WCI #22: Nuts and Bolts of Financial Planning

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dali. Welcome to podcast number 22 where we're going to talk about some nuts and bolts of financial planning.

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Well, welcome back to the podcast. I know that you may be listening to these one after another, one day after another, as I do when I listen to podcasts, but it's actually been over a month since we recorded a podcast and so we feel like we're just getting back into it. Our quote of the day today comes From Thomas Stanley, PhD, who you may recognize as the author of the Millionaire Next Door. He said the greatest detriment to building wealth is our home and neighborhood environment. If you live in a pricey home and neighborhood, you will act and buy like your neighbors. We've got a pretty special edition of the podcast today. We have a guest on here who we're going to call Jack. He's going to remain anonymous and we're going to try something we've never done before and if it works out great, we may do it more often. If it doesn't work out great, this might be the only time you ever see a podcast in this format, so it may be a pretty fun thing to do. But Jack is a new attending physician in a medical subspecialty who is just trying to get his finances sorted out. He tells me he found the White Coat Investor, stumbled onto it about eight months ago. I love it when people say they stumbled onto the website. They have no idea how much work goes into getting them to stumble in here. But he stumbled on it about eight months ago and we're going to talk a little bit about his personal situation and hopefully that will help answer the questions of many of our listeners out there because his situation is in many ways very typical of a new attending physician. So welcome to the podcast, Jack.

Hey, thanks for having me. Excited to be on it.

Alright, so Jack is married with one child soon to be born, and basically comes in with a little bit of money in the bank, which is actually pretty darn good, I think, for a brand new attending physician. He's got about $30,000 as an emergency fund, which is more than I had as a new attending physician, I can tell you that. Also has another $120,000 in a savings account. That really sounds like it's kind of earmarked toward buying, you know, being a down payment on a first home coming up.

Exactly.

He's also got some pretty typical debt numbers for attending physicians. He owes $225,000 at 6.8%. Boy, isn't that number common out there, huh? And is enrolled in the public service loan forgiveness program. Also has another $40,000 in private loans at a little bit better rate than that, but obviously that aren't going to qualify for public service loan forgiveness then makes a pretty good income of around $350,000 a year and plus or minus a bonus. So let's talk a little bit about some of the questions that Jack has about his finances and what he should be doing going forward and where he should be concentrating. So, Jack, you emailed me a few of your questions. Let's go through a few of those and talk about each of them. You want to start. Which one do you think is your most burning question about your finances?

You know, I guess like a lot of new attendings, you know, just kind of been treading water for the last several years and just really want to figure out how to get that saving rate up there and how to best efficiently save the large chunk of the money. So that, I mean, by no means am I a financial expertise so that I could just kind of set it up and kind of go into autopilot for the next 20 years, work my tail off in medicine. I really just want to get that initial setup and I'd sent you some of the details about the 401 and the 457. I just kind of wanted to make sure I wasn't doing anything stupid there.

Yeah, I think that's pretty common. I mean, most of us didn't go into medicine because we love financial stuff. It's just not where our interest was. If that was where our interest was we'd be in finance on Wall street or we'd be in business. And so I think what we want to do is not feel like we're getting hosed or we're doing something stupid with our money, but we really don't want to pay that much attention to it. The more we can put on autopilot, the better. And I think that's actually why a lot of docs end up using a financial advisor, because they want to get this off their plate and onto somebody else's. A lot of times they don't realize how expensive that particular decision can be, nor if they end up with a bad advisor, how much trouble they can get into doing that. But that's certainly a common desire to just want to automate it and get it off your plate.

Absolutely. And if I could just, I mean, you know, definitely went back and forth with my wife about would it be beneficial to get a financial advisor? And then so your book, website and other books, you know, walk down Wall street, that type of thing, really just, you know, it's kind of interesting to do. And I think I'd rather, you know, kind of gave my wife a little bit of a proposition of let me read up on financial stuff for three months about personal finance and see if we could just do it on our own. And really, really kind of don't want to do the financial advisor route. I got a few buddies who went that route and, you know, you know, the whole life insurance thing where they're selling them stuff and they're like, yeah, well, I'm four years in. I don't really want to get out. I don't think I need to elaborate on that anymore.

No, I think most of our readers are quite familiar with that situation. If they haven't been propositioned to buy whole life insurance from someone calling themselves a financial advisor, they haven't been practicing very long. This probably a good time to pause and just point out, in case anybody listening isn't aware of this, that I'm not a licensed financial advisor, attorney, or accountant. I'm just a guy hosting a podcast. I mean, I'm a doc. I spend most of my time seeing patients just like you do. And so just consider this a conversation between some friends in the doctor's lounge and not actual personal, formal financial advice, either for Jack or for you. But certainly your main question is, how do I get this stuff onto autopilot? And I think the most important focus when you're coming out of training is, is on that savings rate. How much of Your income is going toward building wealth because at this point you have a negative net worth, just like most docs coming out of training. And if you're not putting a significant percentage of that great income that you have toward building wealth, it's going to take a while to get back to even much less start going into the positive very far. And so I think one of the best ways to do it is to track it. Actually track how much, what percentage of your income you're saving. And what I recommend to an attending physician is 20% for retirement, 20% of your gross income for retirement. And so that's relatively easy to calculate if you're investing $18,000 in a 401k and $18,000 into a 457 and maybe $11,000 into backdoor Roth IRAs for your spouse. And you, you add all that up, divide it by your gross income, see what the percentage is. And if it's 20% or more, you're there. If it's not 20%, well, you're going to have to invest some for retirement tax in a taxable type of account. But you know, it's important just to keep track of that. And I think just the act of tracking it actually gets you closer to the goal you're trying to get. But the, you know, the truth is when you first come out of training, that's kind of a low percentage, honestly. I mean, you're used to living on a fellow salary, which is probably $60,000. I don't know if your spouse was working, it'd be higher than that, obviously if your spouse was working, but you know, that's what you're used to. And so if you go from there to $350,000, you can give yourself a pretty hefty raise. You know, even if you gave yourself a 50% raise and start living on $90,000 and even after paying the much higher tax bill you have now, you can still put a lot of money toward building wealth, toward paying off your loans and toward, you know, maxing out retirement accounts and saving up down payments and saving for your kids college, you know, out of that $350,000. So I'd encourage you to try to grow into that income as slowly as you can. Try to live like a resident or live like a fellow for as long as you can. You know, I usually recommend a period of two to five years and in that time period be knocking out your student loans in addition to maxing out your retirement accounts. So that'd be my goal for the first Few years out, knowing that that's a temporary time period that you don't have to live like a fellow for the rest of your life. The goal of doing it for a few years is so that you can live the good life later and spend a large percentage of that $350,000 income.

You know, definitely sounds reasonable. I think one of the things, like, a lot of, you know, I fall into the same trap every new attending does. You get out of fellowship. Just, just like every, you know, I've read a bazillion articles about it. We just. We really. There's no financial reason for it. We really just want to buy that nice house. And I know just like that quote you read at the beginning, you buy into the nice house, you buy into the nice neighborhood, it's just gonna be hard to keep your costs down. But gosh darn, we've been dreaming. I mean, me and my wife have been dreaming about that for, you know, years, if not decades. It's just. And I know that's just gonna up titrate everything and make it hard to save that 20%. And, you know, but I think. I think the key is gonna be for me and her to realize kinda what we value as far as having a nice house but not keeping up with the Joneses, so that we could still save, if not that 20%. Like people like, you know, you probably do, who are, I bet, better than me at finances. At least the 15 or something like that.

Right? You know, it's amazing, this urge to buy a house among doctors and especially their spouses. It's incredible. I've never experienced anything quite like it. You know, if I go speak to a group of graduating residents, you know, half the questions and all the questions from their spouses are about buying a house. How much can we buy? You know, how should we buy it? What's the best way to buy it? Because they are just super excited about owning a house, which now I'm now in my third house, having been through the round trip two times and lost money both times. There are many situations where renting works out better. But the truth of the matter is, when I think your job is stable and your social situation is stable, I think it's okay to go and buy a house. I don't even think you have to have a 20% down payment. If you've got a better use for your money, like maxing out your retirement accounts or paying off 6.8% student loans, then I think it's okay to get one of these fancy doctor mortgages where you put down less than 20% and don't pay private mortgage insurance. Now, usually there's a little bit higher fees, a little bit higher interest rate compared to getting a conventional mortgage and putting 20% down. But typically the benefits of using that money elsewhere in your retirement accounts or toward other debt outweighs that cost. And so, you know, once you're in a stable job, in a stable social situation, I would go ahead and buy. I would not feel like you have to have the 20% down payment. Assuming you're putting a significant percentage of your money toward building wealth and it's going to good places, then I think that's fine. To not feel like you got to wait three or four or five more years before you buy a house, I think it's okay to buy it, you know, once, you know, the job stable. And I think that period is probably for most people, six months to a year.

I got a big smile on my face because my wife kind of pushed to. I was jumping to buy just because I've had that dream for a year. And my wife said, yeah, you know, just rent for six months to a year, make sure we like it, yada yada. So she, she. I'm going to tell her what you said, and she's going to have a big smile on her face. You know, not that what you say is gospel, but the fact that she, you kind of said what she said word for word is going to bring a twinkle to her eye.

But yeah, it's totally. It's totally. I mean, we don't want to be extreme about it, right? I mean, we're not trying to buy a house for cash here.

Right?

But we just want to be smart with our money. And so that's what I would try to do is, is just make sure the job and the relationships are stable. And if they look good, then you can move into the house and don't get some crazy huge, expensive house. But if it's within some reasonable guidelines of an affordable house, which what I usually say is a mortgage no bigger than two times your gross income. So in your case, that would be a mortgage smaller than $700,000, then I think you can go ahead and do that.

Sounds good.

You should buy it three months before you graduate from fellowship, you know, give it a little longer. It's amazing how much wealth you can. You can put together if you're still renting for your first 6 to 12 months as an attending. But, you know, you don't have to put it off forever. Let's go into what's your next question?

So you know, I guess one, definitely one thing we've been kicking around and it kind of gets into my head a little bit is if just keeping kind of the rate of what we're able to up titrate our spending as far as. And I think this is more mentality question. It's just, you know, it's kind of hard when the paycheck goes up by magnitudes to keep your spending going up only by a small percentage. And you know, I don't know if there's any general tips about that, but besides just do it. But that sometimes that sometimes can be tricky.

It's really hard. Isn't.

Takes a little, little more discipline than reading a medicine book.

Yeah, it does. You know, it's interesting. I tell people to do this right, Live like a resident. We didn't live like a resident. We increased our spending a little bit. I don't know how much it was. Maybe 10 or $20,000 is probably what we increased it. But we're in a very different situation than most attendings. Our income didn't go from, you know, $60,000 as a resident or fellow to 350,000. Our income went from, I think 42,000 is what I was making as a third year resident to about 120 because I was in the military, so I didn't have this huge jump in income. So I couldn't spend five times as much money. I didn't have five times as much money. And so we were forced a little bit to grow slowly into our income. But even so we managed. We were saving a huge percentage of our income those first few years as an attending. And so that's the goal. The goal is to be putting a ton of money toward building wealth. So is it okay to increase your spending a little bit? Absolutely. Increase it a little bit. But when I'm talking about a little bit, I'm talking about, you know, 50%, not 400%. You know, you want to maybe allow a little bit of lifestyle creep, but you want to avoid a lifestyle explosion, which is what most doctors do. You know, they come out of residency and all of a sudden they're spending four times as much as they were as residents. And that doesn't leave a lot of room to pay back loans and max out retirement accounts and save up down payments. You just don't have the income for it. You're high income but not rich yet. And so I'd let yourself spend a little bit more. I think the goal is try to grow into it as slowly as you can, spend enough that you don't feel deprived, but not so much that you can't reach your financial goals. And that's definitely a mindset thing. If you just feel like you're washing, you know, Ziploc bags and reusing paper towels, you're not gonna be able to stick with the plan. It's like dieting. If you cut it to too low of a number of calories, you're not gonna be able to stick with it. So you got to know yourself a little bit and know what you can stick with, but also make sure the plan that you're gonna do is eventually gonna lead you to reach your goals.

Makes sense. You know, it's just. It's tough when you go and the doctors and the practice have these gorgeous houses, and you're renting an apartment and trying to, you know, save a little, even go a little cheap on the rent, because that's one of our cheap expenses per month so that we could save and get the house. You know, it's tough to hold back, but I definitely hear what you're saying.

Well, let me give you a little bit of inspiration on that point. A couple of things. One, when those partners. Years, those older docs, you know, came out of med school, they owed $20,000. You know, you just got to keep in mind that inflation tuition has been nuts the last 15 to 20 years. It's been absolutely crazy.

I hate that, too.

I mean, I hate that when I started med school in 99, it was $10,000 a year.

Yeah.

You know, and so they. They cannot relate to you. They do not understand your financial situation.

Well, even some of the different. Yeah, even some of the younger guys did it, but. Yeah, no, I get it. But I hate that $225,000 loan number. Just like, not that it. I mean, I have high blood pressure, but not that. That's. That gives me the high blood pressure. But being in the negative that much and just hoping that the PSLF pays off is a little stressful, especially when no one's ever used that. You know, that. That's another thing. I don't. That's not the best transition, but that's another thing. That kind of. I mean, the fact that no one's cashed that sucker in and so much of our net wealth is tied up and depending on that, that's a little bit of a blood pressure raiser.

Yeah. Let me move into public service loan forgiveness in just a minute. But first, let's Talk a little bit about the other thing that I think will give you a little bit of inspiration to stick with this plan to kind of grow into your income slow. Remember, it's growing into it slowly. It's not never growing into it. Right. You're going to be able to spend like they're spending eventually. But here's the deal, right? If you go stick with this plan, you become financially independent after 15 years or so, and then you can do whatever you want. And then all of a sudden those older docs are coming to you asking for financial advice, and they're wondering, how is it that you're going to halftime, how is it that you're retiring early? And so realize that the path you're on and the path they're on lead to very different places and you got to decide where you want to go. But most of them just got on that path by default. They didn't actually make a conscious decision that they wanted to work until they were 70. You know, that just happens to be the default path you end up on if you don't do some thinking about it as you get onto the path. So try to keep that in mind. Try to grow your income as slowly as you can and realize as those numbers, you know, your net worth number improves, that that's a direct result of the decisions you're making and the way you're dragging your feet as you move into buying things.

Sounds good.

As far as public service loan forgiveness, you're a direct employee of a 501, right?

Correct.

And you've been making payments for five and a half years, right?

Exactly.

Okay, so you're only four and a half years out. You filled out the certification form each year for public service loan forgiveness for every job. Okay. And so for basically five years, five and a half years, you made little tiny payments based on your fellow income, correct?

Yeah.

Okay, so you are the perfect candidate for public service loan forgiveness. I mean, you, you had long training period, you made lots of little payments during training, and then when you get out of training, you basically got four and a half years of real payments to make and everything else is gone, going to be forgiven. So if you owe around 100, $225,000 now, I don't know what you'll pay that down to over the next four and a half years. Maybe down to 150,000.

Yeah.

And then the rest of that will be forgiven. You know, that's the way the plan supposed to work. Could it go away? Absolutely, it could go away. But the chances of it going away for you are very low. Yeah, for a couple of reasons. One, you're very close to the end already, right? It's got to go away in four and a half years for you to be hosed. Imagine the first year med student counting on it, right? He's 17 years away from it.

Fair enough.

So that's one thing you got going for you. The other thing you've got going for you is you're already in the program. And typically, when the federal government changes its student loan programs, it grandfathers everybody in who's already in it. And so I think the likelihood of someone like you not being grandfathered in is extremely low. Now, the further people are back from where you are in the medical training pipeline, the more. The more risk there is there. You know, if you're still in med school, there's a fair amount of risk. If you're in residency but now enrolled in public service loan forgiveness, there's less risk. And so I think. I think that risk of you getting hosed from this is pretty low. Despite the fact that nobody's ever received this forgiveness before, that's the part. This October is the first time anybody's going to get forgiveness for it. And the New York Times is going to be running articles saying doctors have hundreds of thousands of dollars of loans forgiven. But you know what? That's the way the program's written. That's the way it's written into, you know, your promissory note. And that's the way and the law is right now.

That's the part that makes my chest a little tight, though. The fact that no one has done it yet, you know, like that.

Well, yeah, I mean, here's the site. Here's. Here's what you do. Okay. If you're really worried about this, if you think you're going to get hosed, is you start saving up the money on the side. Just in a taxable investing account. You make payments like you're going to have this thing paid off in four years, but instead of sending them to the lender, you send them to your Vanguard Investing account. And then if something bad happens, you get hosed out of public service loan forgiveness. You've got this big chunk of money sitting over there in your investing account that you can now direct toward the loan.

Oh, how interesting. You know, I think God knows I've probably stumbled across your site and see someone, but that hadn't. No one had told me that, like, just straight out that day, you know, I gotta say, I felt a little Relief of chest pressure. When you said that idea, I mean, I gotta run up on my wife, but good God, I kind of like that idea.

Yeah. I mean, the other thing to keep in mind is there a little bit of risk there? Yeah. Because you could be refinancing these loans.

Yeah.

You know, if you're refinancing them to a variable five year loan, you might be able to get a rate as low as 3% or so.

A little bit of missed opportunity there.

So, yeah, there's a little missed opportunity there in the event that it didn't pan out. But I think that's risk worth taking in a situation like yours. I mean, you stand to be given a $150,000 gift after tax, you know, I mean, I think that's worth taking a little risk for. You know what I'm saying?

Yeah. That's why I'm in it, you know? But, yeah. Yeah.

So I'll be very surprised if you end up getting hosed out of not getting that $150,000. I think you're gonna get it.

I hope so.

I don't know if somebody that, you know, starts med school five years from now is gonna get it. I think there's a decent chance they're not.

Right.

But I think you are.

I hope so. I hope so. I got my. But I like that idea you had about maybe just, you know, investing in kind of a low risk account at Vanguard, Whatever I would pay off. And then if my wife and lucky enough and I are lucky enough, they just let it go. Then you got that money already in a retirement account or whatever. I like that idea a lot.

Right. You're that much richer. So I think that's the perspective you ought to take from it. And that's really the backup plan for those who are, you know, laying awake at night thinking about their $225,000. And $225,000 isn't even that much. Right. I mean, I run into people with 400, 500, $600,000 in student loans all the time. And the rest of their financial life is dependent on this public service loan forgiveness program. They're going into pediatrics or they're going into psychiatry, and they owe $600,000 in student loans. I mean, they really need public service loan forgiveness.

That's.

I mean, you know, if this really didn't pan out for you, it's not like you can't dig out of this hole. Your income to debt ratio isn't that bad.

That makes me feel a little better. I Think what I'm not. I think why it's a little bit of a pressure on the chest is that I'm not used to my new income yet, so I'm used to not being able to take away huge chunks. So at this point, that. That almost seems insurmountable, if that. But see, you see what I'm saying?

Yeah, but you're also, you know, I mean, somebody's dropping, you know, $25,000, $28,000 into your bank account every month, and that's basically something that you can use to do a heck of a lot of wealth building with, you know, especially when you're used to spending less than $10,000 a month. You can build a lot of wealth in a hurry with paychecks like that.

Yeah, that. That's the goal. I'm with you.

And the focus isn't, you know, a lot of people are really fixated on this. Should I pay my. Down my debt or should I invest? You know, the real focus ought to be what percentage of it's going toward building wealth. You know, paying down debt that's good. You know, investing that's good. You know, they're both good. Is one maybe slightly better than the other? In certain situations? Sure. But at this point, it's all about how much you can put toward building wealth.

That makes sense. Yeah. And that's definitely something. I mean, that's been a mind shift for me from going through to. I mean, I sent you the email with all the expense ratios and all that, but I think really shifting my mind from hunting the best Vanguard index fund to really focusing on making sure to save that 15 to 20% per year, whether it's knocking down loans or investing in a retirement account, doesn't much matter. The nuts and the bolts, as long as you get that percentage and don't blow it and don't know where it goes.

That's right. That's absolutely right. Especially at this stage in your career, you know, as you move, as your portfolio grows, you know, those expense ratios matter and that asset. Asset allocation matters. But at this point, shoot. It's all about the personal finance decisions, you know, and getting yourself onto a reasonable level of spending and getting in the habit of saving money and getting rid of your debts, you know, that's what it's all about in the beginning. That first year is so critical. That first year out of training is the most important year in your financial life.

Just to set the precedent.

Just to set the precedent. Yeah. Because, I mean, really, if you can tell me what you did with your money in your first year out of residency. I can pretty much predict your financial life with surprising accuracy. Now there's a few people that kind of turned around. They're two or three years out of residency and they find the website or, you know, they start getting on the Internet forums and they get the things turned around. But for the most part, the trajectory you start on early in your career, you tend to stay on.

You could, I would be proud to show you, hopefully after the first year, I'd be proud to show you what I did after the first year with our money. I tell you what, you can't look at. You can't look at my money that I did after the first year of med school because, good God, do I not know where any of that money went? I mean, I was, I was a single 20 some odd year old with no responsibilities, making close to 50, 55 grand, and I have no idea where any of that money went. And my wife chuckles at me and she says, where the heck did it go? And I say, I don't know. I have no idea.

Well, you know, that's, that's unfortunately the probably more common story than not.

Yeah.

Anyway, it looked like you had some investing and retirement questions as well. Let's talk about some of those.

Yeah, so, you know, I was just, I'm trying to do, you know, I kind of go by the more boggle head approach. And my guess is most of your listeners and readers do, like me, just try to minimize expense ratios. So I'm trying to mostly go after the Vanguard, you know, Total International and then a little bit of Total Fund. I guess the one question I had, getting down to nuts and bolts, was the general ratio. If I look at the Vanguard target retirement account for 2055, 2060, in general, they have around 8 to 10% bonds. You know, I crunched the numbers a little bit. I'm trying to justify that as a high income, relatively steady job market, knock on wood, that I could decrease my bond ratio to somewhere around 5% and kind of get a better yield year in, year out for the 30 years that it's going to grow before me and my wife retire. Am I justified in thinking that or is that kind of me just wanting to be a little greedy?

Well, let's talk a little bit about that, right? How much different does a 95% stock portfolio perform versus a 90% stock portfolio? I mean, you almost can't tell the difference. It's basically the same thing. And so I wouldn't worry a lot about little changes in asset allocation like this. The real question is, can you tolerate having so much of your money in stocks? Because there is real risk in the stocks. You know, there's no guarantee that they're going to outperform bonds or even cash over your entire investing career. Is it likely? Yes, it's likely, but there's no guarantee. Here's the problem, though, with having a really high allocation to stocks. You have no idea what your risk tolerance is in a bear market, right? You didn't have any money invested in 2008. It's already been nine years, basically, since we had a real bear market. And you have no idea what you're going to do when you see real money evaporating out of your real accounts. For example, here's what happens, right? You got all this money in there and all of a sudden you lose 35% of it. Let's say you got $300,000 in there and there's $100,000 gone. That's a very real $100,000. That's money you did not use to buy, you know, to upgrade your kitchen. That's money you did not use to buy a wake boat.

We love nice kitchens.

Yeah. That is money you did not use to go to Paris. Right. It's real money that you made real sacrifices to put in that account, and now it's gone. And that is not just an intellectual exercise. That is also an emotional exercise. It hurts. It is painful. It is emotionally painful to lose that money until you know how you react in that situation. I would caution you against having a lot of your money in stocks. You know, I was 75, 25 when I went into 2008, and that was about right for me. You know, I lost a lot of money. I think our percentage losses were 33%, I think, in at least one asset class. I think our REITs, from peak to trough, I think we lost 75%, 75% of our money. And that's money that I didn't drive a nice car with. That's money that we didn't travel internationally with. You know, that's money we lived in a crappy townhouse with. You know, that's where that money came from. And to watch it evaporate is very real. And so what I recommend people do until they hit their first bear market. And don't worry, there will be a one along here soon, in the next five or ten years. Then pay attention to what your asset allocation feels like to you, and then you'll know your risk tolerance and if you go into that at 80, 20, and you go, that was easy. That didn't bother me at all to lose that money. I was still piling money in at the bottom of the bear, and now I'm glad I did. Then, sure, increase it to 90, 10 or 100% stocks. But if you get in there and it's 80, 20, and it's all you can do to hold on and not sell everything and go to cash, when you get out of that bear market, you probably ought to decrease to 70, 30, or 60, 40, because that's really how you know your risk tolerance. Now it helps to increase your risk tolerance. And there's some ways you can do that. You can learn about financial history. If you go back and read about these bubbles and you read about these recessions. I read a book not that long ago about the recession of the 1830s. It just gives you a sense of what can happen. I think that increases your risk tolerance so you can emotionally tolerate a more volatile portfolio. And then, of course, reminding yourself that you're investing for the long term, I think that makes a lot of difference as well. But when I talk to somebody that's brand new to investing and we haven't had a bear market in years, and they're talking about being 100% equity or anything close to it, I almost worry that they're going to go 100% equity or something like that and go into their first bear market and have such a terrible experience that it frightens them off from investing at all for the next 60 years. And you're far better off sticking with a 60, 40 portfolio through a bear market than entering it with a 100% stock portfolio and selling out at the bottom. That mistake will cost you far more than just having a little bit less aggressive portfolio. So I would. I would probably err on the conservative side. Whatever you think you can handle. I'd dial it back a little bit more and then wait for your first bear market. You can always ramp it up at that point. It's not like the big factor right now is your returns anyway. The big factor right now is how much money you put in those accounts.

Fair enough. So I think I could handle 95.5. So maybe dial it back to 9010 just to feel like I'm playing it a little safe, at least until I see how the heck we do through the first bear market.

Yeah, I think that's a good idea.

You should have like a WCI support group when there's a bear market for all the People that have money, you.

Know, I think you'll find that on the forum. It's. There's a lot of great people that are very smart on that forum.

How nice are people? They're so nice. They're so nice. They're so nice on it. You go on there. They're so darn nice. They're so darn thorough. Some people don't know what they're talking about, but you could always figure out who knows what they're talking about. You put it up there and you get an answer. They're so darn nice.

Yeah. It's a wonderful resource.

And they don't charge you for nothing. It's so nice.

Nope. It's great.

Yeah.

All right. You had a question about your Roth 401K.

Yeah. So it's the. The Place I work offers, in addition to the 457B, which is governmental, which is nice, they also offer a 401. And you can take it easier either as a Roth or a standard ira. And, you know, I think because we're probably in the higher end of our earning potential, that it makes sense to do it standard. But I, you know, I listened to your last podcast with the tax diversification, which was one of my favorite ones that you did, and so I started to think, you know, how much do we really want in our ira that's a standard, as opposed to could come out taxed so we don't get into those brackets. And I'll stop talking now, but you see why I started thinking about that.

Yeah. It's a common question that a lot of people run into. And I've got a couple of blog posts up about it. But you have the general gist, right? The general gist is when you're not in your peak earnings years, you use the Roth option. In your 401k, when you are in your peak earnings years, you use the traditional tax deferred option. And the reason for that is the arbitrage you're getting between your very high marginal tax rate when you're in your peak earnings years and the lower tax rate you'll encounter when you pull the money out of the account. Remember, when you put the money in, every bit of that comes off the top. You know, where you're getting taxed at 33, 35, 39%. Whereas when you take it out, you can use those withdrawals to fill the 0% and the 10% and the 15% brackets. And so that's why in your peak earnings years, you generally want tax deferred options. Now, you just came out of fellowship this summer, correct. So you are not for tax year 2017 yet at your peak earnings, because you're only going to have six months of earnings as an Attending and six months of earnings as a Fellow. And so this year might be a great year to do the Roth 401K.

Oh, crap, that's interesting. I did not think of that.

That's probably what I would do the first six months out, assuming they're letting you contribute to it. And sometimes they don't let you contribute to it for a year, year or so, three months. But. But if they're letting you contribute this year, shoot, yeah, I'd do the Roth option.

Oh, how interesting.

Also, if you have any other tax deferred accounts from a previous employer or anything like that, I'd put those as well. I'd convert those. I'd pay the tax and convert them to Roth. That's a great time to kind of boost that amount. You have in a Roth IRA or in a Roth. Yeah, essentially a Roth IRA. Also, you can do, you know, backdoor Roth IRAs for both you and your spouse, but you have some time for that. You don't actually have to put that money in until April. And so you've got a little bit of time to do that, whereas you probably need to get your 401k contributions in before the end of the year. And so if your cash flow crunched like most new Attendings are, then you can put that one off until later. Now, eventually you kind of want to bump it up a little bit each year until eventually you're funding it basically first thing in the year. But when your cash flow crunched early in your career, just getting that in there so you don't lose that Roth space forever is a pretty good idea.

I definitely hear what you're saying a lot of that. I had kind of by reading pretty much what you had read, but I hadn't thought about doing the Roth this year because it's going to be a relative lower. I bet you I'm not the only one who that's the case for. That's really interesting.

I mean, it's basically the case for everybody coming out of training.

Right.

We all come out of training on July 1st.

Right.

And so that's, you know, for most people, that first year out is the year. And for sure in, you know, in your fellowship years and your residency years, and if you take a sabbatical and if you're working part time or you have a big, long maternity or paternity leave. You know, those are all years where you ought to think about, well, maybe we ought to do Roth this year. But the general rule if you're, you know, if you're at the peak of your earnings, is to do tax deferred.

That's. Yeah, I like it. I love it. I didn't. I didn't think of it. And I'm grateful to you, like I am a lot of times for bringing that up and the wci. Whatever. Family or whatever the heck. Yeah, okay. That's awesome. I'm excited about that.

All right. Well, you had a question about. About an HSA as well.

Yeah. So, you know, this is something. And this. It's weird. None of my buddies think of this. As far as. Well, maybe one of them. As far as, like, an investment vehicle. Vehicle, whatever. As far as an account that you could use, as you say, to triple tax. I'm a little hesitant to do it just because, you know, out of the hundred people I know who I talk to about this, only one person does it. But, you know, my job. I was looking at it. It's the same. It's pretty much the same fee structure as the 457 and the 401. Is there. Is there any. You know, I'm just. I don't know. It's a little. I'm a little hesitant to do because not that many people I know do it.

Yeah, this is. This one's a little bit new to most people. When I go out and do speaking engagements, I put this slide up there, and everyone's furiously taking notes.

Yeah.

And HSA is your best account. You don't have any other account that's as good as an hsa. You know, you get the tax break going in. It grows tax protected when it comes out. As long as you spend it on health care, it comes out completely tax free after age 65, even if you don't want to spend it on health care, it's no worse than your 401k. You know, sure, you got to pay taxes, but no penalties. I mean, it's a great account. Keep in mind, you don't have to use the one your employer likes. If you've got one that's got kind of crummy investment choices or high fees, you don't have to stay in that. You can open your own on the side and just, you know, do transfers from the one your employer puts the money into over to the one on the side.

You can do that.

You can do that? Absolutely. You are not stuck with your employer's hsa. And so that is, you know, a move that a lot of people ought to make. Now if you're self employed, just open your HSA at a good place. You know, I've got mine at a place called HSA bank which isn't a, you know, unlike most companies I mentioned, you know, is not a white coat investor advertiser. But that's where I have mine. And they do their investing through TD Ameritrade. So it's basically just a TD Ameritrade investing account. And I buy Vanguard ETFs. They're even commission free. They've got a list of them that are commission free. And so it's extremely low cost, great investments. And I'm not stuck with some crummy HSA that had a slick salesman that convinced my employees to use them.

And then how does that work logistically? Like I, you know, my wife's about to give birth. Like if, when you need to use money from the hsa, how does that, do you use the money from the HSA or do you, how does that work?

Well, you got a lot of options. One, you can leave it in there and not use it and just spend from your paychecks. Two, you can take the money out of the HSA and pay for your health care expenses as you go along. I mean, that's the intent of the government when they set them up. Their intent wasn't for you to use it as a stealth ira, but the rules allow you to do that. And so that's what a lot of people are doing. But you have a third option. That option is keep the receipts for, you know, whatever you spend on health care for the delivery of this child, for instance, you keep the receipt and then at some point down the line you can take the money out of the account tax and penalty free. You don't have to take it out the same year you spend it.

You could take it out and just me and, me and my wife, you go spend it on a vacation, you don't have to take it out and spend it on a, on a healthcare item. Right.

As long as you have receipts equivalent to the amount you take out that were spent on healthcare.

Even if you like the way it works, they give us like a card, like a credit card to use. So I guess I got to look into the details of that.

Yeah, I mean you can use that card that's free, your convenience. But that's not the only way you can take money out of the account. Yeah, that's A check to yourself out of the account.

That's so interesting because they make it seem like you just use the card, but basically it's just like an account that you could take out money whenever you want and it can be tripled that tax deferred, like you say.

That's right. It's triple tax free. You know that I wouldn't be surprised to see that rule change that you have to take it out of the account in the same year you have the health care expense. That wouldn't surprise me to see that change. But I think we'll have plenty of notice if it does. And we can kind of catch up with the receipts we have and take out an amount. Because I probably got receipts worth maybe $15,000 sitting around in a folder that I could take out of my HSA tax free, but haven't gotten around to actually doing that. And in the meantime, that money's continuing to grow completely tax protected, and you.

Invest it just like you invest the rest of your.

It's all invested in the Vanguard Total Stock Market index.

Yeah, I got money in that one too.

Just very well the last five years.

Very interesting. I like that. That's exciting.

Any other questions you've got?

No. Heck no, man. You've been. Sorry. You've been amazingly helpful. I got a.

Lot to get, a lot to think about. If you're like most docs, the first time you hear this stuff, you're realize, wow, there's all kinds of improvements I can make to my finances.

Well, you got to give me some credit. I've read a bunch and a lot of this I knew to get to this, but the stuff that I didn't, you know, you just. It's like, you're like a good teacher. You take me to the level where I don't know the answer on rounds. Well, whatever.

You're doing great. Well, we've got our guest for podcast number 23 that's going to be calling in here soon. And so I think we got to wrap this up. But I sure appreciate you taking this time to come on and talk further frankly about your personal financial situation. This would be hard for a lot of people to do to come on and talk about your income and where you're at in life and what your questions are and reveal the things you don't know. You know, that's not easy for us as doctors to do. So I sure appreciate you, Jack, coming on and doing that.

I'll get the heck out of here. You know, you did me a bigger favor.

Well, I hope, I hope I was able to help. That's the whole motivation behind this.

Definitely.

A certain point it's, you know, while men making money doing it certainly helps keep me interested, that isn't what brought me into doing this in the first place.

Thank you so much for everything. Hopefully I do well with the money, but I appreciate all the effort you put into it.

You're very welcome.

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