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overwhelming choices
Old 05-19-2010, 09:28 PM   #1
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overwhelming choices

Hi everyone, I am a 31 year old physician within reach of finally completing my training within the year and getting my first "real" job. My wife is also a physician and we anticipate our annual gross income to be in the 500-600k range for most of our careers. We have managed to save about 80k thus far, including maxing out our 401(k) this year.

I've been to several financial seminars for graduating residents, and have heard on more than one occasion that after maxing out the 401(k), cash value whole life insurance can be a tax efficient method for long term investment. Based on my personal reading, it seems many in the know advocate tax efficient, low expense ratio funds rather than whole life as a retirement vehicle based on the expenses associated with whole life. The arguments i've heard for whole life are mostly based on the tax free growth and withdrawls, but maybe this is counterbalanced by the associated expenses?

Bottom line, this stuff makes my head hurt. Ideally I would love to entrust my finances to a competent planner, but I feel as though the planners I have spoken to always have ulterior motives of some kind (i.e. trying to sell me something). I know how much training it takes to be an expert in a given field, and I am worried I don't have the time or knowhow to fully manage my own investments.

I guess I would like to know if there are simple resources I could start with to get an idea of where to put my money after my 401(k). I would really appreciate any thoughts/ideas on all of this. Thanks
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Old 05-19-2010, 09:56 PM   #2
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After reading the response's you get on this forum be sure to visit bogleheads.org. You will end up with lots of pros & cons to keep you busy thinking for a long time. There is also a physicians group there (free & no pressure) you may find interesting. Both of these forums are full of great people that will try to help you think things through.
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Old 05-19-2010, 10:30 PM   #3
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Welcome coalcracker, and congratulations on reaching your educational goals.

Regardless of whether you take the DIY investing approach or use investment advisors, you won't go wrong by reading some of the books on the board's recommended reading lists. One is here: FIRE Recommended Reading List There's are many other threads on books you can find using the search function. Don't think you need to read them all cover-to-cover to benefit. Just jot down a few promising titles and spend a Sunday afternoon at the library.

Although loaded with details aimed a bit too high for novice investors, you may find Bernstein's books especially interesting - he is a physician.

From my favorite starter book - The Only Investment Guide You'll Ever Need - makes these negative points on whole life insurance:
  • Many pay low interest
  • A layman rarely can tell a good policy from a poor one
  • There is a tremendous penalty for dropping the policy early, as many do
  • The (much) higher payments per dollar of insurance coverage may make the coverage you need unaffordable.
  • The age when term policies start to shoot up in price, when the policy holder is in his 50's, is the time when many find their need for coverage begins to diminish.
Step one is determining how much coverage you need. You don't mention kids, and your wife is a professional with her own earning power. As a resident, I suspect you don't have business partners yet. So, without knowing more about your situation, I would assume your coverage needs today are relatively modest.

Term life in an amount that would cover final expenses and pay off any debts for which you and your spouse are jointly liable may be all the coverage you need for the time being.
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Old 05-19-2010, 11:05 PM   #4
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Welcome coalcracker from a fellow physician.

I wish I had known of this site (and bogleheads Bogleheads Investing Advice and Info) when I finished my residency. Then I would NOT have invested in an expensive whole life policy and wasted my hard earned dollars. Doctors are prime targets for advisors and are notorious for making bad money decisions. I would recommend you read the recommended books here and at bogleheads (many are the same books) and take your time. You don't need to make any quick decisions.

In your shoes I would do this:

1) Max out tax deferred retirement accounts including Roth IRAs
2) Term life insurance for each of you
3) True-own occupation disability insurance (Understanding 'own-occupation' disability insurance) for each of you
4) Create an emergency fund of at least 9 if not 12 months of expenses given how long job searches and licensing can take
5) After reading the investment books decide on an investment plan and implement it. I use ETF's in my taxable account and pay little in dividends/capital gains
6) Live below your means!!!
7) Live below your means!!!

6 and 7 are important. How much you save is much more important long term than whether you have REITS in your slice and dice portfolio. Additionally there is a lot of uncertainty about what will happen with health care in the future and that 500-600k salary may not be there forever.

DD
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Old 05-19-2010, 11:31 PM   #5
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If you need life insurance, stick with term life. Whole of life or any other form of life insurance which claims to be a form of investment should be avoided like the plague - as should any adviser who recommends such products. I'm sure life insurance salespeople have collectively done more damage to people's finances than Madoff could ever dream of.

It is worth spending some time educating yourself on the basics and, if you want to keep your finances simple, it's not that hard - the reading suggestions are good ones.

Before deciding what to do with your savings, you should be considering questions about your future - do you intend to buy a house (or trade up)? Do you have or intend to have children? If so, will one of you either stop working or work part time? When do you wish to retire? And so on - these sorts of issues will have an impact on what you do with at least some of your money.

If you must use a planner - go to a fee only planner and not one who lives off commissions.
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Old 05-19-2010, 11:32 PM   #6
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Hi coalcracker, and welcome to the forum!

Be very suspicious of whole life insurance and its variants. Combining a life insurance product and an investment product tends to result in something that does neither job well.

As you may know, physicians are tempting and easy prey for some in the investment counseling business. Be very cautious of the understandable temptation to just find someone to handle all your investments for you. You'll find that you can develop a strategy that won't take a lot of your time to manage and maintain. Don't panic when the big bucks start rolling in and think you have to do something fast. Even if you just let the excess sit in your checking account for a year or two while you plan you will likely come out ahead of leaping into something too quickly.

Keep an eye on your spending. You've probably been on a pretty tight budget for years now, and your new income will provide a lot of temptation. Take it slow and easy. One of our mantras here, and a key component of early retirement, is LBYM -- live below your means.

Welcome to the forum, and best wishes to your and your wife as you start your professional careers!

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Old 05-19-2010, 11:44 PM   #7
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Welcome to the forum coalcracker! I'm one of the other physicians on this forum. It can be zany at times but is respectful and very informative. I second everything DblDoc said, as well as other posters. Basically there is a whole industry out there who see physicians as suckers. Be informed. Take the time now that some of your colleagues won't, to learn to manage your own finances and detect cr*p when you see it. Don't get sucked into consumerism as a balm for 24 or 36 hour shifts. And if you go into private practice, remember, you're an entrepreneur with a small business. Develop and deliver a high quality product to your customers (patients), value your time appropriately, and manage the business efficiently, or delegate to someone who can. Trust, but verify. And last but not least, look after yourself and your family.

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Old 05-20-2010, 05:59 AM   #8
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The most complete list of recommended books on this subject is still this one:

An updated FIRE recommended reading list (with a military twist)
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Old 05-20-2010, 07:27 AM   #9
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Thanks so much everyone for the advice! There seems to be a clear consensus and I will be very wary of (and almost certainly not purchase) whole life. I was feeling pressure to have a nice, organized retirement plan outlined once I started practice, but maybe I just needed someone to tell me it's OK to take your time and educated yourself first. I will definitely read some of the recommendations you gave.

DblDoc and Meadbh, I was glad to hear advice from fellow physicians, as I feel many of my colleagues know even less about finances than I do! I should have mentioned I am in the process of applying for true-own occupation disability insurance, and as part of the application I will also be eligible for a life insurance policy, which is how all this started. I realize health care may not be what is it now in the future, so I DEFINITELY plan to live below my means as you said.
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Old 05-20-2010, 07:46 AM   #10
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Why would two young married physicians even need life insurance? In the unfortunate event that either passed away, each on their own would still have a great income to support themselves on.
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Old 05-20-2010, 08:00 AM   #11
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Well the unfortunate reality for doctors coming out of training today involves lots of debt and ever-declining reimbursements. For us, medical school loans total about $300k. My wife decided to do what she loves (pediatrics), and makes less than many high paid nurses. If I were to bite the dust, that would leave her with loan debt not to mention paying our mortgage, bills etc, which would leave her with less to live on than she had during residency.
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Old 05-20-2010, 08:04 AM   #12
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Originally Posted by coalcracker View Post
Well the unfortunate reality for doctors coming out of training today involves lots of debt and ever-declining reimbursements. For us, medical school loans total about $300k. My wife decided to do what she loves (pediatrics), and makes less than many high paid nurses. If I were to bite the dust, that would leave her with loan debt not to mention paying our mortgage, bills etc, which would leave her with less to live on than she had during residency.
You didn't mention any debt in the original post but now that I understand you have a large amount of student loan debt I can understand the reason for life insurance.
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Old 05-20-2010, 08:27 AM   #13
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Disclosing that you have that much student loan debt would also influence the investment advice most would give you. I would max out all deferred tax (retirement) options, establish a nice emergency fund, then aggressively attack the student loans with every bit of free cash flow you can muster.

I would also try to avoid the temptation to "live like physicians" (reward yourself for the years of hard work) until you get out of debt.
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Old 05-20-2010, 08:31 AM   #14
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Originally Posted by coalcracker View Post
Well the unfortunate reality for doctors coming out of training today involves lots of debt and ever-declining reimbursements. For us, medical school loans total about $300k. My wife decided to do what she loves (pediatrics), and makes less than many high paid nurses. If I were to bite the dust, that would leave her with loan debt not to mention paying our mortgage, bills etc, which would leave her with less to live on than she had during residency.
while it's been a couple of years since i worked in the financial aid office at my college - if my memory serves me correctly - death and complete paralysis are the only way one can escape the burden of student loans. i don't know how it works with being married, who is backing your loans and all that other good stuff, but at least a read over of the signed documents should be worth your time. if SL debt is your only debt, you may not need life insurance, assuming you select a modest home and LBYM. even if you, or your spouse, can be relieved of the other's SL burden, you may feel you have a moral responsibility to repay...as did one of my college roomies.

the above reason is why I have never had life insurance (beyond what my employer pays for). but with kiddies being talked about, we are looking at a term life policy for me only (as my wife supplies virtually no income).

at minimum you'll learn that you can't file bankruptcy to escape student loans...new lawyers gave everyone a good laugh at the financial aid office.
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Old 05-20-2010, 09:04 AM   #15
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With your combined huge incomes you two have a great chance of hitting ER in about 12 years IMO.

I think the biggest factor that will increase your chances of successful ER is, like others have said, is LBYM. When I was making the big bucks running my business we still lived like we did when we first started out. We kept the starter home for 15 years, we didn't drive fancy cars (and we were car people!) or take expensive trips. We just continued to live a simple lifestyle. But it was not easy. When you make that much money the temptation to blow big money on crap is huge (almost all your peers will be doing it), and you will look like the weirdo for practicing LBYM. Also, for extreme LBYM to work your wife has to be on board big time, so you two need a concrete goal to make all the saving worthwhile. For example, say you two sit down and decide you want $5M in 12 years so you can hang it up (if you want to) and move to a tropical island and surf all day , or maybe practice medicine and help the locals. Whatever. My point is make it a big, cool, crazy goal. If you have a cool goal like that then saving $200,000-300,000 per year doesn't "hurt" so much. Trust me, if you don't have an end goal, saving that much money per year is very difficult.

After you set your long range savings goal then you need to design a simple DO IT YOURSELF financial plan with a smart AA, using low cost mutual funds or ETFs, and then just start socking that money away. So if you think you need $5M in 12 years you need to save about $275K per year at a around 7% return. Can you live on $100K per year, including paying off your student loans? At our most extreme point DW and I lived on $36000 per year and were making (gross) 300K-500K per year on the business, so it can be done.

My other advice would be do not rely on a FA to make a plan for you. And even though you say all this financial stuff makes your head hurt, you need to make yourself read all the books and learn it yourself. I'm a dumb car salesman and I did it, so I would think an MD could certainly do it.

Anyway, good luck. I'm excited for you guys, as evidenced by my rambling post..........
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Old 05-20-2010, 09:13 AM   #16
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I agree with some of the info posted and disagree with others. Your need for life insurance is fairly high now. If you have kids, it will be even higher. At 31, you both could get a lot of term life for very little money, a true pittance. It is a no-brainer.

Life insurance is NOT an investment, no matter what anyone tells you. All insurance is is a transfer of risk. Even good whole life policies from mutual companies like NML don't grow much in the early years because most of the dividend payments goes to pay the agent. While its true term insurance gets more expensive each year, hopefully 20 years from now you have enough of an investment portfolio that the only need for life insurance would be as a wealth transfer vehicle for legacy planning for personal or charitable needs.

Pediatricians are one of a kind people. Dealing with kids all day, yikes!!
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Old 05-20-2010, 09:14 AM   #17
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Should have mentioned some of these facts in my initial post, but I was worried it would be too long. We were fortunate with our student loans in that we have locked in 30 year APRs around 2%, so I can't justify paying anything beyond the minimum as almost any investment would outperform that.

We own a house costing 190k with a mortgage, and I have thought about using some of the extra money to pay off the mortgage early. We did 100% financing about 5 years ago when you could still get it, and have primary mortgage at 6.25% fixed and a second variable rate currently at 7.9%. It makes sense to me to pay these off more quickly, but I'm wondering how to balance that with the loss of the mortgage interest deduction.
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Old 05-20-2010, 09:17 AM   #18
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Originally Posted by coalcracker View Post
Bottom line, this stuff makes my head hurt. Ideally I would love to entrust my finances to a competent planner, but I feel as though the planners I have spoken to always have ulterior motives of some kind (i.e. trying to sell me something). I know how much training it takes to be an expert in a given field, and I am worried I don't have the time or knowhow to fully manage my own investments.
Well, glad to see that your BS meter is fully functional. No question, many of those planners have motives that conflict with your financial well-being.

Investing is not like medicine. It's much simpler. You can reasonably expect to be "up the learning curve" in less than a year with little effort.

With mutual funds you can let a "expert" take care of the investing details. You just need to learn how to pick a decent mutual fund. That also is not difficult. Pick a good fund company and look more for mutual funds that have low expense ratios.

You can do something as simple as pick a tax efficient mutual fund like a Vanguard Total Stock Market or maybe combine that with a diversified international fund. Given your young age - we're not worrying too much about bonds yet as they not tax efficient outside your 401K. Just open your own account with Vanguard and have money automatically deposited and then leave it alone!

Don't get too caught up in the tax avoidance BS such as buying annuities. That can end up costing you.

Then just keep socking that money away instead spending all of it, and things will probably look great in 20 years.

Audrey
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Old 05-20-2010, 09:19 AM   #19
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Also, we have no kids at the moment but plan on starting a family in the next ~2-5 yrs.
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Old 05-20-2010, 09:20 AM   #20
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Should have mentioned some of these facts in my initial post, but I was worried it would be too long. We were fortunate with our student loans in that we have locked in 30 year APRs around 2%, so I can't justify paying anything beyond the minimum as almost any investment would outperform that.

We own a house costing 190k with a mortgage, and I have thought about using some of the extra money to pay off the mortgage early. We did 100% financing about 5 years ago when you could still get it, and have primary mortgage at 6.25% fixed and a second variable rate currently at 7.9%. It makes sense to me to pay these off more quickly, but I'm wondering how to balance that with the loss of the mortgage interest deduction.
The mortgage interest deduction is not that big of a deal, IMO. Your mortgage is "only" $190,000, in the highest bracket, you are not going to get that much effect on lowering taxes at your income rate. pay off the 2nd and concentrate on paying off the house. When your house is paid off, and you have maxed out retirement programs, look at building up a large tax efficient non-qualified portoflio. Do you have an emergency fund?
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