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When can this 55 year old doctor retire?

Posted on March 11, 2018January 30, 2021 by SmartMoneyMD

What are the first thoughts that come to your mind when you hear about a 55 year old doctor who has been practicing medicine for about 15 years but only has approximately $90,000 in her 401k? I’d certainly like to hear more of the story.

Dr. X, who is a Hospitalist is exactly that doctor. She moved to the United States after finishing medical school outside of the country, and had to retrain. She has three kids, two of whom are currently college students attending private schools. Where did all of her earnings go?

As a cost-conscientious immigrant she did learn to pay for everything in cash, including her house which is worth about $700,000. All three of her children own cars that are paid off, as does her husband. As a high-income professional, she also enjoys nice vacations and fine luxuries.

I think that the easiest reaction to hearing all of this is to pass judgment. However, the reality is that not all of us have had the opportunity to learn sound financial habits. Cases like Dr. X are incredibly common. What’s more important is to realize that Dr. X’s situation thins out her financial buffer—she needs to continue working hard at her day job and make prudent financial choices going forward.

Tackle your expenses to gain control of your finances.

Dr. X’s financial situation has similar issues as someone who earns $30,000 a year and has thousands of dollars in credit card debt. The only difference is that she probably is dealing with another zero to her salary. It’s also unlikely that she will have any salary increase given that she is likely at the upper end of her earnings at this point in her career. The biggest variable that Dr. X can control is her expenses.

Children

Dr. X is currently paying for her children’s education but she doesn’t have to. The youngest child is currently in private school while the older kids attend private colleges. There is financial aid for college students, even though Dr. X is a high-income professional. It is unlikely that they would qualify for need-based grants, but current federal student loans can be obtained for a jaw-dropping 6.8% interest-rate! Top tier private college tuition in 2018 is nearly $60,000, with total education packages estimated to be in the $75,000 range. Dr. X does not have the career longevity to put two kids through private college…unless her kids become entrepreneurs at an early age to fund their parents’ retirement.

Room service macarons will add another year to your working career!

If either of the children’s cars are not paid off, then Dr. X should reassess what options she has to reduce operating costs. Can Dr. X sell the cars and pick up a beater for the kids? Or should they rid of the excess gas/electric/money guzzlers unless the children can afford the cars themselves?

Lifestyle habits and other expenses

Dr. X should break out the credit card and bank statements do perform a thorough exam. Expenses should be scrutinized to the level of a twenty-some year old medical student or resident who has a negative net worth to her name. Cable bills, grocery and restaurant bills, and all other recurrent big-ticket items need to be assessed. This includes mega heating bills in the winter or four-figure monthly cooling bills in the summer. Major vacations for the family need to be reconsidered until a set financial plan that can get Dr. X into retirement can be made.

The greater amount that can be moved out of the fixed household expenses, the greater that one can shift towards a retirement savings bucket. Is her husband working? If so, the husband needs to perform a physical examination of his wallet.

Retirement savings

At age 55 with only $90k of 401k to her name, Dr. X doesn’t have much leeway in the tax-advantaged buckets. Assuming a capped catch-up contribution of $24,500 in 401k per year, Dr. X ought to be able to put in close to another $250,000 by age 65.

So starting with $90,000 in the 401k, with monthly investments of $1875 and annual growth conservatively of 4%, Dr. X would have around $403,000 in 10 years. This would only support an annual expenditure of $16,120 with a safe-withdrawal rate of 4%. Tack on roughly $20,000 of social security benefits at age 65, and that adds up to less than $40,000 a year to spend on living expenses. Doable? Absolutely. Most American households aren’t going to have even that, but that’s a far cry from Dr. X’s current expenditures.

The conclusion? I still think that Dr. X can retire, but she will have to make tough decisions to curb her spending, stay healthy throughout her career, and make the most of the situation.

How to file your backdoor Roth IRA through HRBlock Online Edition

Posted on March 4, 2018January 31, 2021 by SmartMoneyMD

This tax year I decided to switch from TurboTax over to HRBlock Online edition, simply because one of my banks offered to cover the cost of the software (approximately $100-$110 for me). In exchange, I believe that I gave them permission to distribute my financial situation to their potential advertisers—this is probably not a great way to give up my privacy for $100, but I think that the AMA (American Medical Association) also distributes my information to insurance companies as well.

I’ve used both the online and CD version of TurboTax in the past, and the interfaces seem relatively similar when filing the backdoor Roth IRA. TheFinanceBuff had a page on using the CD version of HRBlock, but it seems like the online version has a few other not-so-obvious menus. I do thank Harry Sit for providing great concise financial information online throughout the years.

There are two steps in filing a backdoor Roth IRA. (1) Filing a non-deductible Traditional IRA and (2) Filing the 8606 Form for Roth Conversion. Let’s walk through the steps:

The online version has a top horizontal navigation bar with tabs labeled, “Overview”, “Federal”, “State”…etc. Under each tab are sub-tabs. For instance, under “Federal”, there are tabs for “Personal”, “Income”, “Adjustments & Deductions”. Click on “Adjustments & Deductions”.

Top tab options on HRBlock online edition

The interface tries to be helpful in suggesting options, but scroll down to the bottom to find the following click boxes and click “Yes”.
Click “Add” under Retirement and Investments”
Click “Add Traditional or Roth IRA contributions” You will be adding a non-deductible Traditional IRA.
Check “We contributed to a Traditional IRA”
Fill in the amount that you contributed. For 2017, the maximum for those under 50 years old is $5500.
You have zero dollars in this IRA at the end of the year if you converted all of it to a Roth IRA.
You did NOT recharacterize the IRA.
The IRA basis should be zero if you converted everything.
Again, you didn’t recharacterize.
Converted everything.
Now to file the 1099-R form that you received from your custodian to show that you withdrew your non-deductible Traditional IRA and converted it to Roth IRA.
Add in the 1099-R.
Select option 2, and continue to fill out according to what the 1099-R shows.
The funds came from an IRA.
You converted all of it.
I selected that I had a basis, but when you convert all of it before any interest accrues, you will not have any basis.

That’s it! Sound out below if you have questions.

Focus on your savings rate when short on investment time

Posted on February 23, 2018January 30, 2021 by SmartMoneyMD

It’s human nature to want to tweak our investment strategies. Tax-loss harvesting, optimizing your asset allocations, delving into real estate or even multi-level marketing are some of the strategies that we all try to use to give that additional alpha to grow our net worth. The basics of these principles are not rocket science, but implementing them does take time. Even with appropriate strategy, returns are never guaranteed.

Many doctors simply still don’t have enough time or energy to tweak our investments. One of the reasons why I haven’t delved into real estate investments is simply due to the lack of time, motivation, and the interest. Likewise, it’s okay to realize that you can’t win everything. There is no set formula to reaching our financial goals. The great news is that you can still win in the end without micromanaging your investment options.

I like to focus on mini-victories in my daily life. Whether it’s simply getting the laundry basket emptied, keeping the house clean, or even getting through a rough workday, these are all wins. On the investment front, I focus on simplicity when I do not have the time to tweak my investments.

Drinking additional beer will cut into your savings rate

Remember that the majority of our net worth comes from our savings, especially early in our investment careers. We can’t control the bull or bear markets, but the longer we are in the investment market, the more time we have to ride out any dips. This means that we ought to front load our investments to maximize our ability to win.

When you are too busy in your daily life to go for advanced tax and investment strategies, focus on your savings rate. The more you save, the more you can place into the market to grow (and ride out losses). Last year (2017) showed tremendous growth in the stock market, and even with very basic total stock market index fund investments, my pot grew by over 18%! Being able to invest heavily prior to these up markets can offset most losses outside of the worst recessions. This is all due to controlling your savings rate, nothing else!

The next time you find yourself struggling to find time to optimize your investment strategies, just remember on your savings rate.

Employment or partnership? A physician’s dilemma – Part 1

Posted on February 18, 2018January 30, 2021 by SmartMoneyMD

Some people want to run as far away from employment as possible.

The business of how physicians practice medicine has undoubtedly evolved over time. Proponents of healthcare reform argue that many of the changes allow better care for our patients. Some doctors aren’t too convinced. Whether or not we’re on the mainstream bandwagon, we still have to play the game if we practice medicine.

The healthcare system in America has largely operated on a fee-for-service basis. This means that the health insurance (or patient) pays the doctors a pre-arranged amount for services. There was a time in the 1980’s where this compensation almost went away, but due to reasons I can fully understand fee-for-service has stayed alive.

The employed physician

The prominence of the employed physician has grown over time regardless of the underlying compensation structure. This is partly due to growth of certain physician specialties and economic demands of physicians.

Hospitalists, intensivists, and emergency medicine doctors constitute a growing number of the physician workforce. These specialists often work shifts for hospital systems, either as contracted groups or as straight employees. This means that they are compensated for a set amount of work. If they provide more services, they will likely earn more.

You don’t have to belong to those specialties above in order to be employed. Doctors who opt for straight employment contracts with a medical group can also work as an employee. Additionally, you could join a managed care group such as Kaiser Permanente to live a career as an employee.

The benefits of being an employee are exactly the same disadvantages of employment. As an employee, you provide a set amount of services for payment. Life is pretty clear-cut. You receive benefits from your employer, but you also have to work under the rules of the employer. As long as you finish your work, your job is done. Bad coworkers? Tough luck getting rid of them. If you’re the bad coworker, then you could probably feed off of the system while getting paid! In fact, an employed physician exchanges professional time for money. This is an important aspect—whether or not you are actually practicing medicine during this time you are still paid on the clock.

The owner/partner physician

Many years ago, doctors literally started a business to care for patients. They contracted with insurers, bought or rented an office, equipment, hired staff, and worked the business. With any business, the owner is responsible for everything. Deadbeat payors? Deadbeat employees? Your problem. That’s perfectly fine for some of us, but some of us aren’t equipped to run a business in addition to practicing medicine. Some of us simply prefer not to deal with running a business—we became doctors presumably to practice medicine, not to handle the front desk employees.

Presumably the hassle of running your own medical practice or being an owner of a medical practice ought to come with some reward, whether it be freedom to call the shots or monetary compensation that you wouldn’t otherwise enjoy with being a corporate slave or peon.

The take-home? Do you want the freedom to practice medicine for your career in exchange for others managing the business, or does the reward from being your own boss outweigh the additional work?

We’ll look at some financial analyses in a later post. Stay tuned…

Should you use a tax accountant?

Posted on January 21, 2018January 30, 2021 by SmartMoneyMD

Since tax season is but a few months away, the topic of accountants ought to be discussed. How useful are they, and is there some merit to having them do your taxes even if you can very well do it yourself?

In full disclosure, I was late in the game in figuring out anything about money other than spending it. My parents had a tax accountant who helped them out (read: ripped them off) for years, and this same accountant even did my taxes the first two years I filed them in internship and residency. Both years, I was fined by Uncle Sam because my accountant left out a critical form for my state and city. Since the accountant didn’t live in either of the places I worked, he probably never had to file out of state taxes. I think he charged us an extra $70 plus some state tax filings charges for probably an hour of work–I’d do the same too if I were an accountant and my clients asked me to add on another filing.

Fortunately (or unfortunately) by the third year I had to file taxes, my parents accountant was undergoing chemotherapy and no longer was able to work. I ended up filing my taxes using TurboTax, and have done so ever since then.

We all fall under one of three categories of tax filers:

DIY, either software assisted, or manually
Full service accountant hire
“I know how to file taxes, but I’d rather hire someone else”

DIY Tax Filers

With the advent of computer-based tax software, it’s gotten significantly easier to file taxes. The competition for online tax software is so great that we see television advertisements promoting these services. This has been good for the average consumer; if you have a simple W2 salary with minimal investments you can easily file online without paying a dime.

Most financial bloggers fall into this category. They are clearly numbers oriented, nerdy, or had some social shortcomings (okay, I exaggerate). Some of these guys (mostly are guys) are quite skillful with spreadsheets and numbers. Reading mundane tax laws and being able to beat the system is a challenge that they are all willing to take, and they do it well. I learn so much from these guys.

Medical residents ought to file their own taxes too. This is the time in your career where you will have the simplest tax forms, and probably the least amount of investment accounts to keep track of. This was the time I learned about student loan deductions, and realized that there was a dismal phase-out pretty much once I became an attending. How was that even fair? Just because you start making some money means that you can’t benefit from taking out loans for your education? I was pretty angry afterward when I once went an entire year of residency without repaying any student loans only to realize that I essentially lost my chance to deduct student loan interest. It hurts when you actually fall into the 25% federal marginal tax bracket living in a HCOL area with crazy city and state taxes. I probably could have “saved” $800+ of taxes had I repaid some student loan interest.

Full service accountant on retainer

Most doctors likely fall into this category. Maybe they never learned how taxes are filed. Maybe their accountants kept them in the dark. Most of us are likely too busy to be bothered. When my work schedule started picking up, I ended up forgetting to pay credit card bills. Most of us would rather play with our kids, shop, or even vegetate on the couch than to go through learning something new. Some of us have complex business structures in our practices in addition to our own taxes, so it’d be easier to have your tax account do your personal taxes along with the business’s taxes. Some of us also have irreparably broad investment interests in multiple states, all of which require individual state taxes. In these cases, it might actually be cheaper to go through an accountant if you have a longstanding relationship with them.

“I know how to file taxes, but I’d rather hire someone else.”

Fair enough. You’re a 1099 contractor or even a W2 employee with minimal outside investment or financial holdings, but you’re still too busy. Maybe after ten years of filing your own taxes and kicking butt in your medical practice, you are financially loaded. Who cares if you pay your account $2550 to file your taxes?

I think that the majority of physicians and busy professionals will fall into this category. There is only so much time in the day, and many of us didn’t realize that there are medical specialties that allow shift-based work rather than dedicating our lives to the career (ahoy vascular and neurosurgeons!) Eventually I expect to fall into this category, whether due to astounding success in my career or simply the need to carve out more time for the family.

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Five aspects of your financials that you can clean up for the New Year

Posted on December 31, 2017January 30, 2021 by SmartMoneyMD

As we’re counting down the hours until 2017 is no more, I’m going through my victories, failures, and resolutions for the upcoming year. It’s important for personal development to identify what has worked in our lives, what hasn’t, and what we can do to become better people. Financially, 2017 has been a rocky year for me—medicine has hit various professions hard, and the unlucky have been hit. I personally took an 80% pay cut while working longer hours and bringing in 8% more revenue (Yes, that’s collected revenue and not charges) for my employer! C’est la vie. We hope that 2018 will be a better year for medicine.

Despite what happens with our jobs, my financial plans remain as focused as ever. The upcoming year will still be too soon for me to declare financial independence or cut back on my job, but I hope to hit more milestones within the next five years.

In the meantime, I’ve dusted off my Top 5 Financial Checklist that I will be reviewing for the upcoming new year to keep my financial plans sharp:

Fund the Roth IRA

Anyone who is drawing a paycheck who has no tax-deferred IRA space should be contributing to a Roth IRA. Even if you are in early retirement, you ought to plan to fund your Roth IRA as you are withdrawing to cover your lower tax bracket space as conversions. If you don’t quality directly for a Roth IRA due to high income, you should still fund a backdoor Roth IRA.

You might also like: How to fund a Backdoor Roth IRA.

If you have the funds, go ahead and contribute to your Roth IRA in January. I’ve definitely had years when I “never found the time to contribute”. Your future self will thank you for it.

Strategize means to pay off those student loans

Although student loans are fortunately immaterial for me, they were a psychological burden when I was still in repayment. With federal loans in the 6.8% range, recent graduates will benefit greatly by knocking out those loans as if your hair is on fire. It doesn’t matter if your college roommate tells you she can get a 7% return on stocks that will compound while your student loans remain on simple interest. It doesn’t matter if a college acquaintance who became a real estate mogul gives you a lead on a 14.5% real estate return. Repayment of a 6.8% student loan is a guaranteed post-tax gain. If you have to refinance at a lower rate, do it. If you receive a sign-on bonus on your first job, consider contributing a portion of it (or all of it) towards your loans. You could probably live without a fancy new car for at least one year, right?

Reassess liability.

Liability to me involves situations that could devastate your financial situation. This includes:

Disability insurance
Homeowner’s / Renter’s insurance
auto insurance
umbrella insurance

One interesting aspect about umbrella insurance is that it ties into your auto and homeowner’s insurance. Most insurance companies do require a certain minimal coverage on your vehicles before umbrella insurance takes effect. If you drive a very old beater car that really isn’t worth insuring, you still have to increase the coverage. Yes, you have to pay more to get covered more because you have more money. I’d take more money any day.

Update your financial plan.

Everyone will have different levels of details in their financial plans. Some of us will calculate down to the month and year when we will be able to say goodbye to our daily jobs. Other people are simply going to have a basic financial statement declaring their investment strategy stratified by age. I keep my financial plan relatively basic, and I assess my annual savings rate, stocks to bonds ratios, and whether there are any planned big expenses like home purchases or real estate investments that I need to save for at the beginning of the year. This takes maybe fifteen minutes of additional thought and planning each year. No more, no less.

Update any employer-sponsored retirement savings.

Employer-sponsored plans include HSA’s, FSA’s, basic 401k’s, and the like that should be pretty much on autopilot. Not every household is suited for high-deductible health insurance plans to qualify for HSA’s, despite what we commonly seen among financial bloggers. Believe it or not, some of us have families with chronic medical conditions that still benefit from health plans with higher premiums but more coverage. Many FSA plans allow you to carry over $500 or less of your balance into the new year. Be sure to make note of any details—you certainly don’t want to give away any money that’s rightfully yours.

Happy New Year everyone! What other financial housekeeping duties do you go through at the end of the year?

How much disability insurance do you need if your spouse works?

Posted on November 12, 2017January 30, 2021 by SmartMoneyMD

The purpose of disability insurance is to ensure that your dependents are well-taken care of in case you are no longer able to work to support them. This is a real and unfortunately not rare situation. If you are a doctor and the sole breadwinner in your household, you have get disability. It doesn’t have to be much to begin with, but depending on your expenditures and net worth you still need some some coverage. I can only think of one reason why a doctor finishing her training would not need disability insurance:

You or your spouse is independently wealthy, and neither of your incomes are necessarily for you to sustain your living standards for the rest of your life.

I actually know plenty of people who are fortunate enough to be in this enviable situation. Most of these guys are pretty admirable too—many of them have taken financially unfavorable jobs for prestige, altruism, and other personal reasons. Chances are that you aren’t in this type of arrangement. If you ever (or when you do) reach financial independence, you can axe your disability because you are self-insured. You don’t have rely on anyone else for your existence. That’s a good milestone in your life to reach.

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What should you do if both you and your significant other has a job? Can you and should you lower the amount insured? Should you just insure the spouse with the higher income? Can you scrimp by without disability insurance for either spouse? Let’s look through each scenario and weigh in the pros/cons.

Neither spouse buys disability insurance.

This is not advisable. Simple example: You take a family trip to ski. Everyone takes a tumble. Your husband, the orthopedic surgeon, breaks his wrist in five places and ends his short but storied career as the premier should specialist in your area. You break a leg and shred through your intrinsic hand muscles. Technically you could still practice as a radiologist but can only go a tenth of your speed before injury. You have to take a 90% pay cut. Junior has to withdraw from his private elementary school and you have to give up your SoulCycle membership.

The higher earning spouse buys disability insurance only.

If the higher income spouse exceeds her counterpart by several fold, then perhaps this makes sense. Take, for instance, a nurse practitioner and his wife, the neurosurgeon. The nurse could buy up disability insurance—this might cost about $1,000 annually—but it might not make a difference. The cost of a $1,000 annually to have some insurance would not truly impact the savings power of the family. The loss of his income would also not really impact the bottom line of the family. The neurosurgeon should, however, buy up to the maximum amount until the family becomes financially independent. If I were in this situation, I’d forgo disability for the nurse and purchase for the neurosurgeon.

You might also like: How To Maximize Your Finances As A Two Physician Household.

The tougher situation is if the difference in income between both spouses is similar. At this point, it’d depend on how much the insurance would impact the bottom line in the family. Would the additional cost of disability insurance otherwise prevent junior from attending tennis camp every year? Would it slow down the family’s financial goals significantly (I would hope not).

Both spouses purchase disability insurance, but at an adjusted rate.

In some ways a two professional household has it easy–there are two incomes which are hopefully sizable. Double the firepower. Double (or even triple) the savings. Double the job security as well. If a family like this plays its cards right, it will likely reach financial independence must more quickly than most single income families.

Maybe a front-loaded schedule of disability insurance would go like this:

A more complex schedule would include the earning velocity of the household. High-income and high expenditure families should still purchase a relatively higher percentage of their incomes in disability even as they approach financial independence, because they have a large delta even towards the end of the journey. Lower expenditure households can drop off their coverage at a much higher rate since they have a larger buffer.

How much of your income is covered in your disability insurance?