wanted to have a small portion of my retirement savings in bonds, but it made no sense to own bonds that would pay me 3-4% while paying 3% on my mortgage. Paying down your mortgage is a reasonable substitute for buying bonds.
There can be asset protection benefits to paying off your home loan. Some states provide unlimited asset protection for home equity, which makes it nearly impossible to lose your home if a lawsuit doesn’t go your way. Other states, however, protect very little of your home equity. If you want to see what your state protects, go to this link and look for each state’s “homestead exemption”:
http://www.assetprotectionbook.com/forum/viewtopic.php?f=142&t=1566
If you are paying a financial advisor who charges you a fee based on a percentage of your assets under management, by taking some of those assets and using them to pay off your house you reduce your investment expenses.
Benefits to Keeping Your Mortgage
When you make your mortgage payment, some of it goes toward principle and increases the equity in your home. For me this was about $2000/month of forced savings. If you are not financially disciplined, making a mortgage payment will ensure that every month you are squirreling away at least a little bit of money.
Mortgage rates are still near their all-time lows. If you can borrow money at 3-4% and invest it in something that will give you a higher net return, it makes sense to invest the money instead of paying off the mortgage. That said, you have to make sure that you actually invest the money. In addition, there are very few investments that guarantee a return greater than your mortgage. Actually, there probably aren’t any, because of the word “guarantee.” Yes – stocks, high-yield or corporate bonds, real estate, etc. will probably make more than 3-4%, and you can protect yourself by diversifying – but that is certainly not guaranteed.
The after-tax mortgage rate you are paying may be below inflation. For example, my after-tax mortgage rate was 2%. If inflation had been above 2%, I would have been getting paid (in real terms) to borrow money!
The value of real estate tends to rise with inflation but your mortgage payment is fixed, so when inflation increases the value of your house but your mortgage payment remains the same, you are paying the loan back with dollars that are worth less and less as time goes on. When your mortgage is paid off, you give up this benefit.
What Should You Do?
Like most financial decisions, situations vary and this decision can be complicated. The best on-line article I could find that goes through all the complexities of the issue, which my brief article does not, can be found here:
https://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478
You should always maximize contributions to your retirement accounts, pay off all non-mortgage debt that has a higher interest rate, and save for your children’s education before you consider paying your mortgage off early. But if you find yourself having taken care of all of this, and weighing investing in bonds versus paying off your mortgage, you can’t beat the peace of mind that comes with being mortgage-free!
Outside the Box Opportunities
Here are the slides for a lecture on “Outside the Box Opportunities” that I gave at the 2017 Transition to Practice Symposium at NMCSD for all the graduating residents and fellows:
Topics covered include:
- Moving after your are selected for promotion
- How to PCS away from a command you want to leave before your rotation date
- Naval Hospital 29 Palms
- AQDs
- JPME
- Naval Postgraduate School Distance Learning MBA program
- CMO and OIC positions
- Job announcements on this blog
Here is a video podcast:
Fitreps in 18 Minutes
Here is the Powerpoint and screencast of a lecture I gave on Fitreps a few weeks ago at the NMCSD Transition to Practice Symposium for all the graduating residents and fellows. Without audience participation, the lecture went from 30 minutes down to 18. Enjoy!
Tricks for Long-Term Asset Protection
Here are the slides and a screencast of a lecture I recently gave at a national conference on tricks for long-term asset protection:
Tricks for Long-Term Asset Protection
You Were Selected for Promotion to O5 or O6 – Should You Accept It?
BLUF – If you are hoping to retire but are not willing to serve 3 years as a Commander or Captain, you should decline the promotion. (This is not applicable if you are resigning. Only if you are hoping to retire.)
The policy regarding promotions and retirements is governed by OPNAVINST 1811.3A. If you are lucky enough to be selected for promotion to O5 or O6, you should be familiar with this instruction and make sure you are willing to spend 3 years as a CDR or CAPT before you plan to retire.
Paragraph 4b of the OPNAVINST states:
“Officers must satisfy the minimum active duty time-in-grade requirement to retire in the highest grade satisfactorily served…Officers who desire to retire before completion of the minimum time-in-grade requirement must decline appointment to the next higher grade. Officers who have accepted appointment to the next higher grade must satisfy the retired grade criteria in paragraph 7.”
Seems like we need to go to paragraph 7…
“7. Time-in-Grade Requirements. Unless retirement in the next inferior grade is directed by SECNAV for an officer or warrant officer under reference (c), then officers, warrant officers, and enlisted members retired voluntarily or transferred to the Fleet Reserve shall be retired in the highest grade satisfactorily held upon completion of the following time-in-grade requirements…Three years for an officer serving on active duty in pay grade O5 or O6.”
Paragraph 5b states:
“Unless waived by proper authority, approval of requests for voluntary retirement or transfer to the Fleet Reserve will normally be denied until an individual has completed: (1) The applicable time-in-grade requirements of paragraph 7;”
In addition, paragraph 7e states:
“COMNAVPERSCOM shall normally deny retirement requests or Fleet Reserve requests of members serving on active duty in, whose length of service in the highest grade held while on active duty does not meet the time-in-grade requirements specified above.”
What’s the bottom line? There are certain exceptions spelled out in this policy, and you can get information on time-in-grade or next-lower-grade waivers here and here, but if you want to retire and accept promotion to CDR or CAPT you should be willing to serve in that rank for 3 years. Otherwise, you should decline the promotion.
Personal Finance for the New Attending
Here is an audio podcast of a 30 minute lecture I gave at Naval Medical Center San Diego’s Transition to Practice Symposium that they put on last week for all the graduating residents and fellows. I hope you enjoy it.
Long-Term Care, Disability, and Umbrella Insurance: Do I Need All of This?
This video podcast/screencast is a recording of a talk I gave at a national Emergency Medicine conference two months ago. Bottom line up front:
- Long-Term Care Insurance – You probably don’t need it if you’re financially disciplined.
- Disability Insurance – You might need it.
- Umbrella Liability Insurance – You definitely need it.
Where can you get disability insurance as a military provider?
PhysicianFinancialServices.com
NOTE: I have no financial relationship with these sites, and there is more information on insurance on this page.
Here are the slides:
Playing the Odds – Long-Term Care, Disability, and Umbrella Insurance – Do I Need All of This?
Here is the screencast:
How to Resign Worry Free
Recently Navy Personnel Command (PERS) has started enforcing some policies that had largely been ignored, and I’ve heard a few horror stories from people trying to resign from the Navy. With that in mind, here is how you can resign without encountering problems. Assuming that you’ve already decided to resign, here are the steps you need to take to make sure the ride is not a bumpy one.
STEP 1 – Confirm Your Obligated Service Date
There’s nothing like thinking you are eligible to get out only to find out that you are not. Your Detailer is your POC to figure out when you are eligible to resign.
STEP 2 – Negotiate Your Date of Resignation and Terminal Leave With Your Command
When you submit a resignation request to PERS, you specify the month you want to resign. The specific date and how much leave you get is between you and your command, not PERS. You need to approach your chain of command about the specific date you want to resign and how much leave they’ll give you.
STEP 3 – Submit Your Paperwork 9-12 Months Ahead of Your Desired Month of Resignation
This has always been the required timeline, but last minute requests were accommodated. Not anymore! PERS has recently reminded people of this timeline and widely advertised that any requests received less than 6 months before the desired resignation date will be returned to the officer and not processed. Because of this, you need to make your decision and then stick to the 9-12 month timeline. In addition, if you get within 6 months of your projected rotation date (PRD) and have not notified your Detailer of your intention to resign, he/she can write you orders whether you want to stay in or not! Don’t tempt the Detailer.
If you are deploying and you’ll be gone during this timeframe, you need to get the paperwork ready before you leave. You can’t submit a request more than 12 months early, but you can certainly have it ready to go so that you submit it when you hit the 9-12 month window.
STEP 4 – Track the Progress of Your Request Weekly
The Navy is filled with officers who did not track the progress of their request and paid the price. Because your request has to go to PERS with the endorsement of your CO, it needs to go various places at your command before it is submitted. Realize that each stop in the chain of command is a potential place for it to get lost.
STEP 5 – Make Sure Your Request is Submitted to PERS
Most officers will have a personnel department of some kind that will submit their request for them, but just in case you don’t, here are the official instructions for how to submit the request from the PERS resignation website:
“Resignation requests can be mailed to PERS-834F to the address listed below, by fax, or sent in PDF format by email to PERS-834F@navy.mil. Email submissions are highly recommended and preferred. All requests must be submitted 9-12 months prior to the desired separation date.”
Address/Fax (Please adhere to PII requirements when sending documentation):
COMMANDER
NAVY PERSONNEL COMMAND
PERS-834F
5720 INTEGRITY DRIVE
MILLINGTON TN 38055-8340
PERS-834F fax number: (901) 874-2625
STEP 6 – Make Sure Your Request was Received by PERS
Again, from the PERS website:
“After sending your resignation request to PERS-834F, you and your current Command will receive confirmation via message traffic and BOL that your request has been received for processing. If you do not receive confirmation within 2 WEEKS after your Command has forwarded your request to PERS-834F, please call NPC’s customer service call center, 1-866-827-5672 for routing to PERS-834F.”
STEP 7 – Check to Make Sure There are No Issues Every Few Months
This will probably make the Detailers cringe, but oh well. It is their job to serve as your advocate, and I think you should touch base with them every two months or so until you have released resignation orders in your hand.
That’s it! If you’re looking for templates for your request, you can find them here.
Joel Schofer’s Fitrep Prep
Thousands of times a year Navy physicians struggle to do something that no one really ever teaches them how to do…write their fitrep. I have read the Navy fitrep instruction, taken guidance I’ve received from senior Navy leaders and classes I’ve attended, and consolidated it into one document that you can read from start to finish when you need to write your fitrep. Click here for the latest version of Joel Schofer’s Fitrep Prep:
Joel Schofer's Career Planning Blog 