WCI #24: Potpourri of Listeners' Questions

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 Dahli. Welcome to podcast number 24. Here at the White Coat Investor, we're calling this one a potpourri of questions.

I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there is no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors@whitecoatinvestor.com financial advisors.

You can do this and the White.

Coat Investor can help.

Welcome back to the podcast. It's kind of interesting the way we do these. We make all the podcasts for the month on one morning during the month. We don't spread them out. And so while it might seem that you haven't heard from us in a little while, it may be that we recorded those podcasts back to back, but in this case we haven't made one for quite a while. And in fact, the last couple we had were interviews both with Ms. Bonnie as well as with a regular listener. And so we haven't had a chance to hit very many of your questions for a couple of months. And so I thought with today's episode we would go through a whole bunch of questions that we've been sent in that we've had sent in via email or comments on the blog or on Facebook or Twitter. And so this episode is going to be a collection of that. Our quote of the day comes from Benjamin Graham, Warren Buffett's mentor, who said it is absurd to think that the general public can ever make money out of market forecasts. Now our first question today comes from a neurosurgery resident in California. He writes in my employer offers a certain amount of money per month for health insurance. I must enroll through them and then adds the remaining leftover funds to my paycheck. I am married, but my wife does not have a Social Security number yet, so they will not allow her to be on my medical plan. I'm attempting to buy insurance for her separately using money left over from me, buying a cheap plan through the employer and had A question about Health Savings Accounts. My employer offers an fsa, but I turned that down. I wondered if I could enroll in an HSA for myself and then link my paycheck to it or contribute to it and then use that to pay for my wife's medical expenses even though she will not be on the same medical plan as me. That way I could get the benefits of having an HSA as a stealth ira, but also use it for any of her expenses. Will her insurance carrier Kaiser, allow me to use my HSA to link to her high deductible health plan? This is pretty interesting. I was actually surprised to hear there was a Social Security number requirement to put a spouse on your insurance. I think the first thing to do in a situation like this is press a little harder on the employer and the HR department. I mean, is a Social Security number really required in order to put a spouse on health insurance? I would think not. I would expect that a green card number or a marriage certificate would be adequate to get your spouse onto your health insurance. I think that's kind of ridiculous actually that they're doing that. And I suspect if you press hard that might go away. But the rules for Health Savings Account state that you can use it to pay for your family members expenses. And so whether that family member is on the same health insurance plan at that given time or not, you can use the HSA for their expenses. In addition, she could have a high deductible health plan and have her own hsa. And that would allow the resident to maybe even just go with a traditional plan or even use that traditional plan with a flexible spending account if that is the appropriate decision for him. When choosing whether or not to use nhsa, the first choice is which health plan is right for you. For a lot of people it doesn't make sense for them to have a high deductible health plan. They're maxing out their deductible every year. Or if their employer is subsidizing some premium luxury policy. Shoot. Take that. I mean, a health savings account is great, but it's not as great as having someone else picking up your entire health care costs. And so the first decision is we which plan is right for you? And if a high deductible plan is right for you, then by all means use the hsa. But there's this misconception that the HSA is linked to a high deductible health plan. It isn't. You open an HSA and then on your taxes you report that you had a high deductible health plan that qualifies you for an hsa. You don't even have to use the hsa. Your employer offers to put the money directly into your hsa, whether it's their favored one or some other one that usually does save you some payroll taxes versus just going to someplace like HSA bank that I use on your own alright, our next question comes from a radiologist in North Carolina who says I refinanced my student loans of $260,000 that had an interest rate of 6.8% through one of your sponsors at a variable rate of 4.1%. I have another loan for 4,000 at 5%. Should I pay off the smaller loan first or attack the larger loan? 5% of 4K is a lot less interest than 4.1% of 260K. I'm just curious about your thoughts. Well, there's really two schools of thought when it comes to paying off your debts. The first is to pay the smallest loan first. This is kind of the behavioral school of thought. The snowball method it's been called. And the argument there is that math didn't get you into debt, bad behavior did. So what gets you out of debt is good behavior. And feeling momentum from knocking out some of the smaller debts is what really helps you stick with the plan to pay off your debt. The other school of thought says pay off the highest interest rate first. That's kind of the math school of thought. Their argument is that if you put the same amount toward your debt every month, no matter the method, you'll be out of debt slightly sooner if you pay off the highest interest rate loan first. But really, the choice is yours. I lean more toward the math side, but I can see the merits of leaning toward the behavioral side, particularly if you've struggled with debt in the past. However, in this case the smaller loan is the higher interest loan. So that's an easy decision to knock out that small loan because not only is it the right move from a math perspective, but it's the right move from behavior perspective. So that one's a pretty easy one to choose. I would knock out that $4,000 5% loan first and then start working on the $260,000 4.1%. You know, this one's really interesting. As I went through my email box looking at this question, I realized that I've exchanged a few emails with this particular doc and what a transition this doc made. Just an attitude and thought about finance over a couple of months. Let me show you an example from the first email I got. In the first email, he said, I'm trying to get my finances in order. Now I'm about a year out of training. My student loans were at 6.8%. I'm looking to refinance, and that looks like it's going to be either 5% fixed or 4% variable for the amount me and my wife are comfortable paying. We get paid salary of 13,000amonth plus profit sharing bonuses. Each quarter the variable rate is lower, but it scares me about jumping up quickly. I have two kids starting private school because. Because public school is horrible here, and we want to swing 2000 at least a month at the loan while throwing a good chunk of change from the profit sharing. I just thought it was interesting in this first email I got that, you know, his priorities were having the kids in private school, and he knew that he had some loans he needed to take care of, and he was kind of, you know, putting a little bit of money toward it each month, you know. But despite making more than $13,000 a month, all that he could justify putting toward it was an extra 2000. And by the last email I got from the doc, he says, I took your advice and obliterated all of my wife's student loans, cleared out our credit card debt, took out my small loans, and I'm very aggressively now paying off the big mama of $260,000 in student loans. And just the transition over that couple months was pretty impressive to me, and I'm excited to see the progress that's being made there, both, you know, mathematically in that their net worth is now climbing dramatically, but also just their attitude toward taking care of their business, their finances early in their career, which will give them all kinds of choices and options and freedom later. Okay. Our third question today comes from an emergency doc in North Carolina. I open a new traditional IRA at Vanguard and put in my non deductible 5500 for tax year 2017. I have a Roth IRA there, but I also have a rollover and SEP IRAs with Vanguard. Vanguard is telling me that I'll have to pay tax when I convert the $5,500 to Roth because I have money in other non Roth IRAs. Should I put the non Roth IRA money into an individual 401 to make those balances zero? If so, who will allow me to open an individual 401k and put IRA money into it? Because I've noticed that Vanguard won't. Well, Vanguard's exactly right on this. They're not necessarily always right in the answers you get on the phone. So if you're getting something screwy, I'd call back and talk to somebody else. But in this case they're absolutely right. You cannot do the backdoor Roth IRA while having outstanding balances in traditional IRAs, simple IRAs or SEP IRAs. You need those balances to be zero on December 31st of the tax year. And so the best way to do that is to roll that money into a 401. Because those 401 balances don't count. They're not put on Form 8606, which is the one where you report the backdoor Roth IRA. And so if you have a 401k at your employer or a 403, you can just roll those traditional IRAs and SEP IRAs right into those accounts and thus eliminate the issue. This pro rata issue you get with the backdoor Roth IRA if you don't have access to one of those accounts. Another option is to use the individual 401. Now, to open an individual 401, you have to be in business for yourself. That means you have to have some self employed income. It doesn't say how much you have to have. I mean $10 is probably enough. The IRS doesn't specify. And you can make that doing surveys online if you like. But the point is you have to have some sort of self employed income. And then once you have that, you can get an employer identification number from the IRS, open up a individual 401k and then roll the SEP IRA and rollover IRA money into there. And then you can go ahead and do your backdoor Roth IRA as usual by contributing to the traditional IRA with non deductible dollars and then converting that the next day to the Roth ira. There is an issue however, with Vanguard. For some reason they've decided to make your life more difficult, particularly with regards to an individual 401. Now their individual 401 is pretty good. I use it. That's what we use here at the White Coat Investor. But we don't have a need for for to roll over any IRA balances because The Vanguard Individual 401k does not allow that. If you need that feature. Some other options include E Trade and Fidelity. And you can still, you know, you can still buy index funds or ETFs, even Vanguard ETFs through those individual 401s if you like. You just can't open the individual 401 directly at Vanguard and expect to do rollover. They just don't allow it for some goofy reason. Hopefully that'll change soon, but I haven't heard any news that it has. Okay. Our fourth question today comes from a new attending, unknown specialty, who says, I'm an employee in a physician owned group. My contract doesn't mention anything about a pay increase. I've heard others say they negotiate for it, but they don't really talk about details. Do you think it's standard practice to negotiate as I'm approaching the end of my first year, or should I wait another year? They did say I'm doing a great job. I don't want to come off as being too aggressive, but I also don't want to wait and miss out. I wanted to know the industry standard. Thanks. This is kind of a classic physician question and this is actually why docs get taken advantage of quite frequently. I mean, look at what's going on here, right? There's really no negotiating prior to signing the contract. It doesn't sound like there was any apparent contract review of this contract. And this doc is clearly not negotiating from a position of strength. He's afraid to talk about money, he's afraid to be aggressive, and he's really not aware of how negotiation works. He thinks there's some industry standard that employers and employees should adhere to. Now, there's a lot of standards in medicine, but I assure you there is no industry standard with regards to how much you are paid. So I don't want to be critical because this is how most docs think, including me at one time. But let me tell you what I tell my kids. You don't get what you deserve, you get what you negotiate. And since these raises weren't negotiated into the contract, and it doesn't sound like this doc's happy with this compensation or he wouldn't be asking about a raise, the best thing to do is go look for another job. What that does is it helps you figure out what you're worth. And then if you consider staying at this job because you like it or whatever, you're now negotiating from a position of strength because your best alternative to go to this other job where you might be paid 10%, 20%, 30% more. And you can tell your current employer, look, I like working here. I think it's great. I love working with all you guys, but I got to do what's right for my family too. And I've got another job offer paying me 20% more. I'd like to stay if you guys can match it, but if you can't, then I'm going to have to give you my 90 days notice or whatever the contract specifies. Now you're negotiating from a position of strength. You actually know what you're worth, rather than just going into the employer and saying, wah, wah, wah, can I please have more money? Because that negotiation tactic is pretty limited. Also, there's a lesson there when you do negotiate a contract that there ought to be some portion of it discussing how it's going to be decided whether you get a raise after a year, because otherwise you'll be left right at that same pay level for the rest of your career. All right, our fifth question is really a suggested topic sent in from a regular podcast listener who says we talk a lot about diversification. Most of it is about diversifying stocks. How about diversifying bonds? What would be optimal for a regular physician? Saving 20% of a regular physician's salary in tax advantaged accounts or even just taxable accounts? Well, this is kind of a question about asset allocation, but let's go through a few brief things about diversification. Diversification is a good thing. It helps protect you from mistakes, mistakes that you make because you don't know the future and you don't know everything about the present. And so it's a good idea to diversify between asset classes such as stocks, bonds, and real estate. But also within asset classes, you don't want to put all your money into a single stock like Enron. And then when Enron goes bankrupt, you lose a huge chunk of your retirement savings. Now, if we could all know which stock was going to be awesome, sure it'd be great to put all your money in that. But the fact is, when you really think about it, you don't know which stocks can outperform in the future. And if you think you do, start writing it down and keep a notebook. And within a year or two, you'll likely convince yourself that you don't know what's going to happen in the future. So I think all of us know that it's pretty smart to diversify your stocks. It's easy to buy every stock in the world. You can do it in about 15 seconds just by buying a couple of Vanguard index funds. But it's also important to diversify bonds. However, there are a few things you ought to be aware of when talking about bond diversification. First, if all your bonds come from the same person, it doesn't really matter how diversified they are. For example, if all your bonds are treasury bonds, they're all money the US Government owes you. It doesn't really matter that you have a five year bond and a six year bond and a seven year bond because, because if they default on one, they're going to default on all of them. A lot of people consider the U.S. government Treasury bonds to be basically a no risk investment. Now the risk is certainly quite low, especially compared to other bonds, but it's not zero risk. And so I wouldn't necessarily consider it to be no risk at all. But it's a pretty good, pretty safe place to put money. And so if you've decided that you're just going to invest in Treasuries, you don't need a lot of diversification. You know, you can use a mutual fund if you like. You can buy them yourself just from Treasury Direct and save the expense ratio on the funds. You know, you can, you can do that with treasury bonds. But if you're loaning money to corporations, you're buying Ford bonds or you're buying Apple bonds or whatever, then I think diversification matters a lot more. A corporation is much more likely to default a bond than the US Government is. It's relatively easy to buy a mutual fund that will invest in corporate bonds. You can do this through Vanguard or a number of other mutual fund providers and own hundreds of bonds that way. If one company decides to default on their bonds, it really doesn't hurt your overall position. Municipal bonds are probably ideal for most high income professionals investing in a taxable account. And these are also easily purchased in a mutual fund format that not only provides convenience and liquidity, but also provides diversification. Now the truth is municipal bonds are much less likely to default than corporate bonds. And so some people advocate for buying a few individual municipal bonds. I think that's probably okay. I wouldn't put it all into one municipality or one state or one bond by any means. I think you still need some diversification there, but, but it's not quite as important as it is with a riskier corporate bond. Now there are a couple of different types of bonds. There are nominal bonds and there are inflation linked bonds. And these perform differently in various different economic scenarios. And so I think the best step you can take in diversifying your bond portfolio is to own some nominal bonds and to own some inflation linked bonds. Now this generally means tips which are treasury inflation protected securities through the US Government or I bonds. Now I bonds are a little more tax efficient in a taxable account. So if you're buying inflation protected securities in a taxable account, then I think tip Then I think I bonds are probably the Way to go. If you're doing it inside a tax protected account, I think tips are probably the way to go. The tips you can buy through a mutual fund or ETF if you like. The I bonds you pretty much have to buy directly. You're also limited in how much I bonds you can buy per year, but the limit is $5,000. You can double that if you have a spouse and you can actually double it again if you buy some of them using a tax refund. But you're, you know, if you want to dump $200,000 into I bonds, it's just not going to happen unless you do it over the course of a decade. Alright, this next question comes in from Facebook. How come you're not promoting MetLife as one of the big disability insurance companies? Well, I wouldn't say I promote any insurance company directly, but I do mention the big six when it comes to disability insurance. And it used to be that MetLife was one of those actually right up until, well, this month, September 2017, when they basically stopped doing disability insurance for physicians. So because they stopped selling the disability insurance policies, I kind of took them off my list. But at any rate, you should be buying your disability insurance from an independent agent. And an independent agent knows that MetLife has basically stopped doing this business this month. And so they're not going to offer you a policy from MetLife if you go in there, but they'll show you what's available in the marketplace and what's good for your particular health situation, your gender, your state and your specialty, and help you get the best policy for you. So always make sure you're buying from an independent agent. Alright? This question comes in from the spouse of a military physician who asked me to talk a little bit about the difficulties of not having your spouse on the same page with you financially, especially when your spouse is the breadwinner and wants to spend her hard earned money. Sounds like the the doc is the female in this relationship. Give advice on ways to get your loved one on board with you or compromise and try to save your retirement, maybe even your marriage. Well, I think, I think this listener has identified the relevant issues here. I mean, there is an issue here in that, you know, you're married and you got to have the same goals that you're working toward. It's critical for the marriage, not to mention you to be financially successful. You know, I often say you need to be on the same page. That's probably not entirely true, but you do need to be reading the same book. You know, you need to have relatively similar goals and relatively similar outlook on your finances. And so I think it's important not just to try to convert your spouse to your outlook, but to find a compromise that is reasonable for both of you and that will help you to reach your financial goals. Now, for instance, if you want to save 60% of your income and reach financial independence in seven years or something, and your spouse is like, no, I want to enjoy a little bit of money along the way, I think that's completely appropriate for them to object to your rather extreme position. But if, on the other hand, you're trying to get your savings rate up above 5% and your spouse is resisting it completely along the way, well, I think that's a problem because that's going to keep you from reaching any sort of reasonable financial goals. And so you really need to go back and have a conversation about what you want out of life. And if, you know a comfortable retirement is one of those things, and it is for most of us, then you can work your way backward from that, using a little bit of simple math and an online compound interest calculator to see what you need to be doing now in order to get to that place. But the key is to sit down and have the conversation, not just once, but regularly about your goals. And once you get on the same page with your goals, then the implementation becomes relatively easy. Now, there's lots of tactics you can use along the way, but that's the general strategy. One tactic might be having an allowance money that your spouse can spend without having to talk to you or account to you for any of that money. We've had this throughout our marriage, and that's ranged from, you know, 20 bucks a month to thousands. It just depends on, you know, what we want to dedicate from our budget to our allowance funds. And we have to use that to pay for our sports leagues or pay for our toys or pay for our clothes or anything like that. And so I think that's one way to kind of get around this. And that way you'll each feel like you have your own money. But I wouldn't necessarily take your entire paycheck, put it in one bank account, and take her entire paycheck and put it in a different bank account and let you each spend from your separate bank accounts. That sounds like a recipe for disaster to me. I think you're far better off combining your finances and looking at it on one budget that you both work toward together. Now, I've got my wife here today, and I thought Hey, I think this is a great question for you to lend your expertise on. So let's bring her in now. Katie, you want to come give your thoughts on this question?

Yes, I agree. It's certainly getting into having a combined vision that that's important because, and a lot of times it's the, you know, we think it's the spender that's causing all the issues, but sometimes it's the mindset of the saver that's being extreme in a different direction. And so getting on the same page and finding where you can agree on things, but not also to have to account for everything you're spending, that we have different ideas of what we spend. A lot of times Jim will say, man, you spend a lot of money on food. And I just tell him, well, you can go shop for the food and I can assure you you'll spend a lot more on food than I spend spend on food. That it's just understanding different, coming from different backgrounds and ideas of what things cost and what's important. But it's important to find a happy medium that you can both be agree with and that's going to help you reach your long term goals down the road. And you know, if you have a goal but you're not doing the small steps to get there, you're never going to reach that goal. And so figuring out what needs to happen now to, to reach that goal in the end because you don't want to work for 40 years, but that's what you're going to be doing if you keep spending all your money that you're making currently and not putting any away for future.

Thanks Katie for sharing that. You know, it's interesting. Once you can agree and talk about finances and sit down and have a discussion and work out a compromise and an agreement about money, you can do that about just about anything else in life, whatever it might be, whether it's religion or sex or how you raise your kids or whatever. But those skills you learn talking about money can apply to every other area of your marriage as well.

I estimate that 80% of doctors need, want and should use a financial advisor and or an investment manager. Some investment gurus, such as Dr. William Bernstein, think my estimate is way too low. At any rate, if you want to use an advisor temporarily or for your entire life, there's no reason to feel guilty about it. Just make sure you are getting good advice at a fair price. If you need help updating your financial plan or just getting one in place, check out our list of recommended financial advisors atWhite Coat Investor.com Financial Advisors. You can do this, and the white coat investor can help.

Head up, Shoulders back. You can do this, and we can help. See you next time.