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What percentage of your investments should be in a taxable account?

Posted on October 18, 2017January 30, 2021 by SmartMoneyMD

This is a ratio that I struggle with. Obviously the greater amount that one has in a tax-advantaged investment account, the less tax drag you’re going to pay for. With the current options of investment vehicles, one can potentially squirrel away a relatively hefty amount in a tax-advantaged account. Small business owners know what I’m talking about. So do managing partners in their practices. If you have several high-income ventures, you can shove away a solid six-figures in tax-deferred accounts.

When your earning velocity slows down, the tax-deferred amounts can be slowly withdrawn to fill up our lower tax brackets. For some physicians, this can mean shifting from a 50+% marginal tax (sometimes even effective tax) bracket down to something like a 10-15% effective bracket.

If you are able to do that, then you’re in an envious position. Some of us are just stuck in an employed position where we can only fill up the employee portion of our 401k space. Unfortunately we all know that saving only this amount will never be enough to a safe retirement, especially if you decide to hang up your hat early. I am in this very situation, and I end up putting most of my stock/fund investments in a taxable account.

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Over the years, I try to shove away as much as I can to catch up for the lost years of no income during schooling. I’d anticipate that eventually my tax-advantaged accounts will only amount to about 10% or less of my total investments. This is perhaps a much smaller percentage of what most people will have, but this also creates an interesting arrangement that I will have to consider later in life. There are considerations for putting your investments in a taxable account.

Disadvantages:

Tax drag during investing years. Investment vehicles will need to be tax efficient, as dividends and interest that gets kicked out is taxed. Funds with high loads or high levels of activity will kick out taxable events.
Liability. Unlike investments in your 401k, tax-sheltered accounts, or (shudder) cash-value investments, your debtors can access your investments in a taxable account. You need to protect it appropriately. Umbrella insurance is the key word.
You will likely have less of this to invest. You are investing your post-tax income in this vehicle. In some ways, this isn’t really a huge disadvantage, but it does seem that way because Uncle Sam has already taken away what you can put into this vehicle. He will also continue to take away from it through further taxes on growth.

Advantages:

During withdrawal years, income is treated only as capital gains taxes, which is lower than traditional income. You can really combine this with your tax-deferred account withdrawals to minimize your tax burden during retirement.
No maximum amount that you can invest. The sky is the limit.
No minimum that you have to withdraw either.
Tax loss harvesting. If you end up with a loss in a particular category, you can sell it, and purchase similar funds at the lower rate.

Whenever I do go through the pros and cons of taxable accounts, I do feel a little bit more at ease. It’s not bad that we have many options to grow our wealth. After all, the true secret to building wealth is saving more than you spend.

How much of your investments belong in taxable accounts?

Five things I wish I knew about finance before going into medicine

Posted on October 15, 2017February 2, 2021 by SmartMoneyMD

Over the years as I speak with premed college students and medical students, I keep hearing the same recurring questions. Most of these are related to the clinical or career decisions. What grades do I need? How many honors did you get? Rarely do I get questions about being able to afford that Lamborghini after becoming a plastic surgeon, or more practically, whether they would even be able to buy a house or raise a family at age 30.

I asked those same clinical questions when I was in their shoes. By all accounts, my mentors guided me well. I became a competent physician (I think). However, no one ever told me that it was a bad idea to spend 80% of my income on rent (yes, you can do that). Now that I’m getting my finances back in order, it’s time to reflect on what I consider are the important finances that I should have asked or educated myself prior to venturing into the medical field:

Invest in a Roth IRA. Time is on your side. I remember back in college one of my classmates raved about the Roth IRA. He must be rocking his finances now if he already knew what a Roth was back then. In fact, he told me his parents basically matched his Roth contributions so that he was making good financial decisions early in his working career. I, unfortunately, did not have that luxury. I didn’t start a Roth IRA until residency, and even then, I think I didn’t even contribute one of the years because I was short on cash. Post-tax growth is an amazing vehicle, even if you aren’t actually contributing a huge amount each year.
Invest in a 401k/403b account. Again, the premise on these investments is that the earlier you have funds in them, the longer the funds have to grow. I did not invest in a single 401k during my training because my hospitals did not offer a match. Was it a bad move? In retrospect, I probably should have invested, although I am not sure if my hospitals offered low-cost funds either. This may eventually amount to a low six-figure amount by the time I’d be withdrawing from this account. The toughest part about investing in a 401k when you have a mid-five figure salary is that you’re really not deferring a significant amount of income tax compared to what you otherwise would have as an attending. However, you do have to realize that many people out there remain in a five-figure salary throughout their entire working careers. Those people should still definitely invest in a 401k.
Understand where you will likely end up financially. This is broader concept. You are unlikely going to be killing it on your income when you’re done, and you need to get into the mindset that there will still be delayed gratification after your income increases by several fold. There are many steps that you have to take before you stabilize your finances, especially if you are in debt or have a family.
Life-altering events do happen. You are not going to be immune from financially life-altering events. Disease. Injury. Natural disasters (Yup I know a doctor in Puerto Rico who still hasn’t gotten his life back together yet). Prepare yourself appropriately and insure yourself appropriately. If you have but a few pennies in your savings, you might be in trouble.
Be prepared for the long haul. You still have a career ahead of you. Don’t hustle to the level that you’d jeopardize your health. Figure out what you really want out of life. Is the money? Is it the fame? It’s okay to set a plan, execute, and modify.

You might also like: Is a degree from a prestigious medical school advantageous for doctors?

This covers the tip of the iceberg, but it will get you started. Many of these are basic principles, but you can start building upon them.

Somewhere over some snow-capped mountains

How often do you leave work exhausted?

Posted on October 8, 2017January 30, 2021 by SmartMoneyMD

I’ve written about physician burnout before, and it continues to be a prevalent issue in our profession. The Happy Philosopher highlights many of these issues on his website, and I continue to be an avid follower of his wisdom. Truth is that we all have our ways to deal with the ups and downs of our jobs, and one of the issues plaguing us is that we care about our jobs.

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More often than not, I end the workday in the office exhausted. Ironically, the clinical work is rarely the challenge—it’s the environment that we work within. Sometimes problems arise from the myriad of personalities from the front desk to the back office. Other occasions the headaches come of the onerous regulations of the insurance companies. And of course, we don’t want to forget about that extra meeting someone in administration decides to squeeze in just to take away that hour and half of your life.

How do doctors deal with exhaustion and stress?

Apathy

We all know someone in every profession who fits into this category. These folks just go along with whatever rules are dished out to them. As someone with moderate compulsivity, I have been guilty of trying “reform” the apathetic into sharing my beliefs. You can correctly assume how well these initiatives turned out. Over the years, I think that I’ve come to understand better why we are all prone to apathy. It’s simply a path of lesser resistance. I’m sure that many people who appear to be apathetic were once energetic, young, visionaries who succumbed to failures of our system to effect a change. Most importantly, if you start becoming apathetic, you might have a good shot at reducing your work-related exhaustion.

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Resistance

Some of us are perennially disgruntled. There are doctors at my staff meetings who always raise their hands and interject, sometimes only for the sake of interruption and stirring up controversy. Many of these disruptive comments are warranted, however. When you put together a group of high functioning professionals in a room, there is always a good chance that someone will be able to identify something to fix or a problem with something the hospital or administration proposes. Frankly, I’d imagine that putting up resistance will eventually wear you down and exacerbate any ongoing stress. Anecdotally, many of these personality types either have secondary family conflicts that arise because of stress at work.

Some people are born to become party poopers.

Problem Resolution

This is the personality type that I admire the most. These gals seem to have a positive spin on even the most negative situations. Hospital going bankrupt? No problem! Let’s cut the budget in the doctor’s lounge, and work a little harder! I do see doctors who have an endless amount of energy. They are likely hypomanic, their spouses are angels to allow them to focus their energies on work, and they do get stuff done.

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I find myself cycling through all three of these personality modes. It really depends on what the issue I’m faced with, and whether I decide it is worth fighting for. I typically consider myself a positive person, so I tend to look for a way to find a compromise. If I ever become more apathetic than not, that will certainly be a sign that I need to hang up my hat. Until then, I plan to stick to the plan. Get my fair share of compensation at work, save as much as I can in the process, and enjoy the journey. Some exhaustion never hurt anyone, right?

How do you deal with exhaustion from work?

Why it is nearly impossible for doctors to amass ultra wealth

Posted on September 17, 2017January 30, 2021 by SmartMoneyMD

I’ve been relatively quiet on the online frontier as of late, owing mostly to work-related insanity and also helping out family affected by the recent hurricanes. Fortunately, everyone is safe and recuperating from mother nature. It is also eye-opening to be reminded how dependent we are to electricity and modern amenities.

The online financial community tends to be a unique bunch. Very resourceful. Innovative. Self-sufficient, to say the least. Most of the modern world isn’t. Mr. Money Mustache is able to construct a fancy rental property out of materials harvested out of craigslist. The average American probably wouldn’t even think to own a generator (myself included) let alone know how to operate one. Case in point. What happens when you lose electricity for two days? All of your food spoils. What happens when your local supermarket also loses electricity for two days? All of their perishables perish. Boy is it challenging to rebuild that infrastructure. Best of luck to those affected by the recent hurricanes…

Back to the finance world.

The curse of high income earners

High earning families can consider themselves blessed and cursed simultaneously. High earners, by default, have a good velocity of income. Income is a good—it helps pay the mortgage, bills, vacations, and food. Doctors, for instance, are the quintessential white-collared service worker. In exchange for a decade of subpar wages and long hours, we all will typically enjoy very comfortable wages and long hours. I guess that this is a formula that isn’t necessarily a bad trade-off. However, having a stable income and long hours actually prevents you from becoming wildly financially successful.

I know that we all have different ways to define success. My view of success is more of a balance between being financially comfortable and having the health to enjoy it. Fortunately most people in my profession will be able to achieve this. However, we will never be able to buy this home in Malibu:

This average looking house will cost you a cool $8 million.

That’s right. How many Whipple surgeries would you have to do in order to afford this house? Answer: Not enough.

And that is the sad truth. Our level of ability ensures that we can enjoy a good living, but it also prevents us from reaching the extreme levels of wealth. No amount of hustle where your hustle translates into direct income will allow you to achieve this.

Let me reiterate.

If you have to exchange your time or expertise for money, you will never have the time or energy to amass insane amounts of wealth.

How to overcome the curse of high income earners.

There truly aren’t many secrets to success. If you want to own that chateau in Malibu, you have to come up with a plan and keep executing until you achieve it. You must also have luck (lots of it), but it’s all about creating opportunities.

Motivation — You have to be motivated. The problem with motivation is that other aspects of your life will be sacrificed the more motivated you are, and the higher the goal that you wish to achieve. We’ve sacrificed a lot to become physicians, but that sacrifice actually had a clear cut timeline (medical school, residency, and fellowship). Most of us make this sacrifice in our twenties. This is a time in our lives where we might have the energy and ability to sacrifice family, friends, and health to reach those goals. Our goals may change as we get older. It’s a whole lot harder to come up with a plan to own a $22 million home in your thirties with a family to support when you earn $200,000 a year than if you were 22 years old with only a smile to your name. Think about it. The stakes are different, even though the challenges are the same. The blogger who earns over a $1 million a year probably started out with no career path. Where you start out can dictate how much motivation you can funnel into your goals.
Realistic Income strategy — You have to come up with a plausible plan to hit that goal. If you want to afford an $8 million home, you won’t get there selling lemonade. You need to own a franchise of lemonade stands. Likewise, you need to develop a means for your income to be generated passively and reliably. What’s the secret to a reliable strategy? That, of course, is the million dollar question.
Luck — You’ve got to have some luck. The beauty of luck is that the more frequently you put yourself out to risk, the more chances you’ll have to get that break. It all boils back down to how motivated you are to do it, and how much potential there is in your game plan.

What are your thoughts on amassing ultra wealth?

The Private College 529 Plan – Alternative Education Savings

Posted on July 30, 2017January 30, 2021 by SmartMoneyMD

We hear a lot about 529 Plans—a way to contribute to your children’s college education while receiving some state tax deductions. I think 529 Plans are great in that you can save up for college education while getting some tax perks. If you live in a state that allows you to take state tax deductions on 529 contributions, you can reduce around 5+% of the contributed amount towards taxes. Not bad. If you live in a state without income tax, you can still benefit by contributing to 529s by having the growth tax-free. If the stock market goes on a tear for a whole decade before Junior goes to Harvard, you can really come out ahead by not paying taxes for the investment growth:

You get about $69,000 in growth at 8% before taxes on $1000 monthly contributions for a decade.

In this example, a $1000 monthly contribution for a decade will get you $120,000 in principal and roughly $189,000 after investment gains. You basically “gain” $69,000 tax-free.

What if you want to do better?

Come the Private College 529 Plan.

The Private College 529 Plan is a privately run investment vehicle in which you essentially prepay your child’s college tuition in today’s money as a credit for future tuition. Think of it like a points system that we see in credit cards. It is an interesting concept since private college tuition inflates at an insane rate. For instance, tuition at my college is now three times higher than what it was when I attended. I can tell you now physician salaries aren’t three times higher now compared to back then either (in some specialties it’s actually lower!). Shocking.

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I presume that this sort of system works by investing your contribution in a black-box system sort of how those life insurance investment vehicles work (cough::whole life insurance). This isn’t a bad idea in this case. The burden of growing your money is placed on this investment group, and it is honored by the university that your kid ends up attending. The catch is that your kids has to get into a participating college.

What if my kid needs to attend an Ivy league school?

Smart Money MD is a big fan of going big.

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Fortunately there are some top-tier colleges in this program. A complete list is here, but I’ve taken the liberty of listing schools that Tiger moms would typically approve of:

MIT
Princeton
Caltech
Amherst
Stanford
Duke
Johns Hopkins
Emory
Pomona
Rice
U of Chicago
Wellesley
WashU
Rhodes College (maybe)
Vanderbilt

My apologies if your favorite alma mater is actually on the Private 529 Participating college list but wasn’t listed above. What’s more critical is that Princeton is the only Ivy League school currently participating in this program. If Junior’s parents and grandparents are Legacy Yalies, this program won’t cover her tuition (yet)!

Realistically the number of participating private colleges is exhaustive. Based on what I’ve seen, most private colleges that kids would be most likely attending are on here. I suspect that today’s tuition of approximately $45k annually will likely balloon up to $90k+ in another decade. You’d have to be making pretty darn good investments to double your investments tax-free in a decade.

What if my kid doesn’t get into any of these colleges?

This might happen. Or they end up getting into a solid public university on a scholarship. You can still transfer the funds/credits over to another kid’s account. If you decide to withdraw the money, you will end up paying tax on any gains that have accumulated (capped at 2%) plus another 10%. I suppose that the penalties are somewhat onerous but not unexpected given the potential gain.

Overall, I don’t think that this is a bad investment if the criteria fits your children’s educational goals. It’s just tough to predict how their educational trajectory will progress years ahead of time. I also assume that the usefulness of the private 529 plan also depends if the program will still exist by the time your child goes to college too (just like Social Security).

Do you plan to use the Private 529 Plan?

How many investment accounts are you willing to open?

Posted on May 7, 2017January 30, 2021 by SmartMoneyMD

Having too many open investment accounts was never a problem that I ever fathomed facing. I don’t think that I have too many active accounts right now, but presumably the longer we remain investing, the more confusing accounts we will end up with.

Over time, I find myself signing up for accounts whenever custodians end up offering savings or cash back. I think that I started my E-Trade account years ago when they offered $100 for signing up and a few discounted trades. I opened a Fidelity account when my residency offered a 401k/403b plan. I had another 401k custodian through an employer that lasted for a year. When I finally became more educated on index funds, I opened a Vanguard account. I went back to Fidelity when they offered some airline miles and marginally lower expense ratios. I’ll probably open a Schwab investment account in the future since they now advertise expenses even lower than that of Vanguard and Fidelity.

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It’s also easy to rack up bank accounts. As a student, I opened quite a few bank accounts for minimal bonuses like a free mp3 player, $100, or free tickets. Was it worth my time then? Absolutely. I had a negative net worth with essentially no income. I even had to shuffle around my money to make the minimum balance requirements. It was worth spending my free time to get “free” stuff. Is it worth it now? Probably not, unless the sign-up bonuses are huge. I still have most of my old bank accounts open, but it’s relatively easy to manage since I have very little money in most of them. I don’t receive any 1099 interest forms at the end of the year, so I don’t really have to track them during tax season.

Fixed income deposits like CD’s also result in accumulation of excess accounts. Some banks require you to sign up for a savings account so that any interest accumulated can be deposited into an account outside of the CD. Other banks allow you to keep open a CD by itself without ancillary accounts. As you get older, you will inevitably open accounts, whether through the Treasury, banks, or even brokerage firms.

I have about twenty accounts of some sort under my name, including one from Macy’s that I opened while in college. It is too much that I can’t handle? Not yet, but it is becoming more difficult to track, especially when I get occasional mailings from banks that I have no recollection working with (yes, that is also a factor from age)!

It all of this worth it in the end? I still think so. I squeak out some marginal earnings that I otherwise would not have, and over my working career, I will likely squeeze out a few extra bucks. Once my CD’s start maturing, and these banks no longer offer great deals for renewing fixed income vehicles, I’ll start transferring out my funds and shutting them down. I still keep track of my accounts through Personal Capital, which does require some maintenance (I hate the login failures).

Do you have a threshold for the number of open accounts to deal with?

(Photo courtesy of Flickr)

Do doctors even need to have ancillary income?

Posted on April 2, 2017January 30, 2021 by SmartMoneyMD

We focus a lot on finances and keeping realistic lifestyle standards on this website. As doctors, we are privileged to have a relatively high standard of living compared to the rest of the population. Of course, this does come at a price of a long incubating period before doctors “become” useful and a relatively high level of stress in our work. What is important to realize is that despite a nice paycheck, doctors are far from immune to financial ruin and bad decisions. Much of these bad choices come from generalized overspending and bad investment decisions. I remember seeing an oncologist in my hometown open a Baskin Robbins and Popeye’s fast food establishments only to have them close down after a few years. Just because you can cure cancer doesn’t mean that you can run a fast food business. But hindsight is 20/20, as they say. If you are going to hit it big, you’ve got balance risk and reward while adding in a touch of luck. If I truly had that formula, I’d be selling it through my informercials.

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Diversification protects us from obsolescence.

I’ve long believed in branching out our revenue stream. It doesn’t ever seem wise to be a one-trick pony in income generation. What if a younger, better version of yourself comes along to take your job? In middle school, I remember seeing kids trade baseball cards. Sometimes the trades involved cash, but only in small amounts. After all, 5th graders were limited to allowance money.

Later, Magic: The Gathering cards came about and kids started trading and selling those. It was a mini-economy. I remember that there was one kid who seemed to have the most valuable cards that everyone else wanted. The kingpin. I always considered that kid to be a successful entrepreneur until the game fell out of fashion, and no one wanted to buy any of his cards anymore. Amateur. He should have diversified.

If you didn’t protect your trading cards from Kool-aid spills, your investment could be worthless!

You might also like: Why every doctor needs a side hustle.

Unfortunately, most people never diversify either. Most doctors I know certainly put all of their eggs in one basket. Myself included. Most of the time we just don’t have the time, energy, or interest in diversifying income. The people I know who actually do really love money. Sometimes more than their families. The rest of us just buy disability and life insurance and move on.

But having ancillary income isn’t necessarily a bad thing.

What is even better than income diversification is passive income diversification. Who doesn’t love passive income? (That’s you @PassiveIncomeMD!) Many doctors I know buy real estate, flip homes, write books, and even host wine tastings as means of additional income. Some of it is passive. Others seem far from passive. Many of these options do bring income outside of their primary occupations. Who knows, at some point your hard work will actually pay off. The book you wrote that you spent months away from your family can actually produce a lasting income stream for years. Think of it like paying it forward with delayed gratification.

Bullshit! I trained 12 years to become a thoracic surgeon, and you want me to flip used furniture on Craigslist on my hours off?

Point well taken. You have to look at the situation in two aspects:

1) How much time do you have to spare? What are your family obligations? If you spend that extra 5 hours per week writing an ebook after being at work for 85 hours that week, will your wife divorce you? How much do you like money? How much potential earnings and gratification would you get for doing extra work?

2) Will this ancillary business venture affect your primary income stream? You see this as a recurrent theme in Shark Tank. You have bustling entrepreneurs who aren’t willing to quit their day job yet but have potentially groundbreaking businesses that need more dedication. Which one do you choose?

You have to look at what your passion lies. The anesthesiologist who spends his residency looking at foreclosures clearly has a passion in real estate (not in medicine). If you are a thoracic surgeon who spent twelve years of your life to learn about cracking open chests, you’ve probably found your passion. You probably don’t want to (or need to) find a side hustle.

Doctors really don’t need to have supplemental income.

This goes back to my main premise—doctors don’t need to have ancillary income outside of their jobs. We work relatively hard in our primary jobs, and make good money. Just because some doctor you know from the hospital brags about flipping homes in his spare time doesn’t mean that you do too. Likewise, just because some doctor blogger on the internet starved himself for two years to pay off some egregious amount of student loans doesn’t mean that you do either.

You just have to know what is important to you, play your cards strategically, and fold when you have a bad hand. If you have a potentially lucrative hobby, you can decide whether it is worth your time to venture into commercializing it. If not, you can still be a successful doctor even if you are a one-trick wonder.