Physician on FIRE https://www.physicianonfire.com Financial Independence. Retire Early. Wed, 23 Jan 2019 09:18:37 +0000 en-US hourly 1 https://www.physicianonfire.com/wp-content/uploads/2017/02/cropped-FlameDoc-150x150.png Physician on FIRE https://www.physicianonfire.com 32 32 The Doctor Loan: My Experiences Buying and Building with Physician Mortgage Loans https://www.physicianonfire.com/doctor-loan/ https://www.physicianonfire.com/doctor-loan/#comments Tue, 22 Jan 2019 08:55:33 +0000 https://www.physicianonfire.com/?p=11206 I was finally a doctor. A real doctor!

The year was 2002 and I had just graduated from medical school. After a one-year internship living in resident housing in La Crosse, WI, a small city famous for having the most bars per capita of anywhere in the U.S., I would be heading to The University of Florida to spend the remaining three years of my anesthesia residency as a Gator Sedator.

Gainesville, a college town and something of a party town in its own right, had no shortage of student housing. But I wasn’t a student anymore, I was a doctor, a doctor who would be getting up really early, often working late and sometimes working nights for weeks at a time.

I needed a place of my own. I needed a place of my own in the swankiest building downtown high above the din of the partygoers below. I needed a mortgage, a doctor mortgage.

 

The Doctor Loan: My Experiences Buying and Building with Physician Mortgage Loans

 

Having taken out all the subsidized loans I qualified for as a medical student, I ended up with a little bit of money leftover, knowing I might need some down payment money, eventually.

As an intern with little time off and incredibly cheap on-campus housing, I was able to save a bit more each month. I didn’t much time off for frivolity, and when I did, I knew all the best happy hour spots. The Friday night beer and pizza cruise on the Mississippi was a great frugal and fun option in the fall and spring.

I somehow got connected with a mortgage lender and was introduced to the concept of the physician loan. I’ll go into more detail below, but a physician mortgage loan or “doctor loan” is essentially a mortgage with low or no money down, no private mortgage insurance (PMI), and typically a slightly higher rate.

In a fall visit to Gainesville, I found the building that was just what I was looking for, and before long, a one-bedroom condo opened up. I got in touch with my mortgage lender, who had pre-qualified me before I started looking, and prepared an offer.

Years later, after selling the place, I no longer have all of the documentation, but I do have a few emails and a decent memory of the details.

 

Buying My First Property with a Physician Mortgage Loan

 

Doctor loans aren’t just given out to anyone with an M.D., D.O., D.D.S, D.M.D., etc… behind their name. There are some criteria which will vary by lender, but the process didn’t go as smoothly as I had hoped.

I was initially hoping to put 5%, or $6,000 down, on a $120,000 property. Apparently, that would have been fine in a single family home, but the lender could not approve me for such a loan on a condo in a building with five or more stories.

They didn’t love my debt to income ratio, either. With an income of about $36,000, taking on debt of $114,000 on a place with association dues of $175 a month was pushing the limits of what they were willing to underwrite. And I did have that student loan debt, as well.

Did they forget that I was a doctor? I’m good for it, you know!

Eventually, I was approved for the loan with 10% down. By the time we closed, I had enough cash saved up for the down payment. It was late fall and I wouldn’t be moving in ’til the following summer. Fortunately, I had no trouble lining up a tenant in the interim via a property manager, a process that was in the works before closing.

After I moved to Gainesville, I had a sweet pad above a mixture of office, retail, and restaurants. There was a prime steak joint and a Hooters that was later upgraded to an excellent sushi restaurant. And I lived basically paycheck to paycheck for three years.

 

My Experience with a Physician Construction Loan

 

I did nothing but locum tenens work for nearly two years after finishing residency. Initially, I used the Gainesville condo as a home base, but I was eventually able to convince my wife to move our stuff out and rent the place out.

As a homeless doctor, I knew we’d need a place to live when we were ready to settle down in one place. After all, we were expecting our first child in the latter stages of my full-time-locums years.

We had decided to return to a hospital where I had first been a locum. They had been looking for a full-time anesthesiologist, and I would be the department head.

We were told about the strong financials of the place and the fact that they were considering building a surgery center. I might even have an opportunity to invest!

We found a great stretch of vacant waterfront property, and with the help of a 0% APR credit card, I was able to buy the six-figure property with cash.

By the time we were ready to start building (while still away doing locums), the credit card was paid off, and I needed a construction loan.

Did you know you can get a physician loan for construction? It’s true! It was arranged at a local bank (technically a savings & loan) that I was referred to by the hospital’s CEO.

We were not required to put any money down, but the loan could not be made for more than the appraised value of the finished home and property based on the blueprints. Since we already had $136,000 in equity on the lot, we were able to get a construction loan for $490,000, the appraised value of the finished home on the lot, and about how much it was going to cost to build the house itself.

In hindsight, we should have given the appraiser’s words a bit more consideration.

 

You will find that the appraisal is considerably lower than the cost to build the home. There is two reasons for this. First of all, the home is somewhat overbuilt for the area, as most homes in the area are 1400-1800 SF ranches and most are older. Second, this segment of the market has been especially hard hit in the current poor real estate market in Michigan . When you get in the $500,000+ price range, there are many more homes for sale than could sell in 3-4 years, therefore, there are many large, good quality homes on much superior lakefront sites that are for sale and it is a buyers market for these sales. I have researched many sales and feel that this is a pretty solid number for this home. Hope it is good enough to make the deal work.

 

With the construction loan approved, I was able to build the three story, 4,000 square foot home of our dreams. Our forever home.

A few years after we moved in, the hospital went belly up.

I had refinanced to a traditional mortgage by then, and we held on to the property for several years, losing money as accidental landlords, and eventually sold the place for about $200,000 less than we had into it. With realtor fees, it was about a quarter million dollar mistake.

 

 

our dream home on the water

 

 

Our Next Home Purchase

 

If you’re not sure you’re going to stay in one place for at least five to seven years, you’re probably better off renting. I know that now, but I didn’t back then, and the break-even timeframe I recall hearing was three years.

After having the rug pulled out from under our feet, we landed a bit awkwardly. I did some traveling locums work, but we now had a second baby, and it was no fun for anyone, including me, to have me working away from home.

A new hospital was opening up in another state, and they had a great job opening. I had made some cold calls to places a little closer to where we wanted to end up, but I hadn’t gotten any strong leads. I took a chance and took that job.

The job was great! We liked the town and the people, too, but given the remoteness of the place, it sometimes felt like we were on an island. Which was odd, because outside of a manmade lake or two outside of town, there was little water to be seen.

For this move, we didn’t need to shop for a physician loan. I had the funds to make a 20% down payment easily, and this is the route we went. We bought a home in a desirable part of town, knowing that it would likely be easy to sell if we were looking for an out. The fact that this was a consideration should have set off alarms, but what can I say? I’m a slow learner.

Within two years, a great job opened up much closer to home, at a place I had worked as a locum as a new grad, and we left my second “permanent” job after two years. We were able to sell the home by owner, more or less breaking even and recouping the money we had put into the home while living there.

The math of how long it takes to break even definitely changes when both buyer and seller close without realtors. It’s a lot cheaper to pay property taxes and homeowners insurance than it is to pay rent on a comparable home for a couple of years.

And the One After That

 

By this time, I was starting to feel like a collector… of homes. This is not the same as a real estate investor, because an investor purchases properties where the math works out well for profitability, using rules like the 1% rule and evaluating cap rates. These places did not fit those criteria, and it wasn’t even close.

My collection when we were shopping for yet another home included the residency condo (now paid off and rented), the “dream home” (a seasonal rental), the one we were living in (under contract to be sold), and our cabin a.k.a. second home which was more like our fourth home if you do the math.

I was carrying mortgages on two of them, and I wasn’t interested in a third mortgage. We shopped for a home we could afford with cash, and in a low-cost-of-living area in northern Minnesota, you can get quite a lot for your money.

We ended up back on the Mississippi River with a few hundred feet of footage — I lived within a stone’s throw of the Mighty Mississippi in college, medical school, and internship — in a great mid-century two-story ranch with 3,400 finished square feet and a three car garage. Geographic arbitrage is a powerful thing.

Shortly thereafter, we closed on the sale of the home we were leaving and eventually sold both the Gainesville condo and the dream home. We’re now down to two homes, but of course, we’re not done yet. We’ve got at least one more real estate mistake to make, if not several.

I’ll never say never, but I don’t plan on carrying a mortgage ever again. I’ve been hoarding cash to build our next forever home (and should probably start a slush fund for the one after that), and with any luck, we’ll also be selling the house we’re in now this summer.

 

What is a Physician Mortgage Loan a.k.a. Doctor Loan?

 

Simply put, a physician mortgage loan is a **surprise** mortgage, but with a low or non-existent down payment without the need to purchase potentially costly PMI.

For the privilege, you may pay an extra 0.25% to 0.5% or so on the mortgage rate, but will avoid the private mortgage insurance payment of 0.5% to 1%.

Obviously, it’s a break-even proposition when looking at paying an interest rate of 0.5% to avoid a 0.5% PMI, but it’s a big advantage to pay an extra 0.25% on the mortgage interest rate while avoiding a 1% PMI.

The specifics matter, and you’d be wise to shop around.

Another benefit is that there is often no additional interest rate increase for a “jumbo” or above-average loan amount with a physician loan.

You’re also more likely to be qualified for the mortgage than most people who cannot afford to put down a 20% down payment. The banks know you’re a low risk given your high income and relative job stability.

 

 

Should You Use a Doctor Loan?

 

The main “advantage” of using a physician mortgage loan is the fact that you can buy a home sooner than you would otherwise be able to.

This, my friends, can be a double-edged sword.

Most residencies are barely long enough to allow you to break even when consulting a rent versus buy calculator.

Also, keep in mind that many (if not most) physicians leave their first job in the first few years, and before you move somewhere, you may not yet know that the best part of town for you will be or where the best schools are located.

On the plus side, I really don’t like moving, and several times, I was willing to purchase a place rather than rent first to avoid having to move twice if we were to stay.

While it didn’t necessarily work out ideally for me — I did not expect to have three “permanent positions” — I made mistakes I could afford to make due to my solid income and a high savings rate. Somehow, despite our unwise choices, we managed to become financially independent within ten years of finishing residency.

If, like me, you’re not willing to wait until you can put 20% down on a home, a physician loan can be a viable option and one that’s not available to much of the population. If interest rates remain steady or drop and you know you’ll be staying long-term after you’ve been in your home a year or two, you can always refinance to a traditional mortgage with 20% or more down.

However, understand that renting is likely the better financial option unless you’re fairly certain you’ll be in the home for at least five years, if not longer.

Also, be sure you’re buying in the neighborhood you’ll want to be in. Proximity to recreation, good schools, and especially for doctors, proximity to your workplace can be vitally important. It can take some time to figure that out, and you can’t just rely on the internet for the inside scoop.

 

Where to Find a Physician Mortgage Loan?

 

$100 bonus for PoF readers

If you’re looking for assistance finding a realtor and a great mortgage rate, my good friend Dr. Peter Kim, a.k.a. Passive Income MD, has a free concierge service you may want to look into.

Curbside Real Estate works with a nationwide network of vetted realtors and lenders to simplify the home-buying experience for physicians. Visit Curbside Real Estate to view a video from Dr. Kim to learn more about how his service works.

As an added bonus, my readers will receive a $100 bonus at closing if you choose to use their services to purchase a home.

 

 

 

Have you taken advantage of a doctor loan? Did you choose to rent instead, or wait to buy until you could afford a 20% down payment? 

 

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The Sunday Best (1/20/2019) https://www.physicianonfire.com/the-sunday-best-1-20-2019/ https://www.physicianonfire.com/the-sunday-best-1-20-2019/#comments Sun, 20 Jan 2019 08:55:48 +0000 https://www.physicianonfire.com/?p=10874
The Sunday Best is a collection of articles I’ve curated for your reading pleasure.

Expect most of the writing to be from recent weeks and consistent with the themes presented on this website: investing & taxes, financial independence, early retirement, and physician issues.

 

 

Presenting, this week’s Sunday Best:

 

I talk about leaving my job to travel the world with my family. Here’s a physician who is living that dream. Big Family Small World recaps their first year in their Christmas Letter 2018. To better understand what led up to their worldly adventures, read Revisiting Retirement.

 

Doc Wife isn’t looking back at last year. She and her family are focused on a stellar 2019. 100 Actionable Ways to Start the New Year 2019 Easier, Happier, Wealthier. I thought I was going overboard with 10 Financial New Years Resolutions!

 

On January 20th, is it too late to make resolutions for this year? Not according to The Physician PhilosopherIt’s Never Too Late for New Year’s Resolutions!

 

Here’s a resolution for you: stop making bad investments. They may be unavoidable, to some extent, but NextGen Wealth would like to share with you their Top Ten Ways To Avoid Bad Investments.

 

Are you a DIY investor? Are you good at it? How do you know? The White Coat Investor offers 10 Ways To Know You Are Competent to DIY Your Investments.

 

If you want to be on a fast track to financial independence, you’d best avoid those luxury items. Or should you? I suppose it depends upon your definition. Side Hustle Scrubs puts his money toward different styles of Luxury Items.

  • Bonus: What do you have parked in the Doc Lot? [this is comedy gold!]

 

Your typical luxury items can make it more difficult to save for retirement successfully. Are you on track? The Doc of All Tradez (who will be joining me in Honduras in May, 2019 (and you can, too)) attempts to answer that question Using Prediction Calculators for Retirement.

 

You’ll reach your retirement goals more quickly with a second job. Not that Vagabond MD needs one. Hatton1, the Doctor of Finance MD, hosts the interventional radiologist in VagabondMD Has Two Jobs…..FIRE?????

 

This is a great time of year to focus on how to best manage your student loans. I created the Student Loan Resource Page to help you with that. Ryan Inman of the Financial Residency Podcast wants to help you, too. How to Take Your Student Loan Debt from 6 Figures to Paid Down.

 

When you’re debt free, you can afford to be more generous with your money. Crispy Doc knows this and has acted on it. How My Donor Advised Fund Made Me Less Selfish.

 

I won’t pretend there wasn’t any selfish motivation when I started a Donor Advised Fund of my own. I’m not a fan of paying taxes. How much can one save in taxes by making Backdoor Roth contributions? Calculating the Value of Your Backdoor Roth Contributions.

 

When I first heard about Crowdfunded Real Estate, I had lots of questions. I had the pleasure of having some of them answered by the CEO of one of the top platforms. EquityMultiple: An Interview With CEO Charles Clinton.

 

If you want to win as an investor, you need to know who or what you’re up against. In this week’s Saturday Selection, The White Coat Investor shared Know Your Enemy: Investing for Retirement.

 

 

Farewell, John Bogle

 

The father of index fund investing passed away earlier this week. Without his ingenuity and determination to bring index fund investing to the masses, I suspect we’d all be a little less wealthy. Well, all of us that don’t work for brokerages not named Vanguard.

We should be grateful that “Jack” stayed with us as long as he did. Thanks to the miracle that is modern medicine, he received a new lease on life at age 66 back in 1996, and got nearly another 23 years on that second heart.

The investment products he created and the ideas that he shared in countless ways had profound effects on the industry and me, personally. I’ve read several of his books, and I was inspired to write “How Much is Enough?” based on the ideals put forth in his powerful book simply titled Enough.

The Bogleheads have been paying him tribute for years, spreading Mr. Bogle’s message far and wide with the highly informative wiki and offering advice to both new and seasoned investors via the popular forum.

Taylor Larimore shared John Bogle’s obituary here, and hundreds of people have expressed their sympathies and gratitude in the merged thread announcing his passing.

Unlike my friend Dr. Jim Dahle, I didn’t make it to a Bogleheads annual meeting to meet the man when I had the chance. Unfortunately, like the vessel his company was named for, that ship has sailed.

I want to recognize the immense impact the man had on both the financial services industry and my own investment and life philosophies.

 

Parking Cash at… Where Else… Vanguard

 

It’s tough to make a tasteful segue from that discussion, but this seems like a good a place as any to mention that I recently moved a big chunk of “parked cash” to Vanguard.

Over the last year or so, rather than investing in a taxable account as I normally do, I’ve been setting aside money to build a home on our lakefront property that we purchased as a home base for the next phase of our lives.

A rule of thumb is that you should be conservative with money you plan to spend in the next few years — some say five years.

I’ve had a savings account with Ally Bank, and they’ve been steadily raising interest rates. Just this week, we got a bump from 2.0% to 2.2%. That’s pretty darned good, but I realized I could do better with a money market fund at Vanguard.

That hasn’t always been the case. For much of the last ten years, the Vanguard money market funds weren’t paying sqaut. I’m talking 0.01%.

Now, however, yields are in roughly in the 2.3 to 2.5% yield range for funds that are taxed by the feds. Vanguard offers a variety of money market funds, and the taxation of each and how to select the best one would make for a great blog post.

The Prime Money Market Fund (VMFXX) is fully taxable at the federal and state level. The Federal Money Market Fund (VMFXX) is fully taxable at the federal level and may be partially taxable at the state level.

Finally, the Treasury Money Market Fund (VUSXX) is fully taxable at the federal level and not taxed at the state level for most or all.

There are also federal-income-tax-exempt municipal money market funds that pay significantly lower interest, but these may be your best options, particularly if you’re in a high federal income tax bracket, particularly if you live in CA, NJ, NY, or PA, as there is a fund that will be free of state income tax for you.

Here are the current options, expenses, and yields:

 

 

I chose to park my money in VUSXX, which has a $50,000 minimum initial investment. It’s got the lowest expense ratio and is fully tax-exempt at the state level. Living in Minnesota, that’s a 9.85% tax break on the fund’s earnings.

My after-tax earnings on the (currently) 2.31% yield, in the 24% federal income tax bracket will be approximately 2.31% * (1 – 0.24) = 1.76%.

When I moved my money from Ally, my cash was earning 2% but fully taxed at both the federal and state level, giving me a post-tax return of 2.0% * (1 – 0.24 – 0.0985) = 1.32%.

With the new 2.2% interest rate at Ally, the after-tax return has improved to 1.45%, but it’s still 0.31% (a.k.a. 31 basis points) behind the return from VUSXX.

If, hypothetically, I were sitting on an average of $200,000 for a year, moving the money from Ally at 2.20% (1.45% after tax) to VUSXX at 2.31% (1.76% after tax) is a move that would boost my after-tax earnings by $620.

That’s well worth the handful of mouse clicks it took to purchase some VUSXX.

[note: When first published, I had adjusted the return for the expense ratio initially, but have changed the math to reflect the fact that the SEC yield reflects the return after fees.]

 

A Featured Insurance Agent

 

Members of the Physicians on FIRE Facebook Group may recognize this recent monthly sponsor, Pattern.

Pattern

 

Pattern provides simplified tools and training to protect doctors finances, families and futures.
We do this primarily in two ways:
  • With disability and life insurance – We quote and compare the own-occupation providers that work well for doctors.
  • Expert educational webinars and seminars –  We partner with experts in taxes, job search, legal issues, and debt… to provide valuable honest content for residents, fellows, and  and early career physicians.
We want to help doctors eliminate confusion, defeat misinformation and guide them in the next steps to take financially.

 

 

Have an outstanding week!

-Physician on FIRE

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Know Your Enemy: Investing for Retirement https://www.physicianonfire.com/investing-for-retirement/ https://www.physicianonfire.com/investing-for-retirement/#comments Sat, 19 Jan 2019 08:55:20 +0000 https://www.physicianonfire.com/?p=10943 In today’s Saturday Selection, I’ve got a classic selection from The White Coat Investor.

It should come as no surprise to you that succesful investing requires you to vanquish several enemies. If you don’t know who they are, you’re unlikely to win, and you may have a tough time realizing the retirement you’ve envisioned and deserve.

While Dr. Jim Dahle alludes to a fourth enemy in a way, he deosn’t exactly call him or her out. Instead, he calls out “Bob,” the neighborhood chatterbox who always seems to be doing better than you.

The fourth enemy? It’s not Bob; it’s you. You must learn to overcome you and all the innate tendencies you were born with that can cause you to do the opposite of what’s optimal with your money. Best wishes in understanding and overcoming the numerous enemies you are facing!

This post first appeared on The White Coat Investor.

 

Know Your Enemy: Investing for Retirement

 

Investing your retirement savings wisely is not all that different from fighting a battle. Unfortunately, too many investors don’t actually know the enemy they’re fighting.

Financial advisors often reinforce these mistaken ideas by comparing portfolio performance to an index such as the S&P 500 Index composed of the stocks of the largest companies in America. Since that comparison seems important to the advisor, the investor assumes it is important.

Even worse, many investors compare the performance of their portfolios to that of Bob down the street, or more likely, Bob’s idle cocktail chatter. You see, it’s unlikely that Bob mentions anything other than his best investments at the cocktail party, and highly likely that Bob actually has no idea how to calculate an investment return.

 

 

ready for battle

 

You Decide What a Win Looks Like

 

When it comes to retirement investing, what matters is whether or not you reach your goal. The more specific your goal, the easier it is to design and monitor a plan to reach it. A good example of a specific goal is “Have a portfolio capable of supporting an income of $100,000, indexed to inflation, that will last throughout my retirement beginning Jan. 1, 2030.”

Notice how there is no comparison to the S&P 500 or Bob’s portfolio. It’s much easier to win the battle when you get to decide what a win looks like.

 

Three Enemies of Every Retirement Investor

 

Your opponent in this battle is not Bob. Unfortunately, your enemies are far more worthy. The three enemies of every retirement investor are inflation, taxes, and investment expenses.

Consider an investor whose investments achieve a gross return of 8% for the year. He may pay as much as 25% of that return in taxes, leaving him with a 6% return. Investment expenses may run as high as 2%, decreasing the return down to 4%.

If inflation is running at 3%, then the investor’s net return, after inflation, taxes, and expenses, is just 1% a year. At that rate, it will take over seven decades for compound interest to double his money.

In other words, he is going to have to do almost all of the heavy lifting through brute savings, rather than allowing his portfolio to do much of the work of building his retirement nest egg through compound interest.

 

#1 Beating Inflation

 

There is precious little an individual investor can do to actually control the rate of inflation of the goods and service he will purchase over the course of his life. Keep in mind that the rate of inflation that matters is your personal rate of inflation, not necessarily what the government says the overall inflation rate is.


For example, someone paying a great deal of money for health care and college tuition may have a much higher personal rate of inflation than someone who spends most of his money on technology and heating his home with natural gas.

The main error that investors make when combating inflation is worrying about the wrong risk. Too many investors think the main risk they’re running is the volatility of their investments. They remember that gut-churning feeling in late 2008 when a third of their nest egg disappeared.

While volatility is a risk because many investors cannot handle it and end up selling low, a far greater risk is not outpacing inflation and falling short of your retirement goal. In order to beat inflation, a significant percentage of the portfolio must be invested in asset classes that are likely to beat inflation over the long run.

At current low yields, nominal Treasury bonds (much less cash-like investments such as savings accounts and CDs) are unlikely to do this. Riskier investments such as stocks and real estate are much more likely to beat inflation over the long run.

Inflation-indexed bonds, such as Treasury Inflation Protected Securities (TIPS) and I-Bonds are unique in that they are relatively safe investments that hedge a portfolio against unexpected inflation. Although at current low yields they are unlikely to beat inflation by much, at least they’ll keep up if inflation spikes, unlike nominal bonds.

 

#2 Beating Taxes

 

Believe it or not, Uncle Sam wants you to have a nice retirement. There are many tax breaks available to investors. Long-term capital gains and dividends are taxed at lower rates than regular income. If you lose money in a taxable investment, the IRS will share your pain through tax-loss harvesting. When you die (or receive an inheritance), the investments receive a step-up in basis as of the date of death, allowing the heir to sell them tax-free.

There are also a plethora of tax-advantaged retirement savings accounts including 401(k)s, 403(b)s, 457(b)s, profit-sharing plans, defined benefit plans, IRAs, Roth IRAs, SEP-IRAs, solo 401(k)s, SIMPLE IRAs, HSAs, etc. The tax-drag on investment growth is eliminated insomuch as you invest inside these accounts.


The tax advantage of being able to choose when you pay your taxes is also substantial. For example, a resident physician in the 15% bracket may choose to pay taxes now and invest in a Roth IRA. When he pulls that money out tax-free in retirement, he may be in the 25% bracket. A physician in his peak earning years may contribute to his retirement plan and save 40% in taxes on the contribution. The effective tax rate of his withdrawals after retirement may be closer to 15%.

Too many physicians complain about high tax bills without taking advantage of the easiest way to save on those taxes, ensure a comfortable retirement and protect the assets from creditors — contributing to retirement accounts and investing in a tax-efficient manner outside of retirement accounts.

 

 

#3 Minimizing Investment Expenses

 

I have seen physicians paying as much as 2% to 3% of their assets every year in investment expenses. 401(k) fees, mutual fund expense ratios, commissions, and advisory fees can add up rapidly. Many physician investors don’t realize the heavy impact that fees can have on their eventual nest egg size.

Consider two doctors, each saving $50,000 per year for 25 years in an investment earning 8% per year before expenses. The first pays 2% in investment expenses and the second pays 0.2%, or one-tenth as much. After 25 years, the difference in net worth will be nearly a million dollars! Every dollar you pay in fees comes directly out of your investment return.

The retirement investing battle is definitely worth fighting, and it becomes much easier when you realize what you’re fighting against. Having a plan to combat inflation, taxes, and investment expenses will give you peace of mind now and a comfortable retirement later.

 

 

 

What other financial enemies sabotage your retirement plans? Comment below!

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EquityMultiple: An Interview With CEO Charles Clinton https://www.physicianonfire.com/equity-multiple-interview/ https://www.physicianonfire.com/equity-multiple-interview/#comments Thu, 17 Jan 2019 08:55:16 +0000 https://www.physicianonfire.com/?p=9980 I’ve personally invested in a handful of crowdfunded real estate deals. I wouldn’t want to recommend investments to my readers that I wouldn’t be open to investing in, myself.

One of those investments, which happens to be my first and largest to date, was with EquityMultiple.

I like that they offer a variety of investment types (equity, debt, mezzanine debt), and as you’ll learn, perform extensive due diligence, passing on 90% of investments floated their way. I’m also a fan of their extensive Introduction to Commercial Real Estate Investing and other articles on their Resources tab.

CEO Charles Clinton was kind enough to answer a number of questions I had as an investor who does not know real estate inside and out. Last year, I was a guest in an interview by Soren Godbersen at EquityMultiple, and I’m pleased they were able to return the favor.

 

EquityMultiple: An Interview With CEO Charles Clinton

 

EquityMultiple is one of a number of crowdfunded real estate platforms. What sets EquityMultiple apart from the rest?

 

Correct – we saw the number of real estate crowdfunding platforms operating in the U.S. balloon to over 100 in the years following the JOBS Act. There’s been some consolidation and culling of the herd, and we’ve seen remaining platforms consolidate around a few models as far as what’s provided to the investor:

 

  • Syndication marketplaces, where the Sponsor (the firm originating the investment) is connected with a network of investors through software, but the platform isn’t providing much in the way of intermediate diligence or asset management
  • Single-Family loans, whereby the platform provides debt financing for single family fix-and-flips
  • ‘eREITs’, a fund of income-producing real estate that’s opaque or semi-opaque to the investor, similar to the private REITs that have been around for decades
  • Discrete Properties, In-House Diligence, allowing individual accredited investors to access distinct commercial properties, and providing some measure of underwriting and curation on the deals presented.  

 

We’re closest to the last model, with a platform that allows individual investors to access institutional-quality commercial real estate investments starting with as little as $5k. That said, we like to think that there are several other unique qualities to our platform and focus:

 

  • Full-cycle asset management: we report on the performance of closed investments frequently and transparently throughout the lifetime of each investment.
  • Customer service: we think of ourselves as a real estate investment firm first, tech firm second. We’re not looking to ‘automate away’ the human aspects of investing, and we realize that investing is very much about trust, even if it’s transacted online. As such, we strive to be as available as we can to all investors and prospective investors.
  • A range of risk/return profiles: while some platforms focus only on debt, or only on common equity, we present a curated set of senior debt, preferred equity, and equity investments, with a range of target return ranges and hold periods.
  • Institutional CRE focus: we’re focused on institutional commercial real estate projects: partnering with experienced real estate firms in multi-tenant properties, and across property types. We feel that this provides our investors better diversification options and downside protection.

 

 

I understand EquityMultiple is backed by Mission Capital, a real estate company with more than 15 years of experience. Can you tell us a little more about Mission Capital and your relationship with them?

 

Absolutely, and this is related to the institutional focus I just spoke of. You can think about our partnership with Mission as another differentiator with respect to other real estate investing platforms.

Mission Capital – who provided our seed funding and with whom we still share an office – has provided CRE financing and other capital markets solutions to institutional real estate firms since before the last major economic downturn began. So not only does this provide our Investment Committee excellent perspective when it comes to vetting deals, but Mission’s nationwide network of sponsors and lenders also strengthens our pipeline of potential investments.

 

 

Approximately how many EquityMultiple investments have gone through the complete cycle with investors repaid? What are the best returns investors have seen? The lowest? Have any investors lost money in any one deal?

 

To date, we’ve closed on 50 investments across the country, and have had 10 go full cycle so far. 2 have materially exceeded projections, 2 have materially underperformed, and 6 have performed roughly in-line with projections.

We have had $0 in investor principal loss to date. It would be disingenuous to speak in too much depth to realized returns here, because a) it is difficult to aggregate across debt, preferred equity and equity investments b) many of our investments are still early in their term and c) in the interest of accuracy and in order to comply with regulations, we try to avoid speaking to an aggregate set of returns that changes frequently.

That said, we’re committed to presenting realized returns comprehensively and transparently. I’d encourage anyone who’s curious to create an account (which is free).

We’re also working on a comprehensive and fully-transparent Track Record page to help prospective investors understand the performance of our investments and the range of possible outcomes.

 

 

 

Crowdfunded real estate allows accredited investors to invest more passively in syndicated offerings. How much due diligence is done by EquityMultiple? What level of diligence do you expect from individual investors?

 

Great question. EquityMultiple has an in-house team that does extensive diligence on every potential investment – the firm that originated the deal, the market, and the particulars of the investment thesis and underlying pro forma assumptions. This means we spend weeks, if not months, evaluating and negotiating each potential investment, and ultimately we select fewer than 10% of the deals we see.

Hopefully, this gives investors some comfort, but we do feel it’s important that investors understand that all investments entail risk, including ours. Similarly, we recommend that investors take a close look at projected distribution schedules and risk factors for each investment, and consider whether it’s a good fit for their portfolio. To this end, we do our best to structure information on each deal such that investors can understand the investment thesis at a high level and dig into particulars to whatever extent they need to in order to get comfortable.

We also encourage investors to freely ask questions – while we do our best to present investment details in a clear and succinct manner, we realize that clarification may be needed here and there, particularly for folks who are newer to commercial real estate investing.

 

How would you compare and contrast investing in crowdfunded real estate versus other passive real estate investments, like REITs or REIT index funds?

 

REITs are similar to real estate crowdfunding in that both vehicles allow individual investors to access commercial real estate at relatively low minimums, but there are some pretty substantial differences beyond that:

 

  • REITs are generally opaque – management decisions, and even the set of individual properties within the fund, are usually obscured from the investor. With a platform like EquityMultiple, on the other hand, investors can understand exactly what they’re investing in at the asset level, have a more tangible sense of where there money is going, and more closely align their real estate portfolio with risk tolerance and return objectives.
  • Because public REITs are traded, they tend to correlate heavily with the stock market. This means that there is inherently less downside protection than can be achieved with private real estate (the kinds of assets now available through real estate crowdfunding platforms). Similarly, public REITs have historically exhibited more volatility than private real estate.
  • Private REITs don’t have that issue, but have historically been characterized by extremely high management fees (often high single-digits or even above 10%, as compared to the 0.5%-1.5% annual fees on EquityMultiple investments).
  • The flip side of this: REITs are liquid, whereas investments made through EquityMultiple and other platforms are generally illiquid

 

For many investors, it may make sense to hold both REITs and private commercial real estate within their portfolio. As a Blackstone study from a few years ago noted, portfolios that allocate 20% or more to private-market alternative assets – like real estate crowdfunding – tend to outperform those that do not.

 

Real Estate has generally performed well since we emerged from the Great Recession. How would you expect crowdfunded real estate investments to perform in a cooling real estate market or the next recession?

 

The short answer is that no one knows for certain, and you shouldn’t trust anyone who purports to have a crystal ball.

It would be folly to assume the current bull market will last forever without any substantial correction. It would also be overly pessimistic to assume that real estate markets will be as devastated by the next downturn as they were during the last recession, and that opportunities for yield will dry up entirely.

There aren’t the same levels of extreme leverage and overbuilding in real estate markets that there was preceding the Great Recession, and we’re continuing to see opportunities for yield in alternative CRE asset classes (like data centers or self storage) and emerging secondary and tertiary markets where underlying demographic trends remain strong.

As always, diversification is key – some markets, property types, and real estate crowdfunding investments will be adversely impacted during the next downturn. Others less so, or not at all.

Certain alternative real estate asset classes – like self-storage, manufactured housing communities, and student housing – may prove to be countercyclical, and show strong returns during the next downturn. Likewise, some markets will fare better than others due to specific local demand drivers and net migration factors.

Again, no one can predict 100% the specific contours of the next downturn, and how specific local real estate markets will be impacted. But those investors who diversify across markets, property types and hold periods will be in better position to weather the storm, whenever and however it hits.

Platforms can do right by investors by offering a diversity and breadth of commercial real estate investments across the country. At EquityMultiple, we also seek to negotiate built-in investor protections, such as payment priority and interest reserves for payment of cash distributions.

 

What was your background prior to EquityMultiple, and what inspired you to co-found this company?

 

We started the company with a shared vision of making commercial real estate investing more accessible and transparent for individual investors. Private real estate transactions have historically provided great returns in aggregate and great downside protection alongside stocks and bonds, but have been largely inaccessible for individual investors up until very recently.

Our goal in starting the company was to harness technology and allow individuals all over the country to co-invest passively alongside experienced real estate firms, provide a layer of underwriting on investments, and provide a single-point-of-access platform for individual investors to create a diversified commercial real estate portfolio.

Incidentally, we’ve realized that the product is a natural fit for many doctors – smart, detail-oriented, super-busy professionals who don’t have the time to acquire and manage commercial property on their own and really benefit from streamlined access to private-market CRE investments.

My background is in real estate law. Prior to founding EquityMultiple in 2015, I worked for Simpson Thacher, a big law firm here in New York, on some very large, complex CRE transactions – including Blackstone’s $1.9 billion purchase of Motel 6 and Hilton’s real estate asset restructuring and refinancing in advance of its $2.5 billion IPO. My law background definitely helps me navigate the fine print of real estate transactions, structure deals, and sniff out risk.

I’d always wanted to pursue something more entrepreneurial, but the lightbulb really lit up when I received a Christmas bonus and, despite being immersed in lucrative commercial real estate in my day-to-day job, I really had no access to it as an individual investor.

 

 

Where can potential investors see current offerings?

 

Due to SEC and FINRA regulations, we require all investors to answer some initial suitability questions – including self-certifying as an accredited investor – prior to entering our platform and reviewing current and past offerings.

We welcome anyone who is interested to create an account, go through a brief suitability questionnaire, and have a look at our current and past offerings, as well as the aforementioned Track Record page. Creating an account won’t obligate you to any further action.

 

Is there anything else you’d like to share with my readers?

I’d like to mention as well that we’re planning on offer ‘Opportunity Funds; – new tax-advantaged real estate investments per the Investing in Opportunity Act, an under-the-radar component of the late-2017 tax reform. I won’t go into the program at length here (perhaps the subject of a future interview!) but interested investors can learn more at our Opportunity Funds resource page.

 

Related:

 

[PoF: Thank you so much, Charles, for taking the time to answer my questions in detail. I appreciate your candor in detailing both the potential risks and benefits of these hands-off (for us, not you) commercial real estate investment opportunities.

I also appreciate the offer of a 1% yield bump for my readers on their first debt or preferred equity investments with EquityMultiple. The readers thank you, as well.]

 

 

What other questions would you have for the CEO of a crowdfunded real estate company? Have you invested with EquityMultiple or others?

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Calculating the Value of Your Backdoor Roth Contributions https://www.physicianonfire.com/backdoor-roth-value/ https://www.physicianonfire.com/backdoor-roth-value/#comments Tue, 15 Jan 2019 08:55:37 +0000 https://www.physicianonfire.com/?p=10914 I recently published a detailed article questioning the Marginal Value of the Backdoor Roth. I wanted to answer a simple question. “Is it worth doing?”

The answer I came up with? Probably, yes. Unless you’ve got significant obstacles, namely a tax-deferred IRA in your name that you can’t easily roll over into an employer’s 401(k) or individual 401(k). Then, it’s not that big of a deal if you don’t.

The thing is, in the first year that you do the Backdoor Roth, your tax savings is probably going to be somewhere in the range of $10 to $40.

We’re comparing investing $6,000 in a Roth account versus investing the same $6,000 in a relatively tax-efficient taxable account with a tax drag on the order of 0.3% to 0.7%. In year one, the savings won’t even buy you an Instapot.

If you’re not familiar with the Backdoor Roth, it’s an indirect and perfectly legal way for high-income earners to contribute to a Roth IRA annually. Read my updated Vanguard Backdoor Roth 2019: A Step-by-Step Guide for the background and instructions.

Once you’ve read that and the Marginal Value post, you’ll be up to speed.

 

Calculating the Value of Your Backdoor Roth Contributions

 

How valuable is the Backdoor Roth to you, specifically? That depends on many factors, some of which are under your control, others which are at the whims of our policy-makers.

The sooner you start making backdoor Roth contributions, the more benefit you’ll see. You have until mid-April to make a contribution for the prior calendar year. First-timers are now making both 2018 and 2019 Backdoor Roth contributions.

The longer you can make Backdoor Roth contributions, the more valuable they’ll be to you. You must have earned income (capital gains, dividends, and withdrawals from tax-deferred accounts do not count) to contribute to an IRA via the front or back door.

The longer you leave the Roth balance alone, the more advantageous the Roth contributions will be for you.

The higher your taxable income, now and in retirement, the more it helps to make Backdoor Roth contributions.

Accordingly, those living in high-income tax states will benefit the most.

 

Someone Who Will Not Benefit Much from the Backdoor Roth

 

Knowing what we know, let’s profile someone who will not benefit much at all from the Backdoor Roth. Someone who might frequent this site.

Mr. Rothschild is 35 years old. He and his wife earn a combined $240,000 a year. It’s a respectable sum and even after taking into account the $24,400 standard deduction in 2019, their MAGI will be too high to contribute directly to a Roth IRA.

The Rothschilds found this website after they started down the rabbit hole that is the FIRE blogosphere. They realized, like me, that they could afford to retire soon, and came up with a five-year plan to exit the workforce and start living their dream.

Having been living on half their take-home pay since completing their education 10 to 12 years ago after they met in a quantum mechanics class, they’re in good shape to be financially independent after a total of about fifteen years in the workforce. By age 40, they plan to pull the trigger.

That gives them five years to make Backdoor Roth contributions.

Each year for five years, Mr. Rothschild will make a $6,000 Backdoor Roth contribution. His wife, who has a rollover IRA from a previous job’s 401(k) and a current 401(k) with poor investment options, opts not to make Roth contributions. She understands she’s probably worse off rolling over her current tax-deferred IRA into the expensive 401(k) plan just to do the Backdoor Roth for five years.

They live in Texas, a tax-free state. In their taxable investment account that, like mine, contains mostly passive index funds, they endure a tax drag of 0.3% by virtue of paying 15% long-term capital gains rates on qualified dividends of about 2% in that taxable account.

Therefore, each year, the tax savings of investing via the Backdoor Roth instead of the taxable account will be 0.3% of the Roth IRA balance generated by the Backdoor Roth contributions.

For purposes of this exercise, the invested money will grow at 6%.

 

Backdoor_Roth_Value_1

 

Over five years, Mr. Rothschild contributed $30,000. His tax savings that first year was a paltry $18, but that improved to a tax savings of $101 in year five as the balance grew.

Will he continue to benefit from his prior contributions once he starts drawing down the account? He knows his Roth conversions (I have called them contributions, but step two of the Backdoor Roth is technically a conversion)  are available for withdrawal penalty-free at any time five years later, and he starts taking prior conversions out annually starting in his first year of early retirement. He has, in essence, built a “Roth ladder.”

With a taxable income well under $78,750 as early retirees, living primarily off of a taxable account, a 457(b), and the $6,000 a year in Roth money, they are easily in the 0% long-term capital gains bracket.

Therefore, his taxable account works pretty much the same as the Roth account. The qualified dividends and long-term capital gains are tax-free.

There are no tax savings in the years in which he withdraws his contributions.

 

Backdoor_Roth_Value_2

 

Over the course of ten years with a Roth IRA that peaked at a balance of $33,823, the earnings at 6% left him with nearly $9,000 in the account after withdrawing all of his contributions. He’ll let that grow until he can access it easily without penalty at age 59 1/2. We’ll call it 60.

 

 

Throughout these years, the Rothschilds remained in the 0% capital gains tax bracket. Living in a no-income tax state, they didn’t see a dime of tax benefit from the money being in a Roth account during these years. The money would not have behaved any differently in a taxable account.

The total savings for this couple occurred in the five years in which they were working and the grand total of his tax savings for doing the Backdoor Roth was $293, or just under $60 a year for those five years.

 

A Couple That Would Benefit Greatly from the Backdoor Roth

 

On the opposite end of the spectrum, we’ll look at the Rothmans, a dual-income couple earning greater than a half-a-million dollars a year in the lovely high-tax state of Minnesota.

The Rothmans met at a curling league fundraiser while earning their MBAs and were married at The Basilica shortly thereafter.

To make the Roth contributions as beneficial as possible, we’ll assume this power couple was at peak earning power from age 25 to 65, at which they finally retire and continue to enjoy a fatFI lifestyle.

We’ll assume that the Backdoor remains open for each of these 41 years and that they turned 25 in 2010, the very first year Roth conversions were allowed in their income tax bracket, and that they knew one of the few accountants who was advising clients to do this back then.

With income placing them in the top federal income tax bracket, they pay 20% + 3.8% in taxes on qualified dividends, and 9.85% in Minnesota state income tax on those same dividends. That’s nearly 35% of about a 2% dividend yield in their taxable account for a tax drag rounded up to 0.7%.

 

 

After 41 pairs of $6,000 contributions, the Rothmans have contributed $492,000, but the magic of compound interest at 6% over 41 years gives them over $1.6 Million dollars of earnings in the account when they’re ready to retire to their 6 bedroom, 9 bath estate on Lake Minnetonka.

The tax savings was only $84 between the two Roth accounts in year one, but by the time they’re making their 10th pair of contributions, they’re saving over $1,000 in taxes between the two of them.

When they’re sextagenarians and making their 36th pair of Backdoor Roth contributions, the annual tax savings reaches $10,000 per year. The total tax savings over these 41 years is $187,531.

At this point, the size of their earnings eclipses the contributions by a 3:1 ratio with a balance in the accounts of nearly $2 Million.

The Rothmans don’t need to touch this money, as the $12,000 a year contributed to the Roth accounts represents between 5% and 10% of their annual investments. With a large eight-figure portfolio, they let the accounts grow until they romantically pass away just days apart after celebrating their 100th birthday.

 

Backdoor_Roth_Value_update

 

At age 100, a full 75 years after they started these accounts, the value of the Roth accounts alone is $15,222,850 and is growing by over $900,000 a year with those with 6% returns.

By now, the tax savings over a lifetime of investing were over $1.6 Million.

 

How Much Tax Will Backdoor Roth Contributions Save You?

 

If the tax code persists in its current form for awhile, and you’ll be earning a solid income throughout, it’s certainly somewhere between the $300 that the Rothschild family saved, and the $1.6 Million saved by the Rothmans.

Again, it comes down to the following factors:

  • How early you start your Roth IRA
  • How many years you contribute
  • How long you delay withdrawals
  • Your tax drag in a comparable taxable account

 

The examples given aren’t perfect, and they don’t need to be. They exist to demonstrate two extremes.

In real life, returns are far from constant from year to year, and compounding occurs continually. The contribution limits will rise over the years to keep up with inflation. By not accounting for either inflation or the associated increase in the amount one can contribute, we’ve essentially given the Rothschilds and Rothmans a 6% real return, which is generous, but not out of line with past stock returns.

In my last Backdoor Roth post, I gave a number of examples of ways you could make up for the difference of not making annual Backdoor Roth contributions.

A lifestyle change worth $1,000 per year from something like a better, lower cost cell phone plan or one to two new reward credit cards each year were a couple of examples. Cutting expenses or increasing after-tax income by $1,000 in any way, shape, or form would make a difference.

How much of a difference?

I’m glad you asked. Do you smell a spreadsheet? I do!

We don’t need to do the math for the Rothschilds, who only saved $300 in taxes by doing the Backdoor Roth for five years. The answer here doesn’t require a spreadsheet or anything beyond second grade arithmetic.

They’re better off earning a little more money or spending a bit less. They could make up that difference in one month.

For the Rothmans, the answer is not so obvious.

We can compare investing $1,000 a year in a taxable account, with the relatively high 0.7% tax drag, to the growth of the tax savings in the Roth account. Let’s look at what spending $1,000 less or having an extra $1,000 in after-tax income will do with the same annual 6% return

 

Backdoor_Roth_Value_7

 

After 41 years of investing an extra $1,000 a year in a taxable acccount, and assuming they remain in the highest (current) capital gains bracket in a high-tax state throughout, the account grows to $138,329. That’s nearly $50,000 shy of the $187,531 of tax savings over 41 years of Roth contributions.

However, if we tweak the assumptions just a bit, and change the tax drag to a more typical (but still high) 0.5% per year, guess which is the better strategy?

In this case, with a tax drag of 0.5% instead of 0.7%, the tax savings of 41 years of backdoor Roth contributions are $133,951, whereas the taxable account with $1,000 a year contributed grows to $145,587.

Saving $1,000 extra per year can be as valuable as doing the backdoor Roth over many decades.

It’s true that the IRA can become a stretch IRA for heirs, but it will be subject to Required Minimum Distributions (RMDs) when inherited. A taxable account benefits from a stepped-up cost basis when inherited, and will not be subject to RMDs.

 

Should You Backdoor Roth?

 

As much fun as I’ve had with these spreadsheets, my answer hasn’t changed. If you’ve got no barriers to doing this, and you earn too much to contribute directly, you should go ahead and do the Backdoor Roth.

If this workaround remains viable for decades, doing so will probably save you a few hundred dollars a year on average, and perhaps up to about $1,000 a year over the course of a long working career.

On the other hand, if you haven’t done this due to a pro-rata rule issue (pre-tax IRA in the way), or simply weren’t aware of it or were afraid of goofing it up (which is easy to do), you’re not missing out on the investment trick of a lifetime.

Despite the 7-figure benefit I was able to produce over an extreme example and a 75-year time frame, for the typical high-income investor, I believe the benefits of the Backdoor Roth are truly marginal. If you’re a do-it-yourself investor whose investing horizon may resemble the ultra-wealthy Rothmans, the benefit can be big. But in relation to the rest of your portfolio, that $1.4 Million will pale in comparison to a high 8-figure or low 9-figure net worth on your 100th birthday.

It is also true that a Roth IRA offers better asset protection than a taxable account.

Conversely, consider the advantages of a taxable account:

  • 100% liquid and available without penalty at any age
  • The foreign tax credit is realized only in a taxable account
  • Tax Loss Harvesting alone is worth $1,000 or more per year for most high-income professionals. You can’t do that in a Roth account.
  • With a taxable account, you or your CPA won’t have to worry about fouling up form 8606, potentially costing you thousands of dollars.

 

From commenter Luis on the marginal value post:

“Please read this and learn from a fool (being the fool myself). We (my wife and me) have been doing Backdoor Roth since 2012, although we have an idea about taxes, we use the services of an accountant and trust him.

So, being busy as I was until my retirement, mostly accepted for being good what my tax preparer did. I rarely questioned his job, except a couple of times.

So far so good: Recently I received from the IRS a note saying that we owed almost $5,000 in past taxes and penalties!!!!!!!! How this happened? In all this years, from 2012 to 2017 never a form 8606 was produced. Not only this back taxes were due, also I discovered that $780 was paid for “excess contribution to Roth Ira”!!!!!!!! every year: $780 time 6 years equal to $ 4680 (I am the one that discovered the imbroglio).

We share the responsibility with the accountant, for not supervising his job, but he was supposed to be the expert after all. Right now we are in the middle of trying to somehow fix this mess, but my guess is I going to bite the bullet anyway.”

 

What’s Worse Than Not Doing the Backdoor Roth?

 

Since we’ve established that it’s value is in the range of dozens to hundreds of dollars per year, anything that costs you many hundreds of dollars or thousands of dollars per year is more harmful to your bottom line. Let’s review some common ones.

 

Paying AUM fees to a financial advisor.

What do you suppose is worse? Tax drag of about 0.5% on 5% to 15% of your portfolio or paying 1% to 2% in “assets under management” fees on all of your portfolio? The latter will cost you 20 times as much or more per year.

If you need a financial advisor, and there is no alternative to paying those fees, I suppose it could be excused. But the fact is, there are flat-fee and hourly rate fiduciary advisors that won’t cost you $10,000 to $20,000 annually per million dollars invested.

Remember, investment fees will cost you millions.

 

Student Loan Mismanagement

The average indebted medical student graduates with about $200,000 in student loan debt. Most will make mistakes worth tens of thousands of dollars in managing the payback of their student loans. Six-figure mistakes are not uncommon when you start to look at two-physician couples with a half-million or more in debt.

If not pursuing PSLF or another loan forgiveness program, there’s a good chance you can lower your interest rate and/or payment by refinancing. View current rates and cashback bonuses on The Student Loan Resource Page.

The Student Loan Planner has consulted on over $400 Million in student loan debt, creating plans that have saved their clients over $80 Million, or an average of $62,000 per client. Check out their services here.

 

Ignoring Tax Loss Harvesting

At a marginal tax rate of 33% to 50%, a high-income professional can easily deduct $3,000 per year from ordinary income with occasional TLH, resulting in $1,000 to $1,500 per year in savings with a few well-timed mouse clicks.

This is almost certainly a greater benefit than the backdoor Roth. If you’re a Vanguard or Fidelity User, I’ve made tutorials complete with screenshots for you.

 

Ignoring Travel Rewards

If you’re in a position where you can always pay off a credit card balance monthly, but opt to spend via cash, check, or debit card, you’re missing out on valuable rewards.

In the four or five years that I’ve been earning welcome bonuses on a variety of reward cards, my family and I have averaged well over $5,000 a year in free travel. One card alone, obtained by both my wife and I, got our family of four to Honduras for a medical mission, saving us over $3,000 in airfare on one trip last year.

I highlight my simple strategies and some of the top cards to target in the following:

 

So many other decisions will be much more impactful on your finances than the Backdoor Roth. What kind of car you drive. Public versus private school. Where you live. How well you negotiate. Your choice in beer, wine, or liquor. Honestly, anything that has an impact of at least a thousand dollars a year is bigger.

 

In summary, I remain a fan of the backdoor Roth because I like to optimize my finances in every way that I can, and with no barriers to doing this, it has benefited me to the tune of at least $1,000 by now. In 2019, we made our seventh pair of contributions.

I just don’t see it as the panacea it’s sometimes made out to be.

 

For more information, be sure to check out additional articles on the Backdoor Roth:

 

 

 

Have you taken advantage of the Backdoor Roth? How many times? How do you value the benefit of your Backdoor Roth efforts?

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The Sunday Best (1/13/2019) https://www.physicianonfire.com/the-sunday-best-1-13-2019/ https://www.physicianonfire.com/the-sunday-best-1-13-2019/#comments Sun, 13 Jan 2019 08:55:46 +0000 https://www.physicianonfire.com/?p=10873
The Sunday Best is a collection of articles I’ve curated for your reading pleasure.

Expect most of the writing to be from recent weeks and consistent with the themes presented on this website: investing & taxes, financial independence, early retirement, and physician issues.

 

 

Presenting, this week’s Sunday Best:

 

It’s been a little over two years since I published The Sunday Worst in the wake of resident physician and blogger Dr. Amanda Liu’s unfortunate demise. Her site, Dr. Wise Money, was ahead of its time as one of about five physician finance blogs in existence when I started this one. Her sister has kept the site going and offers an update on what she and her family have been through and up to in the interim, a Two Year Review.

 

My friend Jillian from Montana Money Adventures has been sharing her fascinating story with some great FIRE bloggers. She visits the author of The Simple Path to Wealth at jlcollinsnh.com in “I Wanted the Unreasonable.” 

 

Jillian also paid a visit to Kristy and Bryce at Millennial Revolution, penning How to Become FI With 6 Kids, Zero Privilege, and a Small Salary. Naysayers, check it out. And check out Ms. Montana’s free 10-day course (I tried to convince her to charge money, but she persisted): Live With Intention: A Road Map to Your Best Life.

 

A young woman from my little hometown is living her best life, traveling the world, working odd jobs, and of course, sharing her experiences online at The Wanderlust Rose.

 

“The more you limit yourself, the more freedom you create.” Rich from PF Geeks explains the paradox in The Surprising Way that Financial Discipline Leads to Financial Freedom.

 

Wait… did I join a cult? I just may have, according to the Physician PhilosopherJoining a Cult: The Financial Independence Counterculture

 

The cult members could not have been too pleased with the performance of our index funds last year. Based on history, what can we expect in 2019? From Four Pillar Freedom, Here’s How the Stock Market Has Historically Performed After a Down Year.

 

Well, it could be worse. We could have invested with Option Sellers and lost more than 100% of our money. Big ERN of Early Retirement Now explains their strategy and how it lost their clients everything and them some. The OptionSellers.com Debacle: How to Blow up Your Portfolio in Five Easy Steps.

 

This millionaire series has proven to be immensely popular and has now exceeded 100 stories. From ESI Money:

 

John from ESI Money continues to share what he’s learned from asking detailed questions of so many millionaire investors. Five Attributes of Millionaires, Part 1 and Five Attributes of Millionaires, Part 2.

 

I made my 2019 non-deductible contribution of $6,000 each for my wife and I on January 3rd and converted to Roth on January 4th, completing the two-step Backdoor Roth. Vanguard Backdoor Roth 2019: a Step by Step Guide.

 

On Thursday, I published updates with lots of 2018 data pertaining to the blog and our personal finances.  2018 Q4 & Annual PoF Portfolio, Spending, and Blog Performance Update.

 

This week’s Saturday Selection from Passive Income MD focuses on his imperfections when it comes to money. Seven Money Matters I’m Horrible with and How I Deal with Them.

 

 

Companion Passes for the Masses

 

Easily Earn a Southwest Companion Pass in 2019

 

If you may be flying on Southwest Airlines later this year, it’s easier than ever to score a Companion Pass for a complimentary flight for a guest who travels with you. The second fare is free using a Companion Pass, with only fees/taxes of $5.60 each way.

This week, Southwest announced a first-ever offer of a Companion Pass as part of the welcome offer on each of their three Visa cards via Chase Bank. Spend $4,000 in the first three months as a cardholder and you’ll get a Companion Pass good for the rest of 2019. You’ll also get 30,000 bonus points (miles) when meeting the minimum spend.

Note, this is not as valuable as earning 110,000 points to qualify for a Companion Pass good for the remainder of the current year and all of the next year. To qualify for that, most people also acquire the Southwest Rapid Rewards Premier Business Card, which is currently offering 60,000 bonus points after spending $3,000 in the first three months.

The three personal cards (Southwest Rapid Rewards Plus, Southwest Rapid Rewards Premier, and Southwest Rapid Rewards Priority) give you another 30,000, and you’ll need to pick up an additional 20,000 points via spending and/or flying to earn the pass good for greater than 12 months.

Personally, among the three personal cards, I like the Priority card the best. It’s got a higher annual fee, but with the $75 Southwest credit, it’s more like a $74 annual fee if you fly on the airline annually, and the top perks level make this card the best value among the three.

 

Southwest Airlines Rapid Rewards Priority: COMPANION PASS & 30,000 points

  • Companion pass good for all of 2019 after spending $4,000 within the first 3 months. A companion flies free
  • 7,500 point bonus on cardmember anniversary
  • $75 annual Southwest Airlines credit
  • No foreign transaction fees
  • $149 annual fee
  • Learn More about this card

 


 

Southwest Airlines Rapid Rewards Premier: COMPANION PASS & 30,000 points

  • Companion pass good for all of 2019 after spending $4,000 within the first 3 months. A companion flies free
  • 6,000 point bonus on cardmember anniversary
  • No foreign transaction fees
  • $99 annual fee
  • Learn More about this card

 


 

Southwest Airlines Rapid Rewards Plus: COMPANION PASS & 30,000 points

  • Companion pass good for all of 2019 after spending $4,000 within the first 3 months. A companion flies free
  • 3,000 point bonus on cardmember anniversary
  • $69 annual fee
  • Learn More about this card

 


 

 

If the Companion Pass is not a high priority for you, but you do enjoy earning Southwest points, remember that Chase Ultimate Reward points transfer 1:1 to Southwest Airlines (United, too). The Chase Sapphire Preferred has a welcome bonus of 50,000 points and the Chase Ink Business Preferred offers a whopping 80,000 Ultimate Reward points in its welcome bonus.

These are my Preferred cards (pun intended) for those getting started with travel rewards.

 

Chase Sapphire Preferred: 50,000 points

  • 50,000 points after spending $4,000 in 3 months
  • $95 annual fee, waived in year one
  • 2x points on travel & dining
  • 25% more value when booking travel with Chase portal
  • Many point transfer partners
  • No foreign transaction fees
  • Learn More about this card

 

 


Chase Ink Business Preferred: 80,000 Points 

  • Spend $5,000 in the first three months
  • $95 annual fee
  • 3 UR points per dollar on travel and select business categories
  • No foreign transaction fees
  • Learn More about this card

 

 


 

I have updated my Credit Card Tracking Spreadsheet to reflect the changes in the Southwest and other cards. You can download that below by subscribing to my email list. You’ll be given the option to unsubscribe at any time or receive one email per week in the form of a weekly digest.

For more information on credit card rewards strategies, please visit my previous posts:

 

 

 

 

Have an outstanding week!

-Physician on FIRE

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Seven Money Matters I’m Horrible with and How I Deal with Them https://www.physicianonfire.com/seven-money-matters/ https://www.physicianonfire.com/seven-money-matters/#comments Sat, 12 Jan 2019 08:55:59 +0000 https://www.physicianonfire.com/?p=10861 Today’s post comes from my WCI Network partner Passive Income MD. I think he’s pretty good with money, but he begs to differ. At least in some respects.

He makes a great point in that just because we’ve seen success with money, it doesn’t mean we have all the answers or do everything right. I’ve weighed in on five money mistakes I choose to make and I’m sure there are more I have yet to discover.

Dr. Peter Kim’s not perfect, either. As I read through this article again, a scene from Forgetting Sarah Marshall popped into my head. If you avoid strong language, avoid the video. If not, enjoy this clip and you’ll understand why I thought of it.

This post was originally published on Passive Income MD.

 

Seven Money Matters I’m Horrible with and How I Deal with Them

 

 

I write fairly frequently about my own financial and investment experiences, and I’ve been fortunate enough to achieve some success in my ventures. Because of this, people tend to think I have everything figured out.

It’s human nature to want to appear perfect, to seem like we have it all together. This is especially true in medicine, where we’re afraid to show the cracks in our perfect image. Maybe this is because we feel like we’ll lose respect, and it’ll take away from our ability to have some control in the workplace.

But if there’s anything recent events have taught us, it’s that while we may achieve success in some areas and appear perfect on the outside, we all have underlying flaws. The more comfortable we become with sharing our deficiencies, the better we can address them and improve.

Personally, I have enough flaws to fill a book’s worth of pages, but I can’t say I’m quite ready to bare them all here yet. When it comes to financial matters, however, I’m happy to share them even at the risk of looking like an idiot. There are plenty of things I definitely could improve on, and though I try to offer advice the best I can, I’m still figuring out most of the answers for myself along with the readers of this site.

Thanks to numerous doctor blogs and podcasts (like the well-named Dr. Money Matters), physicians have reminders and ways of addressing some of these issues. However, here are some of my own money matters I’m working on improving at the moment.

 

Money Money Money

money money money

1) Accounting

 

When it comes to financial matters, keeping detailed records of your money is vital. I’ve touted the benefits of tracking your net worth and knowing how to use the tax code legally to benefit you. Although I know these things are extremely important, I find it all extremely difficult to keep track of.

When it used to come to tax time, I dreaded the idea of tallying everything up. Because of this, I let everything build up until I’m forced to take care of it. Every spring became a humongous ordeal with paperwork seemingly flying all over the place.

My way around this is to now pay for bookkeeping. A good CPA can be of great benefit in this regard. I’ve started with a new CPA and it’s like I didn’t know what I was missing, until now.

Honestly, he’s made my life much easier. I put all of my spending on specific credit cards, especially for my various businesses. My CPA has access to my credit card statements and is able to separate out the spending into categories. He helps me figure out what is an appropriate deductible expense and what isn’t. All I have to do is review his bookkeeping statements every so often to make sure they’re accurate. I’ll be honest, that’s a chore itself, but it’s much better than having to create the spreadsheets myself.

I’ve found it’s definitely worth the cost and time and energy to do it. Plus, it’s tax deductible for my businesses, so that makes me feel better about it.

2) Budgeting

 

In complete honesty, I’m horrible at keeping a tight budget. It’s important to know where your money is going every month, and I know some people are great at it. People have found great success with Dave Ramsey’s envelope method where you pay using cash, for example, or simply by checking their accounts daily to keep track of any overspending.

My wife and I have talked about budgeting to the dollar, and we’ve decided against it. It’s difficult for us, so we’ve decided to just be conscious of what we need in the beginning of the month for all of our bills and for our investments, and then to be smart with our purchases the rest of the month.

If you look at our credit card spending month-to-month, barring any huge one-time expenses such as a large trip, our balance tends to be very consistent on a month-to-month basis, even without trying very hard to make that happen. It also helps that Personal Capital sends us a little reminder a few times a month comparing our spending to the previous month.

 

 

We’re also fortunate enough to receive decent monthly incomes from our day jobs as physicians as well as increasing income from all of our side hustles. So these days we’re never really close to overspending and are able to save what we need to make smart investments that create additional passive income.

But I know that this line of thought can be dangerous. If your personality leads you to keep up with the Joneses, or if lifestyle inflation has taken such a hold of you that your spending is out of control, then you probably need a tight budget.

 

3) Paying the Bills

 

Bills, bills, bills. They come from everywhere these days. Student loans, preschool tuition, mortgage payments, utilities, insurance, AAA, cell phone, etc… it’s hard to keep track of everything. I’ll be honest, before online payments, I spent a lot of money paying off late fees. I always had the best of intentions, but somehow I tended to lose track of bills as those letters would get swept into piles on my kitchen table.

Now, with the advent of online and automated payments, I don’t struggle with it quite as much. I’ve set it all to automated payments as early in the month as possible and now forget about it. Every quarter I take a look to see exactly how much is being spent and see if there have been any changes. If it weren’t for modern technology, however, I’d probably still be racking up those late fees.

4) Being an Unemotional Investor

 

I’ve participated in two economic crashes: one in the early 2000s and the one in 2008. I’ve learned that when it comes to the stock market, I tend to get caught up emotionally. In the early 2000s, I was an investor riding the bubble investing in things like Nortel and QQQ along with everyone else before things came to a screeching halt. In the years leading up to 2008, I was investing in whatever the hot stocks were at the time as well.

When things were crashing around me, I oftentimes couldn’t resist the urge to sell, which sealed those losses. Fortunately, those losses were before I became an attending and they were with significantly lower stakes than I’m playing with now.

However, those situations taught me a lot about my emotional makeup. Ultimately, this drove me to find a trusted financial advisor. Sometimes it helps to have that layer of separation from your stock portfolio, especially when you can buy and sell with a simple click of the mouse, and it definitely does in my case. It may sound weak to say that when bad times come I can’t control my own emotions–but I’ve learned that I’m far from being the only one.

The people I truly give the most credit to today are the ones who have been through it firsthand, the ones who have seen 25-50% of their net worth disappear in a short period and yet managed to stay the course. It’s easy for everyone to say how they’d react in a downturn when they’ve only been investing during one of the greatest bull runs in history. At least I know myself and when it comes to the stock market, I know I’ll be ready for the next crash.

5) Keeping Track of Frequent Flyer Miles & Using Credit Card Points

 

The idea that you can use points from travel or credit cards and redeem them for free flights and hotel stays is fantastic. However, I’m horrible at keeping track of and actually using these points. I know I have to redeem them and convert them to certain airlines to use them, but I seemingly forget to do them every time I travel. I have certain credit card points that are just piling up.

I have friends who are extremely adept at utilizing them and at times I’m a bit jealous when I hear of all the upgrades they get to business class or nice suites at hotels. Physician on FIRE created a great spreadsheet to track his various credit cards and their various travel rewards and perks.

So, what I do now is simply to use cards mostly with cash back rewards. It makes it easier for me to not have to think about tracking points and what’s easier than receiving cash back. If I do use credit cards that give reward points, I make sure I use one with great perks.

 

6) Keeping Track of Paperwork

 

I’ve noticed something strange about my kitchen table. It seems to be a black hole that sucks in any paperwork, mail, or bills that come near it, some of it lost forever. I’ve made so much extra work for myself having to have things re-printed and re-issued because of the abyss at the center of my dining room.

So what do I do? I now scan almost every bit of important mail I get immediately. I use an app on my phone, like TurboScan or Google Drive, to digitally file every bit of paperwork away, safe inside the cloud. If I think it’ll come in handy later, up it goes, and I can easily search and retrieve it any time I want.

7) Canceling Memberships

 

Cut your bills with Trim Bill Negotiator

I’m a sucker for a free trial period. Apps, memberships, subscriptions–I love signing up for them but always seem to forget to cancel before the trial is finished. I’m sure those companies bank on people like me. Every time I see a charge for a month of a subscription I forgot to cancel, I die a little inside and resolve to change my ways.

I am getting a little better, though. Now, I either don’t sign up for trial memberships without mentally committing to the actual thing I’m paying for, or I do go ahead and sign up for the trial and make double and triplicate reminders immediately to cancel these things at a certain date. So far, this has been working. Most of the time.

Summary

 

Obviously, there are certain things we all excel at. If that weren’t the case, none of us would be where we’re at. However, sometimes it’s more helpful to know what your weaknesses are so you can avoid making big mistakes. So, yes, both strengths and weaknesses exist, and the most important thing is to diagnose them.

I have plenty of flaws when it comes to financial matters but they haven’t stopped me from achieving financial independence from medicine. So I completely believe it’s achievable for everyone.

Double down on your strengths and get help with your weaknesses. That’s been my strategy and it’s definitely helped me get where I am.

 

 

How well do you know yourself? How about you, what are some of your strengths and weaknesses?

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2018 Q4 & Annual PoF Portfolio, Spending, and Blog Performance Update https://www.physicianonfire.com/2018-q4/ https://www.physicianonfire.com/2018-q4/#comments Thu, 10 Jan 2019 08:55:56 +0000 https://www.physicianonfire.com/?p=10818 Every three months, I publish an update to let you know how well my portfolio has done, how much we’ve spent as a family of four, and what’s going on with the blog. Some people like to know the blog stats. Weird, I know.

After three years of tracking our family’s expenses, I’ve learned something. We spend about as much as I thought we did. As the late Denny Green famously said, “they are who we thought they were!” That’s us.

Before I started blogging, I had a pretty good idea of what we were spending based on the credit card statements. It turns out I was right, and I have decided to stop tracking our spending down to the penny. I did so to prove to both me and you that we were actually financially independent, and now we know.

Yes, we are still FI after the recent downturn in the markets. I’ve argued that a bear market can’t really “unFI” you, but that’s a different post.

With the conundrum of expenses that can be attributed to the blog, expenses that can be attributed to our upcoming build (is that spending or building home equity?), I am no longer going to report the precise dollar amount. I’ll continue to watch it from a 37,000 foot view, which is good enough for me. I hope it’s good enough for you.

 

2018 Q4 & Annual PoF Portfolio, Spending, and Blog Performance Update

 

2018 PoF Portfolio

 

Using my universal portfolio tracking spreadsheet that I’ve made available for everyone, I’ve updated my portfolio as it stands in early 2019.

 

 

Rather than share the actual values, I’ve altered the dollar amounts to add up to a cool $1 Million dollars. The ratios are perfectly accurate, though.

The taxable portion makes up over 50%. Roth accounts are about 25%. I’ve got about 13% in two 401(k) accounts. The 457(b), which I’ll deplete over 5 to 10 years beginning in 2020 is just over 6%. The remainder is cash, brewery, and other investments like my HSA and crowdfunded real estate (which deserves its own line — next time).

With an average expense ratio of 0.068, this portfolio costs me $680 per million invested. Compare that to a 1% AUM fee of $10,000 per million invested, and I’m pretty happy to be a DIY investor.

If you opt not to DIY, please strongly consider a financial advisor who doesn’t charge huge fees or push suboptimal investment products on you. My recommended financial advisors are fidicuary, fee-only advisors with some of the lowest fees you’ll find.

I’ve intentionally strayed from my “desired” allocation as we prepare to build a home, allowing cash to pile up while our equity investments lag a bit. The spreadsheet shows the following, again with modified sums but accurate percentages.

 

 

By this time next year, we hope to have built a house, sold a house, and I should be in a position to rebalance the portfolio back to the desired allocation.

If you’d like a copy of the spreadsheet I created, enter your email below and I’ll send you a link. Well, not me personally… it’s an automated thing. Anyway, you will be subscribed to my email list at least momentarily but you can opt out at any time.

 

 

2018 Q4 PoF Portfolio Performance

 

Do we have to do this? Really?

It wasn’t pretty. To be honest, though, I knew with certainty that there would be a bear market at some point. I didn’t know when, of course, but I was secretly hoping it would happen before I retire rather than shortly thereafter. And it did happen, at least according to most definitions.

Sorry about that. I should be careful what I wish for!

How did my portfolio do in the fourth quarter of 2018? Quite poorly, and thanks for asking.

According to Personal Capital, my You Index, which I would call My Index, lost 10.97% while the S&P 500 lost 13.97%. My portfolio was down, but I beat “the market” as defined by 500 large cap US stocks by 3% last quarter.

 

 

It helps to be holding some cash (in the Vanguard Treasury Money Market Fund (VUSXX) earning 2.3% and state-income-tax free). The cash isn’t represented in my You Index, but the bonds are. The bond index fund I own eked out a slightly positive return of 0.87% last quarter.

 

 

On the other hand, a small value tilt did me no favors. The fund lost 17.4% in the fourth quarter of 2018.

 

 

The only individual stock I own, Berkshire Hathaway, only lost 4.6% and the REIT fund performed better than most stock funds, recording a 6.5% loss.

 

 

The volatility was impressive. Over the course of a couple months, I saw about 5 or 6 entire years worth of future spending disappear. The day after Christmas, I got a year back, and I’ve gotten a couple more years back since.

I had a little bit of money invested back in 2000 and a low six-figure amount back in 2009. I handled those nasty drops without issue, but this was the first test I’ve had with a seven-figure portfolio.

Although the drop wasn’t (or isn’t to date) nearly as dramatic as the 40% to 50% drops in the first decade of the milliennium, but I feel like I’ve passed this test just fine. I pretty much just shrugged my shoulders, understanding this was not abnormal.

The only selling I did was matched with buying as part of some tax loss harvesting efforts. Since I’ve been hoarding cash this year, there wasn’t a lot of opportunity for me, but I did manage to take some paper losses that will become future tax deductions.

 

2018 PoF Portfolio Performance

 

When looking at the bigger picture, we can see that a decent chunk of the fourth quarter losses were taking back gains made over the course of the first 9 months of the year.

My portfolio dropped 7.5% on the year while the S&P 500 lost 6.2%.

 

 

 

The bright spot? Berkshire Hathaway, with a 3% gain on the year, moving into positive territory in the final week of the year.

 

Bonds didn’t fare so well in the increasing interest rate environment. The total bond fund dropped 2.8%. Bonds are poorly correlated with stock market returns, but not inversely correlated. They were not a safe haven in 2018.

 

 

 

International stocks were a real drag in 2018. My worst performer was the developed markets fund, losing 14.5%. Thanks, Europe.

 

 

It will be interesting to see what 2019 brings. After 6 trading days, we’re up about 3.5%. If this pace continues, I expect my portfolio to be up about 150% by New Year’s Eve. fatFIRE, here we come!

 

 

 

2018 Annual Spending

 

If you read the introduction, you’ll know that I don’t have exact figures to share.

We did have some big expenses this quarter, though. I spent around $2,500 on four flights to Costa Rica and Honduras — we’ll be going back to another medical mission in May.

And then there was the $28,000 I dropped on a 2017 Nissan Armada. The next big ticket purchase will probably be a travel trailer to pull behind the beast of a vehicle I now drive.

As of last quarter, we were on pace to spend about $66,000 this year. Two years ago we spent $62,000, last year we spent $61,000, but now we’re paying an extra $5,000 or so in property taxes this year.

The consistency was remarkable, but I blew it out of the water with the SUV. Since we tend to replace a vehicle every 5 or 6 years on average (driving two vehicles for 10 to 12 years), the cost should really be spread out over that timeframe.

I’ve maintained that we spend about $5,000 to $6,000 a month ($60,000 to $72,000 a year), and adding $5,000 to $6,000 a year for vehicle replacement to the prior years’ spending totals lands us squarely in that range.

This year, the grand total of our spending was just shy of $100,000 and next year we’ll be spending all kinds of money on building supplies and labor. Eventually, we should settle into a more predictable pattern, but I’m glad I’ve worked “one more year” several times before retiring in 2019.

 

2018 Annual Blog Performance

 

This blog is now a confident toddler, having celebrated its third birthday yesterday.

E-mail subscribers can skip to the end, as they’ve already seen this data and more. I also share site revenue data with subscribers and some details on how this site managed to clear a six-figure profit last year.

As you may know, I am donating half of my profits, and I plan to make a six-figure donation in 2019 as a result.

If you’d like to be included in the next quarterly newsletter to get all the juicy details, please subscribe in the box below. You’ll get some great bonuses, as well.

 

 

Site Statistics:

 

As of 01.09.2019, the site has 547 published posts and 47 pages. These have been visited by people in 215 countries. Still no visitors from Greenland, Svalbard, North Korea, Western Sahara, or the Republic of the Congo.

Please tell all of your friends in Greenland, Svalbard, North Korea, Western Sahara, and the Republic of the Congo about the site so we can fill in the rest of the world map!

Don’t worry about those other white spots between countries. I won’t get credit for visits from the Baltic, Black, or Caspian Seas.

 

 

As of yesterday, the site’s pages have been viewed 4,625,321 times, with more than half of those (2,637,402) coming in 2018. We’re off to a strong start in 2019 as people are attempting to fulfill their Financial New Years Resolutions.

 

 

 

 

How readers are following Physician on FIRE

If you’ve got any friends who may benefit from my content, please forward this e-mail on to them. The more people who hear the message of financial independence, the better.

 

The Top 5 Most Viewed Posts of all-time:

  1. Vanguard Backdoor Roth 2019: a Step by Step Guide (143,162 views) (has been republished with annual updates x2)
  2. Is Having a Mortgage a Great Way to Force Savings? (52,876 views)
  3. How Much Does a Doctor Need to Retire (47,954 views)
  4. The PoF Portfolio (41,873 views)
  5. Tax Loss Harvesing with Vanguard: A Step by Step Guide (36,505 views)

Tax Reform! How Physicians and the Self-Employed are Affected dropped out of the top 5.

#2 is a Saturday Selection from PIMD that had amazing traffic over a few days, presumably thanks to Google’s content suggestion in new tabs in Chrome and on Android phones. I think physicians are searching online for how much they’ll need to retire, as #3 moved up from the #4 slot last quarter.

 

The Top 5 Posts of the Quarter:

  1. Vanguard Backdoor Roth 2019: a Step by Step Guide (41,452 views)
  2. Tax Loss Harvesing with Vanguard: A Step by Step Guide (22,981 views)
  3. How Much Does a Doctor Need to Retire (14,182 views)
  4. The Marginal Value of the Backdoor Roth. Is it Worth the Trouble? (10,927 views)
  5. Credit Cards for People Who Love Free Travel and Money (9,457 views)

Only #4 was a post written in the last quarter, and a couple others (#2 and #5) were revised and republished in the 4th quarter. #6 was another new post: Physician Retires Early and is Met With Scorn.

 

Where is my traffic coming from? Top 5 referring sites all-time:

  1. White Coat Investor (107,369 sessions)
  2. Twitter (81,959 sessions)
  3. Facebook & Facebook Mobile (69,092 sessions)
  4. Rockstar Finance (40,594 sessions)
  5. Reddit (17,675 sessions)

My WCI Network partner Passive Income MD is #6 with 12,924 referrals.

 

Top Referring Sites this Quarter:

  1. Facebook & Facebook Mobile (13,170 sessions)
  2. White Coat Investor (10,777 sessions)
  3. Twitter (8,762 sessions)
  4. Bogleheads (5,682 sessions)
  5. Doximity (2,074 sessions)

I send a lot of traffic to Bogleheads. I have learned so much from my peers on the forum.

 

Where do people go from Physicianonfire.com? (mainly referred from The Sunday Best & Christopher Guest Posts): All time clicks:

  1. ESI Money (26,525 clicks)
  2. Passive Income MD (15,542 clicks)
  3. Bogleheads (13,265 clicks)
  4. Early Retirement Now (10,307 clicks)
  5. Nerd’s Eye View (kitces.com) (9,148 views)

WCI would very likely show up at the top, but some must exist that keep me from seeing those clicks in the Jetpack Site Stats. #5 is a new entry. I love Michael Kitces’ deep, detailed dives into financial topics.

 

Most clicked site this quarter:

  1. ESI Money (5,561 clicks)
  2. Passive Income MD (2,773 clicks)
  3. Bogleheads (1,915 clicks)
  4. Miss Bonnie MD (1,527 clicks)
  5. Nerd’s Eye View (kitces.com) (1,470 views)

 

What’s Next?

 

In the coming months, I’ll be further elucidating the “marginal benefit” of the backdoor Roth with some projected numbers. I plan to review a couple FIRE books coming out from popular FIRE bloggers. I’m going to review the retention bonuses offered by credit card issuers as welcome bonuses are starting to become a bit more sparse. I’ll revisit stealth wealth and write about Disney World for the FIRE crowd.

In early March, I’ll be presenting as part of a Financial Independence online conference #FIsummit. I’m looking forward to connecting with folks around the world and will be joined by some great speakers and friends including people behind Choose FI, the FIRE Drill Podcast, Montana Money Adventures, The Thrifty Couple, and Mr. Money Mustache. 

At $49 or $29 and 10% off with the code POF, you might want to consider signing up to pick up some knowledge and motivation from this talented cast of characters. And by using my discount code (POF), a portion of your purchase will help support our charitable mission.

I hope you have a great winter and if you live someplace cold like I do, you find a way to enjoy the outdoors and/or escape for a spell.

 

 

Cheers!

-Physician on FIRE

 

 

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Vanguard Backdoor Roth 2019: a Step by Step Guide https://www.physicianonfire.com/backdoor/ https://www.physicianonfire.com/backdoor/#comments Tue, 08 Jan 2019 12:22:08 +0000 http://www.physicianonfire.com/?p=3624 Set For Life

This year, I made my seventh pair of “Backdoor Roth” contributions with Vanguard. If you’ve heard of the Backdoor Roth, that’s great! You’ve been paying attention.

If not, I’ll give you a brief overview, and a number of links to additional articles with more complete descriptions of the history and important caveats.

This post has been updated with fresh screenshots from my 2019 contribution and conversion, which were completed on January 3rd and 4th, 2019. I like to contribute early in the year to start the tax-free earnings as soon as possible, but you have until Tax Day in mid-April, 2020 to complete a 2019 Backdoor Roth contribution.

Vanguard is the company I use, and tends to be favored among many index fund investors, so that’s what you’ll see. The process should be similar with other brokerages, but the screens will look different.

 

Backdoor Roth 2019: An Overview

 

Money contributed to Roth accounts does not result in a tax deduction, unlike contributions to tax-deferred accounts. Both Roth and tax-deferred accounts benefit from tax-free growth, unlike a taxable account that is subject to tax drag (which can be minimized). The Roth dollars, unlike tax-deferred dollars, will not be taxed when withdrawn.

One of the first world problems of earning a solid income is the inability to contribute directly to a Roth IRA or tax-deductible IRA.

A modified adjusted gross income (MAGI) of $203,000 for a couple filing jointly, or $137,000 for an individual makes you ineligible to contribute to a Roth IRA in 2019. Phaseout ranges where you can make a smaller Roth contribution (less than $6,00) start at $193,000 and $122,000 for married couples and individuals, respectively.

Many physicians are thus excluded from making either deductible IRA contributions or direct Roth IRA contributions. If your income might put you into or above those phaseout ranges, you’re better off using the backdoor, just in case.

Now, a high income doesn’t mean you can’t contribute directly to a Roth account of some kind. You may have a Roth option within your 401(k) or similar account, although I would argue you’re probably better off with the tax deduction offered by making tax-deferred contributions if you’re in the 32% or higher tax bracket.

 

Related: Should You Invest in a Roth or Traditional 401(k)?

 

Another important distinction is that a high-income does not prevent you from making Roth conversions. The income limits were lifted in 2010, and I took advantage by making a Mega Roth conversion when it was believed the income limits would be reinstated. However, there are still no income limits, and hence, the backdoor remains wide open.

The income limits for a traditional tax-deferred IRA contribution are even lower than the Roth contribution limits. If you participate in a workplace retirement plan, you won’t be eligible to contribute as an individual earning more than $74,000 or as a couple earning more than $123,000 in 2019.

 

Before Attempting a Backdoor Roth

 

While income limits are a non-issue for the backdoor, there exists one important prerequisite to be able to properly execute the backdoor Roth.

You cannot have money in a tax deferred IRA in your name. That includes traditional IRA, SEP IRA, and SIMPLE IRA, but does not include 401(k), 403(b) or similar acounts. If you do hold tax deferred IRA dollars, you’ll be subject to taxes when making your conversion per the pro-rata rule.

If you do have these types of accounts, you’re not hosed, but you need to have a strategy to move that money elsewhere or you can forget about the backdoor Roth.

If the balances are small and you can afford the taxes on the conversion, you can convert it all to Roth and just pay tax on the conversion. This could be a good idea for those in lower tax brackets — residents and students, for example.

Another option for employees may be to roll the IRA into an employer’s 401(k) plan. Not all plans accept rollovers, but mine does, and this was the route I chose with my SEP-IRA a few years ago. Fortunately, my 401(k) offers institutional Vanguard index funds. If I had lousy options, a rollover might not have been worthwhile.

It might also a good idea to avoid having a SEP-IRA in the first place by putting your independent contractor earnings into a solo 401(k) instead. The White Coat Investor covers some of the advantages in this article.

One way employees without a business of their own create one is by obtaining an EIN for a survey-answering business. Earning just a little 1099 money on the side qualifies you as a business owner, and you can open an individual 401(k) a.k.a. solo 401(k) for the business.

As long as the plan accepts rollovers (many do), you’ll be able to roll over traditional IRA, SEP and SIMPLE IRA money into it to circumvent the pro-rata rule and associated taxation when attempting the backdoor Roth.

For healthcare professionals, I’ve found that the simplest surveys that take the least amount of time and pay well per question asked come from InCrowd Answers.

 

Here’s how I make my backdoor Roth conversion with Vanguard:

 

Step 1: Make a non-deductible IRA contribution.

 

If you haven’t done so already, you’ll need to open a Traditional IRA. I won’t walk through all the steps, but it should be straightforward. You’ll start by selecting “Open an account” from the top of the page, leading you to a page that looks like this.

 

 

 

Since I opened mine years ago, I start by making a contribution to my existing IRA, an account that Vanguard thankfully leaves open, even when the balance is zero.

Open your Traditional IRA account, select “Buy and sell” then “Buy Vanguard Funds”

 

Vanguard_Backoor_Roth_2019_01

 

 

 

Next, you’ll tell Vanguard where the money is going (and where it’s coming from such as your checking account or a money market). I invest my non-deductible IRA contribution in the Prime Money Market Fund so day-to-day volatility is a non-issue.

 

 

 

 

 

I’ve selected Traditional IRA, and entered $6,000. If I were age 50 or older, I could contribute $7,000. You’ll be asked to consent to the investment you’re making.

 

 

Vanguard now wants to know where the money is coming from. Knowing I’d be investing in my Roth IRA shortly, I let the late-December dividends from my taxable account stay in my Federal Money Market fund, and there’s enough there to fund today’s non-deductible IRA contribution.

 

 

 

 

You’ll be asked to consent to electronic delivery of the prospectus if you’d opted to go paperless for these, which I recommend you do to save some trees. 

 

 

 

 

 

Next, you’ll have a chance to review and submit. Look over everything to be sure everything looks right.

 

 

 

Alternatively, if you’re funding the transaction via Electronic Bank Transfer (as I did in 2018 in the screenshot below), the screen may look like this:

 

Backdoor Roth 2018 _04

 

Note: In recent years, all new IRA accounts at Vanguard have been “brokerage accounts” as opposed to “mutual fund accounts.” There are several differences. The brokerage accounts allow you to purchase individual stocks and funds from other brokerage companies.

The brokerage account also has a settlement fund and a number of people have run into delays of up to 7 days when funding a brokerage account IRA via electronic bank transfer, waiting for the funds to “settle.”

Even when funding directly from a Vanguard money market fund in a taxable (non-qualified) account to their IRA brokerage accounts, friends of mine are seeing delays.

 

 

If you have been with Vanguard for some time, I recommend you keep the mutual fund account if prodded to make the transition to a brokerage account unless you are planning on investing in something other than Vanguard mutual funds in the account. Eventually, all accounts may be transitioned to brokerage accounts, but I’ll hang onto the mutual fund account as long as they’ll allow it.

 

 

Next, click Submit and Vanguard will politely thank you.

 

 

Vanguard_Backoor_Roth_2019_16

 

 

 

 

You should also receive an e-mail confirmation.

 

 

 

 

Step 1.5: Wait?

 

There is a thing called the “step transaction doctrine” that had some people believing it’s best to do nothing for anywhere from one statement cycle (a month) to a full year. Most people move on to step 2 without much of a waiting period, and I’m not aware of anyone having issues with the IRS after doing so. For more on the subject, see this article from Ann Marsh or this recent thread at Bogleheads.

[Update: Congress officially blessed the steps of the backdoor Roth as allowed under current law in 2018. See forum thread and links in the White Coat Investor Forum.]

 

 

Step 2: Convert to Roth

 

I move on to Step 2 the next day. Navigate to “My Accounts” “Balances and holdings”

 

 

 

Backdoor Roth 2018_16

 

Scroll to your Traditional or Roth IRA (or open a Roth account if you don’t have one). Click on  “Retirement contributions and distributions.”

 

 

 

 

On the next screen, be sure to select the correct tax year. Vanguard defaults to the previous year. If you’re making your 2019 Backdoor Roth contribution, be sure to select Tax Year 2019.

 

Note: if you’ve never done the Backdoor Roth, and you’re financially able, now is a great time to make one contribution for 2018 and another for 2019. If you’ve got an eligible spouse (and by eligible I’m referring to backdoor Roth eligibility), the two of you can sneak $23,000 into Roth accounts this year as long as you complete the 2018 contribution by mid-April, 2019.

 

 

 

 

 

Look for the dropdown menu in the lower right labeled “I want to…” and select Convert to a Roth IRA.

 

 

Vanguard_Backoor_Roth_2019_09

 

 

 

Next, we tell Vanguard where the money is coming from (Traditional IRA) and where it’s going (Roth IRA). I chose the REIT fund since that is a little underweight based on my desired allocation.

 

 

 

 

 

You’ll be warned that a conversion is a taxable event. This isn’t true in this case because the initial IRA contribution was a non-deductible contribution. This can safely be ignored.

New this year is a warning that the contribution cannot be reversed. Tax Reform has eliminated the ability to recharacterize (undo) Roth conversions.

 

 

 

 

 

Since it’s not actually a taxable event, do not withhold any federal income tax.

 

 

 

 

Click “CONTINUE” one last time.

 

 

Vanguard_Backoor_Roth_2019_14

 

Click “Submit,” and you’re done!

 

Vanguard will say thank you and send you an email of the transaction submission.

 

 

 

You’ll also be able to view the transaction in your Transaction history.

 

 

 

 

Step 2.5: Repeat for Spouse (if you’ve got one)

 

Step 3: Fill out Form 8606 in your 1040

 

The IRS has instructions here and the form here. I see no need to repeat them. The Finance Buff tells us it what it should look like in this post, which includes instructions for TurboTax, H&R Block, and Taxact.

 

Additional Resources

 

If you have additional questions, you may find answers in the following posts.

 

Looking for additional investment opportunities now that you’re maxing out your tax-advantaged space? Look to my Crowdfunded Real Estate Resource Guide.

 

 

Is the Backdoor Roth Worth the Trouble?

 

I would say “Yes.” If you’re considering the backdoor Roth, the $5,500 or $11,000 most likely takes the place of a portion of your investments that would otherwise be invested in a taxable account.

As long as the money remains in a Roth account, it will grow without tax drag. Currently, my tax drag is nearly 0.6%, but with the right investments (index funds) and an ability to land in the 0% capital gains tax bracket in early retirement, tax drag can be quite close to zero.

Also, as a taxable account appreciates, you can end up with substantial unrealized gains, which may eventually force you into a higher tax bracket as you realize those gains to have spending money in retirement.

Clearly, Roth money is more valuable from a tax perspective than money in a taxable account. I see no reason not to take advantage of this opportunity, as long as it exists, unless you have IRA money that would subject to the pro rata rule, and no good rollover options (such as an employer’s or solo 401(k)).

 

Related: I go into more depth on this topic in The Marginal Value of the Backdoor Roth. Is it Worth the Trouble?

 

Was this helpful? Please consider subscribing to this site. I’ll give you a spreadsheet full of useful and fun (yes, I said spreadsheet and fun in the same sentence) calculators, and you’ll know when new posts are published.

 

For more information, be sure to check out additional articles on the Backdoor Roth:

 

 

 

Have you taken advantage of the backdoor Roth? What’s holding you back?

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The Sunday Best (1/6/2018) https://www.physicianonfire.com/the-sunday-best-1-6-2018/ https://www.physicianonfire.com/the-sunday-best-1-6-2018/#comments Sun, 06 Jan 2019 08:55:30 +0000 https://www.physicianonfire.com/?p=10769 The Sunday Best
The Sunday Best is a collection of articles I’ve curated for your reading pleasure.

Expect most of the writing to be from recent weeks and consistent with the themes presented on this website: investing & taxes, financial independence, early retirement, and physician issues.

 

 

Presenting, this week’s Sunday Best:

 

I recently went underwent a diagnostic study, courtesy of the radiologist with XRAYVSN. He played a role more consistent with that of a psychiatrist, asking all sorts of questions.

 

WCI Network partner Passive Income MD takes a look at the last year and sets his sights on 2019. A Quick Recap of 2018, Goals for 2019 and How I’ll Accomplish Them.

 

A highly anticipated FIRE documentary was completed in 2018 and will be released soon in 2019. Filmmaker Scott Rieckens of Playing with FIRE shared a guest post on the experience with J.D. Roth of Get Rich SlowlyFive lessons I learned while making a documentary film about FIRE.

 

Scott collected a lot of wisdom while making that movie. Zach from Four Pillar Freedom has been Collecting Wisdom. He shares some in Life is About Finding Fulfilling Work, Not Saving Up Enough Money to Never Work Again.

 

More wisdom from Daniel Kahneman, as shared by QuartzA Nobel Prize-Winning Psychologist Says Most People Don’t Really Want to be Happy. What do we want?

 

The Wealthy Doc drops some wisdom when his children ask a simple question. Dad, Are We Rich?

 

The White Coat Investor is a wealthy doc, too. He can afford to retire early and he shares his best tips. How to Retire Early as a Doctor.

 

Do you think you understand the 20% Qualified Business Income Deduction? Stephen L. Nelson of Evergreen Small Business does. He wants to you be wary of the Section 199A Qualified Business Income Deduction Danger Zones.

 

Many of the Next Millionaires Next Door are small business owners who can benefit from that 20% deduction. After compiling 100 Millionaire Interviews, ESI Money recently shared some Millionaire Stories: How 7 Everyday People Became Wealthy and What We Can Learn from Them.

 

Millionaires need to think about estate planning. Sam, the San Franciscan Financial Samurai, has. Three Things I Learned From My Estate Planning Lawyer [That] Everyone Should Do.

 

I’ll add a Fourth Thing. Complete a legacy binder to help your loved ones understand not only where your money is, but how to log into those accounts, as well as email, social media, and other accounts, and so much more.

Chelsea Brennan’s put together an outstanding 170-page In Case of Emergency Binder for us, and she’s further discounted the low $29 price tag to kick off the New Year. The 20% discount code NEWYEAR19 expires tomorrow night!

 

Last week, I wrote up a list of Ten Financial New Year’s Resolutions to Make (and Keep) in 2019. If you do just one of these things, you’ll be better off in 2019.

 

Mr. Crazy Kicks, an engineer who retired from a career in designing computerized helicopter controls at 34, stopped by to be the latest victim in my Q&A series. Christopher Guest Post: Mr. Crazy Kicks.

 

Yesterday’s Saturday Selection was an instructive one from The White Coat Investor. Calculate Your Debt Slave Ratio. Mine is zero, I’m happy to report.

 

Make Money Playing Video Games?

 

A few months ago, a sports figure I had never heard of graced the cover of my ESPN magazine. To be more specific, it was a pale-faced “esports” figure with brightly colored hair that I had never heard of.

His name is Tyler Blevins, but the people who already knew of him, which apparently number in the millions, know him as Ninja. The ESPN article detailed what his life and income looks like, and I was reminded again when his name showed up on Money Magazine in Fortnite Superstar Tyler ‘Ninja’ Blevins Says He Made Nearly $10 Million Last Year. Here’s How.

This was in the “Everyday Money” section, by the way.

The 27-year old Topher Grace look-alike is making bank. Playing video games. To quote Ron Burgundy, “I’m not even mad. That’s amazing!”

On one hand, I do think it’s insane that a popular gamer can make as much or more in a year than most physicians will in a career. On the other hand, he’s a good example of someone who found a potentially lucrative market and figured out how to make the most of it. That’s entrepreneurship.

As a sports fan, I’m not personally excited about what ESPN is doing. This is at least the second major feature of esports that I recall in their magazine. I feel like they’re trying to create a bigger market for esports to create an additional revenue stream. NASCAR didn’t pan out, so they’re pushing something else.

But it may just be an example of skating to where the puck is going. @Ninja has 3.78 Million Twitter followers compared to my 13.1 Thousand. He’s got me by a factor of 288, not that anyone’s keeping score.

It’s hard to feel bad for a guy who exceeds my annual salary in a month at an age where I was working my tail off as a resident for a modest income. Yet, in some ways I almost do. From the ESPN article:

 

Blevins compares himself to the owner of a small business, and the only product is Ninja. He weighs every decision to leave his computer — to travel to a celebrity-heavy event like the Pro-Am in Los Angeles or even to visit family — against the financial repercussions. “When we decide whether I’m going to an event, the pay has to be there,” he says. “If it’s not paid, how much clout are you going to get? Are you going to be networking? Is that networking worth $70,000?” At the same time, there’s the constant threat of fading popularity. “The more breaks [streamers] take,” he says, “the less they stream, the less they’re relevant.”

 

It’s among the most first world of all first world problems, but he does constantly have to weigh the opportunity cost of just taking it easy versus the income he can generate each minute he spends at the computer.

 

From the Money article:

 

“The longest vacation I’ve ever taken was my honeymoon, and that was like six days,” he told the New York Times last month. “And that was devastating. It was a calculated risk.”

 

Apparently, that’s the only vacation he’s had in nine years.

I can’t relate to the magnitude of the income he has the ability to generate, but I can relate to having to make that choice of whether or not to make money on a regular basis.

First, I made the decision to work less at my primary job as an anesthesiologist.

Now I have a second income source (you’re looking at it!) and the revenue is very much effort-based. The higher the quality and the more frequent the posting, the more pageviews I get and the more dollars are generated.

How many dollars does this site generate? Subscribe to my e-mail list and I’ll tell you this week, but I don’t publish the numbers on the site.

 

 

It’s money I don’t need at this point and I donate half of my profits, but that only makes me feel more guilty when I think I might want to slow down at some point and do less.

Back to Ninja — I’ll be curious to see what happens with this guy. When asked what it would take for him to be comfortable, he answered “$80,000 to $90,000 a year.” Based on that, he’s easily financially independent from this year’s after-tax income alone. But why quit now while the getting is good?

I’m not about to.

 

A Recommended Insurance Agent

 

Loyall Group

You want an insurance agent that knows how to navigate the complex world of insurance all while keeping your unique needs in mind. With 20 years of experience, Loyall Group, is a niche insurance firm that works exclusively with physicians.

We take worry and confusion out of the equation by researching the best option for you as we represent all of the top disability and life insurance companies in the industry. We make the process of applying seamless with our paperless electronic applications. To get started, email jennifer@loyallgroup.com, or call 972.503.5125. From chaos to clarity on all matters related to insurance, we free you from insurance so you can focus on what matters.

Loyall Group Application

 

 

Have an outstanding week!

-Physician on FIRE

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Calculate Your Debt Slave Ratio https://www.physicianonfire.com/debt-slave-ratio/ https://www.physicianonfire.com/debt-slave-ratio/#comments Sat, 05 Jan 2019 08:55:32 +0000 https://www.physicianonfire.com/?p=10381 Today, I’m featuring a classic post from The White Coat Investor discussing the role of debt in your financial life.

Personally, I’m not a fan of using the word “slave” to describe a financial relationship between entities. I often read, but never repeat (well, except in this instance) the term “wage slave.”

Having to work to pay your bills or owing money to someone is very different than the slavery that was once commonplace in our nation or the human trafficking that still takes place throughout the world today. For those reasons, I shy away from the term.

Nevertheless, the origins of the terminology in relation to money go much further back. From Proverbs 22:7, “The rich rule over the poor, and the borrower is slave to the lender.” I believe this phrase is the basis for Dr. Dahle’s comparisons in the following post.

As always, this Saturday Selection originally appeared on The White Coat Investor.

Calculate Your Debt Slave Ratio

 

Sometimes it is fun to calculate a financial ratio to determine how well you’re doing compared to your goals or even to other people. One ratio that I think most physicians ought to be very aware of is their debt to income ratio (DTI).

It sometimes seems that the only time anyone ever really talks about debt to income ratios is when you’re trying to take on new debt, like a mortgage.  Mortgage guidelines change frequently, especially after major economic and real estate meltdowns partially brought on by lax lending standards. However, a typical mortgage lender likes to see a DTI of 33/38 or so.

That means that your housing expenses, including principal, interest, taxes, insurance, and HOA fees should consume a maximum of 33% of your income. If you also include other debt (like student loans, auto loans, or credit cards), then the maximum should be 38% of your income.

Let’s Call Your Debt to Income Ratio what it Really is: Your Debt Slave Ratio

 

Longtime readers know that I generally recommend that housing expenses, including utilities, should not consume more than 20% of your gross income and that I really think you should take on consumer debt pretty much…never.

However, I think it would be instructive for a physician to really consider his overall debt to income ratio, including mortgages, buy-ins, student loans, auto loans, and consumer debt. I think it would be even more interesting to adjust it first for taxes.

Instead of calling it the rather benign debt to income ratio, let’s call it the debt slave ratio. That’s really what debt is since the borrower is slave to the lender. A debt is simply spending life energy (time or money, since they’re fairly interchangeable in most situations) before you’ve acquired it.

 

How to Calculate Your Debt Slave Ratio

 

How much of your life energy is going to servicing your debt? What percentage of the time are you actually working for yourself, rather than someone else? You don’t want to be someone else’s best investment.

Consider an emergency doctor who works 16 shifts a month.  Let’s say he makes $1500 a shift, or $24,000 per month. At this income level, it wouldn’t be unusual to pay 25% of that income toward payroll, federal income, and state income taxes.  So his first four shifts pay taxes.

Next, he has $300K in student loans on a 10-year plan. The loans are at an average rate of 7.5%, so that works out to a monthly payment in the neighborhood of $3,750. That’s another 2.5 shifts a month.

Now, he lives in a place with a high cost of living, and although he limited himself to a modest 2000 foot 3 bedroom house, he ended up taking out a 4.5% $900,000 30 year physician mortgage on this property. That’s another $4,500 a month, or 3 more shifts.

He and his spouse drive two nice cars, with $400 monthly payments on each of them.  That’s another 1/2 shift.

They actually carry a little credit card debt, left over from residency, but which they haven’t yet paid off.  The minimum payments on this $40,000 debt are $200 a month, but they want to get rid of them eventually and calculated that they need to pay $600 a month just to cover the interest.  So they pay $1,500 a month, another shift.

He now gets to work the last 5 shifts a month for himself, including any retirement and college savings.  But since his income is relatively high, he finds that to be doable and his family settles into that lifestyle.

Now, however, he decides he is sick of working nights, and really doesn’t like working 16 shifts a month.  He’d like to cut back to fewer shifts, work fewer nights, or take on a job in a less busy department that doesn’t pay as well.

But he can’t.

He is a slave to the money he has already spent on education, his home, his cars, and his lifestyle. Not only must he keep his job, but he has to keep running at it as fast as he can. His debt slave ratio (not counting taxes ) is 7/12, or 58%. Counting taxes (using his net income), it is 11/16, or 69%. That seems pretty terrible to me.  Truly, he is a slave to his debt.

 

My Debt Slave Ratio

 

I thought I’d calculate my own debt service ratio. For the most part, I try to practice what I preach. Not only is my mortgage less than 2X my gross income (my general recommendation) but now that my income has grown and the mortgage has been paid down a little, it is less than 1X my gross income.

I lived like a resident for 4 years after residency (partially voluntarily and partially due to the fact that the military only wanted to pay me 1/4 to 1/3 what a private emergency doctor could make) and so I have no student loans.

There are no payments on the vehicles we bought used and we don’t carry credit card balancesWe do have a rental property, but its expenses are almost covered by the rent, and what is not is trivial compared to my overall income. So essentially, my only debt is my mortgage, a 15-year loan fixed at 2.75%. It requires about 9% of my income to service that debt. Maybe 10% if you add in property taxes and insurance. Not too bad, and certainly much less than the 69% used in the example.

But you know what? if I didn’t have that debt at all I could work two fewer days a month, or quit working nights altogether, and sometimes, after a rough shift, that looks pretty appealing.

 

[Editor’s Update: We paid off our mortgage and became debt-free in July of 2017! Still no car debt. Still no credit card balance. Did the “we’re debt-free” yell. I don’t feel too much different but it mostly feels great to accomplish a goal.]

 

Dahle Mountaineering

nothing but freedom up here!

 

What’s A Good Debt Slave Ratio for a Doctor?

 

I’m not sure there is a good ratio.  Zero is the ideal for the anti-debt, Dave Ramsey types, although even Dave is always quick to point out you should only throw extra money at your mortgage AFTER you’re putting 15% of your gross income toward retirement.

Certainly, 69% is not a good ratio. 20-30% is probably okay for a young attending who still has student loans to pay off, but I would feel uncomfortable with a ratio that high.  I get uncomfortable just looking at my mortgage statement each month and seeing how many days of my life, after-tax, I’ve already spent on this stack of twigs I’m living in. (It’s about 220, for those who care, or a little over 3000 patients.)

It is almost as if they don’t “feel” the weight of their student loan burden. It seems so light and fluffy to them that as soon as they get out of residency (and often even before they get their first attending paycheck), they stack a big fat mortgage and a car payment or two right on top of it.

I’ve noticed that far too many doctors out there are entirely too comfortable with debt. I’m not sure why that is. Perhaps it is the fact that many doctors who followed a traditional route into medical school have never had a real job and lived for years just signing promissory notes every semester, and then signing IBR statements each year in residency.

Before you know it, they’ve got a debt slave ratio of 40%, 50%, or even 75%, just like the rest of America. They have squandered their ticket (the high income of a physician) out of the rat race.

 

Prevention is the Best Solution

 

The solution to having a low debt slave ratio is, like dieting, simple, but not easy. The best solution is prevention. There are lots of ways to prevent the addition of debt on to your life.

  1. Apply broadly to medical schools (so you get into more than one) and matriculate to the least expensive (including cost of living of the city.)
  2. Minimize living expenses during school, remembering that everything you buy will really be twice as expensive by the time you pay it back.
  3. Learn to live beneath your means as a resident. You’ve already dug yourself a big enough hole.  You don’t have much of a shovel to fill it back in, but you could at least stop digging.
  4. Upon residency graduation, live your net worth, rather than your income.
  5. Don’t buy cars on credit.
  6. Don’t use credit cards for credit.

 

Related: Consider consolidating high-interest credit card debt with a 0% APR Credit Card. And pay it off as quickly as possible!

 

Perhaps, like many, it’s too late. You have a terrible debt slave ratio. Realize that you’re not alone in this situation. I’m now routinely getting emails from doctors who owe $400-500K in student loan debt alone. I recently heard from a two physician couple who owes $950,000 in student loans. You may have a car loan, a few leftover credit cards, and a fat new mortgage. What can you do about it?

 

1. Consider reversing some of the debt. Sometimes, it is easier to downsize your lifestyle than to pay off the one you’ve mistakenly purchased thinking that was what you really wanted. Have a $60K Audi costing you $800 a month? Selling it would certainly reduce your ratio.  Same with a house. Rather than trying to pay off that $1 Million mortgage maybe you should sell now while house prices are up and buy a $500K house.  Get rid of that sailboat you bought on a whim and don’t have time to use anyway and you may free up all kinds of cash flow.

 

2. Boost income, cut lifestyle, and direct the difference to the debt.  Negotiate hard for your salary, moonlight or pick up a few shifts on the side, eat out a little less, and direct that money to credit cards and student loans until you can get them down to a reasonable level.

 

3. Remember that debt is debt. Many people like to differentiate “good debt” (like student loans and mortgages) from “bad debt” like boat loans and credit cards. But you know what?  It all costs cash (your life energy) every month. Even good debt must be serviced.

 

4. Refinance your student loans. This is a no-brainer unless you are going for PSLF. There are so many options for refinancing loans that can save you thousands in interest every year.

 

5. Remember that “leverage” is overrated. Lots of people like to point out that debt at 1-3% is really like free money, at least after inflation.

The math is right.  If you borrow at 2% and earn at 6%, you’re going to come out ahead (although not necessarily on a risk-adjusted basis).  But have you considered just how far ahead?

Let’s say you are lucky and have $100K in student loans at 3% you don’t want to pay back too fast since it’s “free money”. You manage to make 6% on that money over the long run, 5% after taxes, over 10 years or so. How much money did you make by doing that? Perhaps $10K total.  Not exactly life-changing money. But would your life change in a meaningful way if you didn’t have to send $3K each month to the lender? It just might.

The biggest difference I see between physicians who are financially successful and those who are not is their attitude toward debt. Look at debt as a cancer that needs to be wiped out rather than a rheumatologic disease that needs to be managed and you’ll lead a healthier financial life.

 

[PoF: Like Dr. Dahle, I am not a fan of living with debt. I became debt-free in a slightly different manner. It wasn’t paying off a mortgage, but selling our only remaining property that had one that made me debt free by forty.]

 

 

What do you think? How high of a debt slave ratio is too high for a doctor? What did you do to keep your ratio manageable? Comment below!

 

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Christopher Guest Post: Mr. Crazy Kicks https://www.physicianonfire.com/mr-crazy-kicks/ https://www.physicianonfire.com/mr-crazy-kicks/#comments Thu, 03 Jan 2019 08:55:42 +0000 https://www.physicianonfire.com/?p=10290 It’s my pleasure to welcome “Mr. Crazy Kicks” as the latest guest to be featured in my eleven-question interview series, the Christopher Guest Post.

Stop me if you’ve heard this story before. Talented engineer makes good money, lives simply, invests in index funds, and retires in his thirties. Enjoys his days exploring new hobbies, riding a bicycle, and travels for next-to-nothing.

Oh, and he started a blog.

While it may be a familiar story, Mr. CK has some unique hobbies (shrooms), is an urban homesteader, and is making this happen in the relatively high-cost-of-living area known as Connecticut.

You’ll also notice that blogging doesn’t represent a career change for the young man. He blogs when he wants about what he wants, and the site isn’t much of an income source. And he’s clearly OK with that. You’ll find an average of about a blog post a month in 2018, the year in which he began his third year of early retirement.

Let’s get to know the homebrewing, vegetable-growing, crazy-shoes wearing FIREd guy a little better.

 

 

mr crazy kicks

 

 

What in the world is a Christopher Guest Post?

 

Inspired by Nigel Tufnel, the character portrayed by Christopher Guest in Spinal Tap, I took Mr. 1500’s ten questions, and amped them up to eleven.

 

If you’re not familiar with the scene, take 50 seconds to watch this video and enjoy the dialog between Nigel and Rob Reiner.

 

I decided I’d start a Q&A of my own. Not satisfied with just ten questions, “this one goes to eleven”. Just like Nigel’s amplifiers.

 

 

What do you do (or did you do) for a living? What do you like best about your job? If you were a physician, what type of a physician do you think you would be? Why?

 

Before retirement, I was an engineer working on helicopters. My job involved researching and designing computerized flight controls, so I got to spend a lot of time flying simulators as well as riding around in test aircraft. It was stressful at times, but a pretty cool job.

When it comes to being a physician, I’d probably choose being a radiologist. Dealing with x-rays sounds a bit less hectic, and it still involves cool technology. In fact, I worked with an engineer who went on to become a radiologist. He came back to do research work part time because he was bored being a radiologist… So maybe scratch that. How about a surgeon? I’m good with knives. Need a new heart tube?

 

[PoF: I want to retire to your pre-retirement job. Have they filled that position yet? It has been a few years now, hasn’t it? Although, I can see how being airborne in test aircraft could be stressful. “What’s the safety record of this bird?” “Well, it’s never been flown, but the simulations are promising.”

I thought for awhile I might want to be a radiologist. They do have some of the coolest technology.]

 

 

Describe your blog and tell us why your blog would appeal to a physician seeking FIRE in eleven sentences.

 

In my opinion, health, wealth, and happiness are all driven by lifestyle. This is going to look different for everyone, but I share what my early retirement lifestyle looks like. I find the most effective way to convince family and friends to achieve FIRE is by showing them how awesome it can be. I do break down our financial strategies in as simple and concise terms as possible, but I also write a lot about what our sub $40k lifestyle looks like.

Don’t worry, fatFIRE physicians, my blog isn’t about extreme frugality. It’s more about juicing the most happiness out of each dollar spent. For example, we went to Spain and Jamaica last year for free through travel rewards. I also got to spend over a month this year surfing in Costa Rica. During the rest of the year, we live in New England and have a mini urban homestead where I do a lot of DIY projects and grow much of the organic food we eat.

 

We toured Spain for free

 

Even I used to think we’d need double the amount of money to live the way we do. That’s why I share not just our budget, but also what we’re doing with all the extra free time. Physician or not, if you like tinkering, DIY, gardening, travel, and/or personal finance, I’m sure MrCrazyKicks has something that will interest you.

 

[PoF: It’s especially fun to see what people are up to several years after retiring. Based on what I’ve seen, I can’t imagine you’d ever be interested in going back to a traditional 9 to 5.]

 

What inspired you to start a blog of your own? Was there a particular event you remember that made you feel your blog had arrived? Any big plans for your blog in the future?

 

I spent a lot of time in my cubicle reading blogs about how people got to retire early and what they were doing with the freedom they gained. So when I retired, I started my own blog to pay it forward. It’s also a way for me to nudge friends and family toward FIRE.

In the early days of my retirement, the blog was a way for me to keep feeling productive, and I wrote more regularly. After over two years of early retirement, I’ve become more comfortable with being unproductive (I’ve gotten lazy.) The blog is progressing the same way my retirement is – relaxed and free form. Some days I’m thinking about money, other days I’m obsessed with my latest hobbies, and my writing reflects that.

Interestingly, most referrals to my site come from personal finance posts, while most google traffic comes from DIY posts. So I guess I have no direction except to keep putting out posts that I think will be informative and interesting.

What do you think the future of MrCrazyKicks should be?

 

[PoF: I think you’re doing it right, my man. In some ways, I find it easier to keep up with the blog when we’re home and our lives are structured, even when I am also working.

The freedom that will come with early retirement, along with the extensive travel and homeschooling aspects, might make blogging on a rigid schedule more difficult and less appealing. I can imagine slowing down and writing when I have something I want to say.

On the other hand, for every post I publish, I have two or three other good ideas that end up in the draft pile.]

 

Give me eleven posts you think Physician on FIRE readers might want to read.

 

My Journey to Financial Independence

Reflecting on Two Years of Early Retirement

The Secret to Pizzeria Quality Pizza

DIY Greenhouse Design and Build

How to Get Started Hunting Mushrooms

Brewing Crazy Awesome Beer Cheap

Easy Ways to Crush Your Energy Bills

How to Travel Hack a $6,000 Vacation for Free

Should I Pay Off My Student Loan Debt?

Is the Stock Market Getting Too High?

Efficient Investing with the Three Fund Portfolio

 

[PoF: If the stock market did get too high there for a while, it’s come back to earth. I’ve been secretly hoping that would happen before I retire and not after. 

Count me in for some of that crazy awesome beer and pizza!]

 

At what age are you most likely to retire (or at what age did you retire) from full-time work? What are you doing to help realize your retirement target?

 

I retired at 34.

Our target retirement was to move somewhere warmer and cheaper where my wife could teach at a community college (for some reason she loves school) and for me to play farmer and tinker with different projects. We’d been working toward this since we were married – about 10 years ago – and had a goal of reaching financial independence by 2020.

The biggest boost came from maxing out pre-tax retirement accounts and investing into a three fund portfolio. After streamlining our investing, we concentrated on maxing out our savings rate which eventually went over 70%. With our financial sails trimmed, we progressed much faster than expected as the bull market pushed us along.

Even though we thought Connecticut wouldn’t be the best place to retire, about 4 years ago things started falling into place. My wife found a job at a local community college teaching physics and engineering. The pay was less than half of what she was making, but we were financially secure and I told her to go for it. The teaching gig covered our expenses, and we kept socking away my paycheck. A couple of years later, we hit our target – well ahead of our 2020 goal. Wanting to join my wife in her summer off, I quit my job that spring.

 

[PoF: The returns over the last ten years or so have made it easy for many of us to meet and exceed our goals. Even the bad years haven’t been all that bad since 2009. A lot of people have been freaking out lately, but the losses from most asset classes in 2019 were in the single digits.

I’ll be curious to see how long your wife continues with the teaching gig and whether you might end up someplace warmer, eventually. It sounds like you’re happy to stay put, but it’s good to know you have options.]

 

What does an ideal retirement look like for you? What will you do with your time when full-time work is in your rearview mirror?

 

When I was working, my dream retirement was to move out into the country where I could play farmer while my wife taught at a community college. Since my wife found a position teaching in Connecticut, we never moved out to the country. Instead, we stayed in the same house that sits on a quarter of an acre. On our small plot of land, I manage a large garden, greenhouse, and chickens.

 

There is plenty to keep me occupied on our little compound

 

It’s not the sprawling homestead I originally envisioned, but urban homesteading has worked out much better than expected. We can grow more veggies than we need, and it’s more than enough to keep me busy. Now that I have some experience playing farmer, I’m realizing that I don’t want a big homestead – it’s a lot of work! I’m happy to have more free time to enjoy mountain biking and fishing while learning whole new hobbies like mushroom hunting.

Keeping things small has also allowed us to travel more than I originally planned. We have trusted neighbors close by to watch the house while we’re gone. Being in the suburbs also has the advantage of being closer to major airports. I’m finding it much more pleasant to spend winters in Costa Rica than on a homestead.

 

Snow-birding in Costa Rica has been a great addition

 

You envision an ideal retirement while working, and when it hits, it evolves and keeps evolving. I think I’m living my ideal retirement for now, but I couldn’t tell you what will be ideal 10 years from now.

 

[PoF: I’ve been fielding a lot of questions about our future plans, and my answers are intentionally vague. The vision may not match the reality, and that’s OK.

We plan on taking things one year and one adventure at a time. Sounds like a similar plan or lack thereof is working well for you.]

 

 

I’ll give you eleven sentences to dish out advice to a young physician. Any and all advice is welcome. We talk about personal finance, so money is fair game, but if you have advice on being a better doctor, a better parent / spouse / friend / human, we’re all ears.

 

The good doctor and I are on the same page when it comes to investing – a simple three fund portfolio of US stocks, International stocks, and bonds is efficient and effective. I already have more hobbies than I have time to pursue, and don’t need to waste my days researching stocks. Max out your 401k and any pre-tax savings options you have, then start making automated investments into a brokerage account.

With investing automated, all you need to do is have fun developing your own early retirement lifestyle. Try out some cheap new hobbies like learning to cook your favorite foods, brewing beer, gardening, hiking, biking, etc. The benefit of living as close to your early retirement lifestyle before retiring is that you will already know what your retirement budget will need to be.

All of this lifestyle building stuff is just as important as building a portfolio. When you leave work, you lose that part of your identity. The prestige and stimulation you found in being a doctor or engineer will be gone, and so will the co-workers that you talk to every day. It’s worth spending time along the way to develop community as well as hobbies you are passionate about.

Mrs. CK has med school hopefuls in her physics classes, and she says the most important thing she teaches them is to exercise reason and compassion.

 

[PoF: We are on the same page. Losing the career identity may be the toughest part of the transition for me. I can already hear my awkward hemming and hawing when asked the inevitable “what do you do for a living?”

You really made those eleven sentences stretch! I don’t know that anyone has put together quite as much good advice in the section given the limitations.]

 

You’ve got eleven days to visit anyplace in the world with an $11,000 budget. Where do you go and what do you do?

 

Jeez, the last time we almost spent that much money on a vacation was for a honeymoon to Fiji. We changed our minds last minute and went on 4 separate honeymoon vacations to Hawaii, the Keys, Newport, and Jamaica.

It would be tough to get ourselves to spend that kind of dough in 11 days, so we’d have to go to the other side of the world. Maybe fly to Australia and splurge on a big beach house – explore the surf breaks and the seafood. There would be plenty of cash for good beer and grillables so we’d invite some friends. Up for a beach party?

 

[PoF: I got my swim trunks. And my flippy floppies.]

 

 

Name eleven beverages you enjoy. You can be as general or specific as you like.

 

I’m a simple man, beer and water make up about 95% of what I drink. That means we are going to have to get pretty specific here…

Tap water – ours is pretty darn good
Filtered tap water – even better than tap
Carbonated tap water – homemade from my keg
IPAs – flavor beers
Saisons – funky flavored beers
Belgians – good people, but I mean the beer
Light lagers – it’s important to hydrate
Green tea – it must be cold outside
Mint tea – still cold outside
Oolong tea – is that what’s at the Chinese/sushi restaurants?
Black tea – we must be out of beer

 

[PoF: That last line reminds of a great line from Dazed & Confused. “I came here to do two things. Kick some a** and drink some beer. Looks like we’re almost out of beer.”

I’ll bet those drink drops would be pretty good in carbonated keg water. I used to keep some water on tap like that, but it takes such a higher pressure for good soda water compared to beer. Like triple the PSI.]

 

Now, eleven foods.

 

There’s a lot more diversity in what I eat. I love all kinds of food, and 11 is a short list!

Braised Beef
Pizza
Pho
Korean BBQ Ribs
Burgers
Tacos
Sushi
Stuffed Cabbage
Curry Goat
Fried Chicken
Escovitch Fish

 

[PoF: How many of these will you be serving at the beach party?]

 

How did you first learn about PhysicianonFIRE.com? What one piece of advice do you have for

 

I met the doctor when he stopped by my site to welcome me to early retirement.

It’s hard to give advice to one of the most successful personal finance bloggers out there. Whatever you’re doing, doc, keep it up! If anything I should be seeking your advice. I have one suggestion though: how about giving some of those PoF beer coozies to Christopher Guest Post guests? You know, to help with the advertising 😉

 

[PoF: All you had to do was ask! I can hook you up with a beer koozie anytime. You really should make the trip down to D.C. for FinCon this year, though, so we can say Cheers in person.

Thank you for humoring me and giving us an insider’s look at what it’s like to be retired and living a good life as a thirty-something.

[virtual] Cheers!]

 

 

Interested in hearing how other top personal finance bloggers have answered these questions? Check out a few of these Christopher Guest Posts:

 

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