The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: PencilThinMustache on April 22, 2014, 03:57:20 PM
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greetings fellow Mustachians and aspiring muctachians. I have been following the blog for a about a year now and would like to present my scenario to see if I can get any sage advice from any of you like minded folks. I'll start with my stats and then investment dilemma.
Im a physician in my early 30's and have no consumer debt, but have 200k+ in student loans and have absolutely no savings of any kind for retirement (do have about 20k cash in case emergency). Wife and I have managed to adopt a "pencil thin mustachian" life, with post-tax savings rate of about 50%. I can contribute to 401K and IRA (but havent yet) and my employer maxes my HSA annually
from reading here and elsewhere it seems that the first thing I should do is stuff the max into 401k and IRA/spousal IRA. Anyone disagree? At my current income level I can do that and still have leftover of about 3k per month to "save" or pay towards debt. (not spend on lavish goods / cars / trips)
So my question: after maxing IRA and 401K contribution, what to do with leftover? My current thoughts revolve around starting 529 college plan for my son, paying more towards mortgage (4%), paying down higher interest loans (I have about 100k at 6%, 50k at 4% and 5k at 2%), or starting a traditional taxable brokerage account. I know this is a very different dilemma than most, so I appreciate your advice in advance
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Hey, there...good to see other young, deeply in debt providers out there. If I had to post my stats up here, they would be almost identical to yours. My current strategy is to max out my 403b contributions, live low to the ground and try to funnel 3000-4000 per month against my student loans. Once the highest interest rate loans are taken care of, I may start doing more investing on the side (about 1/2 of mine are hovering around 2.3%). The 6.8% ones must die.
I'm with you, though...I would love to hear from any senior physician mustachians who have navigated the health care landscape.
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Greetings
I am a CPA who works almost exclusively with physicians like yourself.
Beyond maxing out the 401K, and IRA if you’re eligible, I have been advising clients to max out the HSA each year and use that as another vehicle for investing in retirement. The idea being, you take the tax deduction when you put the money in and if you can afford to pay for health related costs out of pocket, do so and invest the HSA assets and allow them to grow tax free. You can withdraw down the road to reimburse you for prior health care costs, or withdraw funds when you retire similar to an IRA.
When paying down debt consider taxes. Home mortgage interest is deductible, but when you’re a high income earner, student loan interest is not. Higher income means a higher tax rate so the deduction from the mortgage interest can be valuable causing the effective interest rate to be a lot lower than the stated rate.
Here's a short article that describes the HSA idea if you're interested:
http://www.forbes.com/sites/baldwin/2014/01/06/turn-doctor-bills-into-retirement-income/
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If I were in your shoes I would probably max out traditional 401(k) and IRA contributions, then put every last cent toward that 6% student loan. Kill that one with fire. I generally say any debt with an interest rate of at least 5% should be prioritized pretty highly. Loans in the 3-4% range are more of a gray area. You'll probably do better investing in the stock market instead of paying these down, but paying them off will decrease your required monthly expenses. This adds a little bit of an extra margin of safety into your life if you were to become unemployed or something. You might as well hang on to that 2% debt for as long as you can.
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Is your hospital a nonprofit? You might be able to get your loans forgiven if it is.. If that is the case, get on the extended repayment plan (25 years) and get them forgiven after you have worked 10 years.
If not:
401k to get the max match if you do get one
If you are close to the lower tax bracket put some more into your 401k/T-IRA to drop it down if not, go after your student loan debt.
Don't pay any extra for the mortgage - if you have plenty of equity in your house, get a HELOC and use that to pay off some debt.
I just did a HELOC for student loan debt, saving 1.8% and get the tax break on the loan vs no tax break for the student loans.
I would kill the 5k at 2% just because I would feel like it is laughing at me and I would feel better having it gone. Then go after the 6% student loans.
No one will guarantee that the markets will go up for the next 2-4 years, but they will guarantee that you will be losing 6% in interest.
And maybe, just maybe, you will time the market right when you have all of your debt paid off and go on a crazy shopping spree when the market is down.
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If I were in your shoes I would probably max out traditional 401(k) and IRA contributions, then put every last cent toward that 6% student loan. Kill that one with fire. I generally say any debt with an interest rate of at least 5% should be prioritized pretty highly. Loans in the 3-4% range are more of a gray area. You'll probably do better investing in the stock market instead of paying these down, but paying them off will decrease your required monthly expenses. This adds a little bit of an extra margin of safety into your life if you were to become unemployed or something. You might as well hang on to that 2% debt for as long as you can.
Solid advice. First money should fund 401k, then ira's for you and the wife to do backdoor roth ira conversions. Also keep max funding HSA.
Don't forget adequate insurance though. You should not think about investing until you have adequate life and disability insurance. Physicians have a different risk profile than many professions. You spend a lot of time and money training, so in the early part of your career you have much human capital remaining and this needs to be protected. Life insurance is cheap, disability insurance is not, but you need it. You can ditch it as your stache grows.
I would keep a 4% mortgage and 2% loans forever. Attack the 6% debt.
If you know you will save money for your kids college then invest in a 529 up to the level where you get a state income tax deduction - each state is different so research it.
I would pay off the 4% student loan before investing in a taxable account but I can see both sides of the argument.
If you are in a private group investigate the possibility of some kind of cash balance/defined benefit plan for the tax deferral.
Check out this website:
http://whitecoatinvestor.com/new-to-the-blog-start-here/
Hundreds of articles dedicated to physician related financial issues. Great site.
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Thanks for the great advice all. I am working on the IRA and 401K now. the main thing I take away from your comments is that the last thing I should put money towards is the mortgage, b/c I will always be able to deduct that interest no matter my income.
@PhxMustachian: Interesting advice about funding but not touching the HSA...I wasn't aware that this can be tapped at retirement for anything other than qualified medical expenses. Is this correct?
@seattlecyclone: I agree about killing the debt at 6.8%. Its really a shame that the government lends money at such confiscatory rates for education. I have had credit cards, unsecured lines of credit, and auto loans with lower APRs. Unreal...
@GoldenStache: appreciate comment about HELOC but no good for me since I don't have much equity, just closed in December.
@frugaldoc: appreciate the link. great trove of resources there. I will explore the 529 a bit more but fortunately here in FL there is no state tax, so no deduction!
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Are you an employee or, like so many physicians, an "independent contractor"? If so, could you put any additional monies away in a SEP-IRA or other vehicle?
My ex worked for a large HMO but was an independent member of the physician's group - he had a 401 k but also a Keogh. I'm in private practice and I contribute to my IRA, but if I was in a position to put more money away right now, I'd probably open a SEP.
I agree with getting your disability and life insurance in place. And with paying off your student loans, at least the high interest ones. What you really want to achieve is FLEXIBILTY - low enough monthly bills and high enough savings to be able to make any future choices about career based on what YOU want to do, not what you HAVE to do. So I would max out your current retirement vehicles, pay off the student loans (except maybe that 2%) and then start investing in some accessible vehicle up to the amount it would take to pay off your house.
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Thanks for the great advice all. I am working on the IRA and 401K now. the main thing I take away from your comments is that the last thing I should put money towards is the mortgage, b/c I will always be able to deduct that interest no matter my income.
@PhxMustachian: Interesting advice about funding but not touching the HSA...I wasn't aware that this can be tapped at retirement for anything other than qualified medical expenses. Is this correct?
@seattlecyclone: I agree about killing the debt at 6.8%. Its really a shame that the government lends money at such confiscatory rates for education. I have had credit cards, unsecured lines of credit, and auto loans with lower APRs. Unreal...
@GoldenStache: appreciate comment about HELOC but no good for me since I don't have much equity, just closed in December.
@frugaldoc: appreciate the link. great trove of resources there. I will explore the 529 a bit more but fortunately here in FL there is no state tax, so no deduction!
One more consideration, Florida has a huge homestead exemption so paying down a mortgage will effectively shield assets from creditors, whereas money in a taxable account is exposed. Depending on your malpractice coverage and specialty this may be something to consider.