Taking the Financial Initiative

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Nathaniel Minnick, DO, St. John Hospital and Medical Center, Detroit, MI

Every year the cycle restarts. Newly appointed senior residents begin to search for jobs, comparing locations, group sizes, and numerous other variables. Prior to graduation, residents should have some basic understanding of investment topics in order to prevent mistakes in the future. This article introduces a few concepts with which residents should familiarize themselves in order to establish their financial futures. Senior residents should begin learning about retirement account options in benefits packages. For the junior residents, there are some avenues that can be taken advantage of now that will no longer be an option with an attending-level salary. Few, if any, medical schools teach personal finance. The sources and references in this article will provide a base upon which all residents can build a stable financial future.

Average Growth is Ok
Simplistic definitions
A share of stock represents fractional ownership of a company that can be purchased by an individual or group.

An index is a tracking of the cumulative gains or losses of many stocks. The Dow Jones Industrial Average tracks 30 specific stocks, whereas the S&P 500 tracks 500 stocks.

A mutual fund is a giant pooling of money from many investors. The pool becomes spread among different invest­ments, of which the individual investors hold a certain share or percen­tage. Funds represent investments in stocks, bonds, real estate, or even other mutual funds.

A mutual fund that attempts to mimic a stock market index is called an index fund. For example, an S&P 500 index fund will course with the S&P 500. When the S&P increases, so does the value of the index fund. A pure index fund holder will not significantly beat the relative index, but will not underperform it either. Under-performing the market results in lost opportunity.

Start here: All residents should read “The Bogleheads’ Guide to Investing,” which breaks down different investment types for novices in a simple and understandable way.1 A “Boglehead” is a person who follows the advice of Jack Bogle, the founder of The Vanguard Group, one of the largest financial firms in the world. Bogle pioneered index funds as a way for individuals to hold a large number of stocks through a mutual fund. This reduces individual risk of loss, allows investment portfolios to require minimal time for maintenance, and eases tax burdens from the investment. The knowledge from the Boglehead book can be parlayed into a resident’s current 401(k)/403(b) plans and future accounts. One can practically read it on a round-trip flight during a job interview.

Fund buddies: The Bogleheads have an open online forum providing financial advice, answers to questions, and news discussions consistent with the Boglehead philosophy of passive investing.2

An Option in Your Hands
Employer plans: Employers provide their employees 401(k) or 403(b) plans for retirement contributions. For-profit companies offer a 401(k), and non-profit employers are mandated to provide a 403(b). Employees elect to contribute a certain amount of their paycheck to the plan, and often the employer provides a “match” to a certain limit. Index funds may exist in the plan in one form or another. The employee simply chooses the funds in which they’d like their money placed.

The default allocation of contributions does not reflect age or need. Typically, the default may not be appropriate for a resident. Accessing the account and changing the allocation toward lower cost funds and/or index funds should be a priority upon contributing.

A few variations on employer-type plans exist, but by and large the 401(k)/403(b) options encompass the majority of plans offered to a resident. Independent contractors have different plans available.

A Fruitful Container: The Roth IRA
Anyone can create an account for an individual retirement arrangement, or IRA. This arrangement exists outside of employer-provided plans and requires the individual to maintain the account through a broker. Common brokers include Scottrade, Vanguard, or E*Trade, though the list of providers is extensive. There are two types of IRAs: Roth or  traditional.

Watch this: Blogger Kevin McKee excep­tionally explains the difference between the two types of IRAs and the value of a Roth in a YouTube video.3 Searching YouTube for “What is a Roth IRA” yields his “Mr. Thousandaire” video as one of the first results.4The video does more justice than any text can. After watching it, you should have an understanding of “pre-tax” money, which traditional IRAs and 401(k)/403(b) plans utilize, and “post-tax” money, the type put into a Roth.

An IRA allows investments in nearly anything, dependent upon where the account exists. The most flexible accounts can be found through an online stockbroker or mutual fund company. Aforementioned index funds provide a simple and low-maintenance option to invest within a Roth. Billionaire Warren Buffet recommends Vanguard index funds.5

Compound it: For most residents, contributing to a Roth while in residency makes financial sense. A single resident with no side income, or even some moonlighting income, is likely eligible for full Roth contribution. An IRA has a maximum annual contribution limit that cannot be exceeded ($5,500 for 2014), but no minimum amount exists unless specified by the brokerage firm.6

Developing a habit of saving money now increases the likelihood of hyperbolic account growth from continued contribu­tions and compounding interest. Under­stand the concept of compound interest as a function of time. This remains critical to investments, notably those with dividend payments. The earlier you start, the more
compounding can increase your investments.

Learn about the backdoor:Problem­atically, income restrictions exist for contributions to an IRA; most attending salaries are too large to allow contributions into a Roth.7 There is a conversion trick known as a “backdoor Roth” that allows Roth contributions for high earners, but it requires a decent knowledge level in order to avoid tax penalties. Some preparation as a resident for future “backdoor conversions” can help save money in potential taxes if existing traditional IRAs exist in the portfolio.8

Finding a date: Roths can be opened and contributed to at any time. Contributions for each year can be made up until income tax is filed. For fiscal year 2014, for example, individuals have until April 15, 2015 to contribute based on their 2014 income. On April 16, or after filing a return, contributions apply toward the 2015 fiscal year. An increase in income, such as graduation from resident to attending, can create problems if income exclusions apply.

Choosing a Target
Choosing between Roth or 401/403 con­tri­­bu­tions as a resident requires attention to priorities. A 401/403 with an employer match is “free money.” However, one can­not remove contributions from these accounts without penalties. If the funds in the account have high expense ratios, principle erosion from fees plays into the choice. In some circumstances, the account may have poor funds in general. Check with the account’s firm prior to contributing, asking for a list of available funds.

A Roth requires a more hands-on approach since the individual maintains the portfolio. Contributions can be removed without penalty, but penalties will be assessed when withdrawing appreciated interest or any gains. Therefore a Roth, with the resident’s low tax bracket, acts as a complex bank account. Withdrawing contributions requires significant paperwork, but if a catastrophe occurs, money is more accessible as opposed to a 401/403.

Insure Your Talent
The ally: James Dahle, MD, blogs about physician personal finance.9 Earlier this year, he published a financial “how-to” book titled The White Coat Investor (WCI), which is also the title of his blog.10 Both the blog and the book aim to educate physicians about financial topics. In addition to this, the WCI offers a physician-centric independent view on disability and life insurance. Often, insurance salesmen approach residents in order to discuss life or disability products. This leaves a resident’s knowledge limited to whatever the salesman tells them. The WCI familiarizes physicians with the background and basics of different insurance types in order to avoid costly mistakes. Prior to purchasing life or disability products, read his posts to make sure that the salesmen are giving you a “fair shake,” as he calls it.

Owing Your Master
Student debt: Perhaps the most complicated financial aspect for residents and attendings revolves around paying off debt. How to address the issues and the time frame for repaying loans are frequent concerns. This topic extends well beyond the scope of a single article. Paying off accrued interest monthly remains an imperative approach toward loans while in residency. To avoid a required payment on the principle, you can enter residency forbearance through the vendor. This status allows a resident to have zero required payments on their graduate student loans.

Interest on the loans still accrues, so paying off the monthly interest keeps a level ground. Paying against the principle rests upon the individual’s situation. Residency forbearance does not count toward programs such as Public Service Loan Forgiveness.

Upon graduation from residency, two firms can turn government loans into private loans with a lower interest rate. They are SoFi and DRB.11 Before consolidating with one of these private firms, full knowledge of the disadvantages of reconsolidating should be weighed, such as forgiveness programs offered under federal rules.

Tap Your Favorites on the Weekend
Who to turn to: Using 30 books to study for the MCAT, Step 1, or in-service exams causes diminishing returns, versus having one or two that fit an individual’s style. The same goes for online financial advice. Ubiquitous investment advisors, blogs, and magazines offer opinions that create a lot of “noise.” Finding a few respected finance blogs to read on a couch on Sunday mornings will keep financial literacy up to date and help with reducing mistakes.

Resourses to Get You Stared
White Coat Investor www.whitecoatinvestor.com
As mentioned, an EP maintains the blog, with occasional guest posts from lawyers, independent insurance salesmen, and others. One post has comments continuing two years after the original posting.

My Money Blog www.mymoneyblog.com
This is a blog by a “DIY investor” who writes about a variety of financial subjects, particularly comparisons of retail services. His blog covers all aspects of personal finance, not just investments.

The Oblivious Investor www.obliviousinvestor.com
A focus on investment accounts, it has a great end-of-week roundup of other financial blogs highlights.

Rick Ferri www.rickferri.com/blog
An investment advisor, author, and index-fund champion with posts geared toward the serious individual investor, but often with posts applicable to all.

If You Don’t Spot the Sucker in the Room…
Comprehending financial basics as a resident can prevent costly mistakes in the future. An advanced degree does not qualify a physician to have tacit knowledge about investing. The simplicity of index funds in a “three-fund portfolio,” and an understanding of compounding interest can yield hundreds of thousands of dollars over 20 years.12,13 A primer on life and disability insurance can save hundreds to thousands of dollars per year. Self-educating while in residency needs to happen in order to prevent mismanagement and poor investment choices over the course of a career, and the hope for an on-time retirement.

Disclaimer: This article is only for information. Consult with your tax advisor for personalized guidance. The resources and blogs listed here are opinionated suggestions for which the author receives no compensation.

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