Chris Kimmet

  • Financial Planning, Home Buying, Loans

    What is a Physician Mortgage Loan?

    Medical professionals, particularly those just starting their careers or with significant student loan debt, often find it challenging to qualify for a traditional mortgage. However, many lenders now offer a physician mortgage loan, which is specifically designed to meet the unique needs of doctors and other medical professionals.

    Physician mortgages offer lower down payment requirements, more flexible underwriting guidelines, and higher loan amount limits, making them an attractive option for many physicians. In this article, we’ll explore the details of physician mortgage loans, how they compare to traditional loans, who qualifies for them, and the pros and cons you should take into account when considering this type of mortgage.

    Key Points

    • A Physician Mortgage Loan can be a great option for medical professionals, especially those at the start of their career, with significant student loan debt, and future income growth.
    • Doctors, Dentists, and Veterinarians along with other medical professionals can qualify for a physician mortgage loan.
    • Physician mortgages don’t require 20% down payment to avoid PMI and have different underwriting requirements allowing borrowers with hefty student loan debt to qualify.

    Details of a Physician Mortgage

    A physician mortgage is a home loan specifically designed for doctors and other medical professionals. Unlike traditional mortgages, physician mortgages typically require little or no down payment, which is attractive for physicians who are just starting their careers and may not have a large amount of cash on hand for a down payment. Additionally, physician mortgages may offer more flexible underwriting guidelines, taking into account the significant student loan debt that many medical professionals carry.

    One of the most significant benefits of a physician mortgage is that it typically offers a fixed interest rate for the life of the loan. This means that borrowers don’t have to worry about fluctuations in interest rates over time, which can make budgeting and financial planning more comfortable and predictable. Additionally, physician mortgages often have fewer fees and closing costs than traditional mortgages, which can save borrowers a significant amount of money.

    Differences between a Physician Mortgage and a Conventional 30-Year Mortgage

    The primary difference between a physician mortgage and a conventional 30-year mortgage is the down payment requirement. While conventional mortgages typically require a down payment of 20% or more to avoid paying Private Mortgage Insurance (PMI), physician mortgages often require little or no down payment without a requirement for PMI.

    Avoiding PMI is an awesome benefit that can save borrowers hundreds of dollars a month. Banks see borrowers that can’t afford to put down 20% of the house purchase price as “riskier” and require PMI payments as an additional bit of insurance in case of default. Physician Mortgage Loans do away with PMI entirely, allowing you to purchase a house with as little as a $0 down payment.

    Another significant difference with physician mortgages is that they may have more flexible underwriting guidelines. One factor lenders consider is your debt to income ratio (DTI), how much your debt payments are as a percentage of your income. This includes car loans, credit card debt, other property loans, and your student loans. Most borrowers have a DTI limit around 40%, meaning that if your total debt payments with the new loan will be above 40% of your gross income you they won’t qualify you for the loan.

    This can be a huge hurdle for getting a conventional loan considering the significant student loan debt that many medical professionals carry. Lenders With a physician mortgage the lender may exclude student loans from your DTI ratio allowing you to qualify for a larger loan.

    Another feature of physician mortgage loans is they do not have the same limits as conventional loans. With a conforming conventional mortgage the most you can borrow is $726,200 or $1,089,300 in high-cost areas. Physician mortgage loans don’t have this same limit, potentially allowing you to borrow more money for your home purchase.

    Just because you can borrow more though doesn’t mean that you necessarily should, you should always take into account the effect on your cashflow when purchasing a home. Staying within or below your means can help you weather future financial emergencies, or take advantage of future opportunities that you might not be able to if you are spending as much as you earn each month.

    Differences between a Physician Mortgage and an Adjustable-Rate Mortgage

    An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate can change over time, based on market conditions. While ARMs can be attractive for some borrowers who want lower initial monthly payments – and they have seen a surge in popularity lately with the rise in interest rates – they can also be risky, as borrowers don’t know how much their monthly payments will be in the future.

    A typical adjustable-rate mortgage is a 5/1 ARM where the mortgage interest rate is set for the first five years of the loan and then changes every year thereafter based on changes in market rates. These can be a good option for a borrower that plans to refinance their mortgage at some point within the fixed portion of the loan, but no one can predict what rates will do in the future and you shouldn’t bank on being able to refinance at a lower rate.

    In contrast, physician mortgages offer a fixed interest rate for the life of the loan, providing borrowers with greater financial stability and predictability. Additionally, physician mortgages typically require little or no down payment without mandating the borrower pay PMI, while an ARM has similar requirements as a conventional mortgage when it comes to putting 20% down on the purchase upfront to avoid PMI.

    Who Qualifies for a Physician Mortgage?

    To qualify for a physician mortgage, borrowers typically need to be medical professionals, which includes doctors, dentists, veterinarians, and other medical professionals. Additionally, lenders will require proof of income, employment, and education, as well as a strong credit score.

    Should You Consider a Physician Mortgage?

    When considering a physician mortgage as an option, borrowers should consider several factors, including:

    1. Interest rates: While physician mortgages often offer a fixed interest rate for the life of the loan, they may have higher interest rates than traditional mortgages due to the lower down payment requirements and more flexible underwriting guidelines.
    1. Monthly payments: Because physician mortgages may offer a lower down payment and a higher interest rate, they may require higher monthly payments than a traditional mortgage. Borrowers should ensure that they can comfortably afford their monthly mortgage payments over the life of the loan.
    2. Closing costs: While physician mortgages may offer lower closing costs than traditional mortgages, borrowers should still factor in these costs when considering whether a physician mortgage is the right option for them.
    3. Future plans: Borrowers should consider their future plans when deciding whether to apply for a physician mortgage. For example, if they plan to move within a few years, a physician mortgage may not be the best option. Because of the low (up to $0) down payment required borrowers do not start out with much if any equity in their home and may not recoup their closing costs and other fees upon selling.
    4. Other responsibilities: As a young physician your primary focus will be on growing your career and being successful in your profession. Owning a home brings many additional responsibilities, expenses and distractions. Renting can be a good choice early on in your career, so it’s good to have a clear understanding of your goals when buying a home.

    Pros and Cons of a Physician Mortgage

    Pros:

    1. Lower down payment requirements: Physician mortgages typically require little or no down payment, which can be attractive for physicians who are just starting their careers and may not have a large amount of cash on hand for a down payment.
    2. More flexible underwriting guidelines: Physician mortgages may have more flexible underwriting guidelines, taking into account the significant student loan debt that many medical professionals carry.
    3. Larger loan limits: Physician mortgages don’t have the same limits as conventional conforming mortgages meaning that you could potentially borrow more than with a traditional mortgage.
    4. Fixed interest rates: Physician mortgages typically offer a fixed interest rate for the life of the loan, providing borrowers with greater financial stability and predictability.

    Cons:

    1. Higher interest rates: Physician mortgages may have higher interest rates than traditional mortgages due to the lower down payment requirements and more flexible underwriting guidelines.
    2. Limits on residency types: Some lenders won’t allow you to take out a mortgage loan on a condo or on a second residence, such as a vacation house or rental property.
    3. Limited lender options: Physician mortgages may only be available through certain lenders, limiting borrowers’ options.

    Wrap Up

    Overall, physician mortgages can be an attractive option for medical professionals who are just starting their careers or have significant student loan debt. They offer lower down payment requirements, more flexible underwriting guidelines, fixed interest rates for the life of the loan, and lower closing costs. However, physician mortgages may have higher interest rates than traditional mortgages, and eligibility requirements that limit borrowers’ options. Ultimately, borrowers should carefully consider their financial goals and future plans when deciding whether a physician mortgage is the right option for them.

  • 403b, 457b, Financial Planning, Investing, Retirement Planning

    What are the different OSU Retirement Plans?

    When starting a new job, you often have many new things to learn and get used to: new commutes, new coworkers, different policies and procedures. Being successful in your new position requires you to get up to speed as quickly as you can. An item that’s often pushed off until later, but one that’s crucially important to achieving your long-term goals is understanding and maximizing your new retirement plan benefits.

    The governmental, non-profits, contractors, and large health systems that make up the majority of employers in the healthcare world offer a wide array of benefits and retirement plans. The variety and seeming complexity can be overwhelming to anyone, whether you are a med school grad starting your first residency or an experienced PA making a move to a different hospital.

    Ohio State University, in Columbus Ohio, provides a good example of this complexity. As a state university they employee faculty, university and hospital staff, as well as student employees. The subsequent variety of retirement plans offered can confuse even veteran healthcare workers with years of experience.

    This variety can be confusing at first, but in the end provides a great opportunity for employees to contribute and save a ton for retirement in multiple different accounts. After reading this post you should have a better idea of what’s available when it comes to choosing an OSU retirement plan.

    Key Points

    • As an OSU employee you can fully contribute to three separate retirement buckets (and in some cases even a fourth!).
    • For your “primary” retirement account employees choose between a pension version, for most staff this is OPERS the Ohio Public Employees Retirement System, or a defined contribution version the ARP the Alternative Retirement Plan, similar to a 403b.
    • All employees can also contribute to a 403(b) plan and/or a 457(b) plan.
    • Ohio State Employees don’t pay into Social Security. Your primary retirement account (OPERS, STRS, or the ARP) are meant to replace your social security benefit.

    OSU classifies three types of employees: Faculty, Staff, Student

    OSU places employees into three buckets: Faculty, Staff, and Student employees. Which bucket you fall into affects which OSU retirement plan you have access to. There are also scenarios where you could fall into multiple buckets. A surgeon at the OSU medical center would be classified as a staff employee, but if they were also teaching a course outside of their normal duties they could be classified as faculty as well.

    Staff Employee Retirement Plans

    Staff Employees will be automatically enrolled in the Ohio Public Employees Retirement System (OPERS) for their primary retirement plan, or they can instead opt out of participating in OPERS and choose the Alternative Retirement Plan (ARP) for their primary OSU retirement plan.

    Staff can also contribute to a 403b and/or 457b. OSU calls these their Supplemental Retirement Accounts (SRA).

    Some staff, where their salary exceeds the IRS and Ohio retirement system limits may even be able to contribute to the Retirement Continuation Plan (RCP)/415(m).

    Faculty Employee Retirement Plans

    Faculty Employees will be automatically enrolled in the State Teachers Retirement System (STRS) for their primary retirement plan, or they can instead opt out of participating in STRS and choose the Alternative Retirement Plan (ARP) for their primary OSU retirement plan.

    Faculty can also contribute to a 403b and/or 457b. OSU calls these their Supplemental Retirement Accounts (SRA).

    Some faculty, where their salary exceeds the IRS and Ohio retirement system limits may even be able to contribute to the Retirement Continuation Plan (RCP)/415(m).

    Student Employee Plans

    We will focus mainly on the retirement plans available to OSU Faculty and Staff in this post. Student Employees have access to similar OSU retirement plans and can choose to enroll or opt out of OPERS as well as contribute to the Supplemental Retirement Accounts.

    Ohio Public Employees Retirement System (OPERS) Plan

    • Available to Staff employees
    • Can be like a pension or a 401k/403b depending on your choice
    • Employees can opt out and choose the ARP instead

    Staff employees can choose to participate in the OPERS plan. The base version of this plan is a defined benefit plan where employees receive retirement benefits calculated using their salary and years of service.

    Employees can also participate in a member-directed version of OPERS and choose their own investments. In this version the employee assumes all of the risk and their retirement benefit is based on the growth in their investments.

    In either plan employees contribute 10% of their eligible compensation to the plan and OSU contributes 14% of their eligible compensation. In the member-directed version, not all of the 14% employer contributions ends up in the employee’s account. 7.5% goes to their OPERS account, 4% goes into their OPERS Retiree Medical Account (RMA), 2.24% goes into the OPERS Traditional Pension Plan to fund past liabilities (required by law), and 0.26% goes towards administrative expenses.

    There are also different limits on the amount that can be contributed to each of these accounts. The member-directed limit is pretty straightforward. The maximum that can be contributed each year is $66,000 combined from employer and employee contributions.

    For the OPERS pension plan, the limit on contributions is based on your salary and when you were hired. Employees hired prior to 1994 get contributions based on up to $490k in earnings, and if you were hired after 1994 you make contributions based on up to $330k of your earnings.

    State Teachers Retirement System (STRS)

    • Available to Faculty employees
    • Can be like a pension or a 401k/403b depending on your choice
    • Employees can opt out and choose the ARP instead

    The STRS retirement plan is very similar to the OPERS plan offering a defined benefit pension version and a defined contribution version, but unlike OPERS an employee can choose a combined plan that has pension and self-directed accounts.

    OSU and the employee both contribute 14% of their eligible salary to the STRS plan. In the member-directed STRS plan 11.09% of employee contributions go to your STRS account and 2.91% goes to the STRS plan to fund past liabilities (required by law).

    The total contribution limits ($66,000) and the eligible compensation limits ($490k if hired before 1994, $330k if hired after) are the same as the OPERS plan as well.

    Alternative Retirement Plan (ARP)

    • Available to both Faculty and Staff employees
    • No pension option – only a defined contribution plan like a 401k/403b

    If an employee doesn’t want to enroll in the OPERS or STRS plans they can set up an account with the Alternative Retirement Plan instead. The ARP only offers one plan type – a defined contribution plan similar to a 401k/403b.

    Contributions to this plan are very similar to what an employee would contribute to their OPERS or STRS plan. Employees contribute 14% of their pay and OSU contributes 10% for staff or 14% for faculty. A portion of your employee contribution goes to OPERS or STRS as a mitigating rate to mitigate any negative impact on the state retirement system. The total employee/employer contribution limit is $66,000.

    Additional Retirement Plans employees have access to

    Along with an employee’s primary OSU retirement plan – whether that is OPERS, STRS, or the ARP – OSU employees also have access to a few supplemental retirement accounts. This is great news for employees looking to sock away even more money for retirement accounts as these supplemental accounts exist in their own retirement buckets and you can contribute to all of them at the same time.

    Supplemental Retirement Accounts (SRA) – Traditional and Roth

    • 403b plan (Traditional and Roth versions)
    • 457b deferred compensation plan (Traditional and Roth Versions)
    • Allows an additional $45,000 in retirement contributions ($22,500 in each account), $60k for those over 50 years old due to catch-up contributions

    Along with one of the State pension plans and the ARP, employees are able to contribute to both a 403b plan and a 457b deferred compensation plan.

    A 403b, similar to a 401k is a defined contribution plan where you (the employee) make contributions and select your investments. There are no employer matching contributions for either of these plans because OSU is already contributing to your primary retirement plan.

    A 457b deferred compensation plan is another plan where you contribute your own money on a pre-tax or Roth basis and make your own investment decisions within the plan. Your contributions are technically income that you haven’t been paid yet and it’s held within a trust managed by your employer. If you want to learn more about 457b plans you can read this explainer article I wrote here.

    The great thing about these plans is that they exist as 2 distinct retirement buckets and you can make the maximum contribution ($22,500 in 2023, plus an additional $7,500 if you’re over 50) for both of them. So that’s an additional $45,000 in retirement contributions you can make in these accounts, not counting what you are already saving in your primary OSU retirement plan.

    Executive Retirement Plan – Retirement Continuation Plan (RCP)/415(m)

    • Only available to select employees
    • RCP and/or 415(m)
    • A way or employees with salary greater than retirement plan limits to save more

    The Executive Retirement Plan is only open to employees with salary and retirement savings needs higher than the retirement plan limits.

    Wrap up and which retirement plan is right for you

    As I said in the beginning of this post there are a lot of options to choose from when it comes to selecting your OSU retirement plan. But it really boils down to whether you’d rather have a pension and allow the state of Ohio to manage your investments for you, or if you’d like a plan where you have more control over your investments and assume more of the risk. And depending on how much you can contribute you can have both options – selecting OPERS for your primary retirement plan while also contributing to a 403b and/or a 457b plan.

    For employees that plan to work at OSU for their entire career, and for 30 years or more, choosing the OPERS plan likely makes the most sense. But for individuals know they will be transferring to another employer or just aren’t sure, then choosing the ARP might make more sense since they will be able to bring their retirement contributions with them and roll them over into another plan.

    No matter your situation, with all of the OSU retirement plan options, you are sure to find one that works for you.

  • 457b, Financial Planning, Investing, Retirement Planning

    What is a 457b Plan & How Should Physicians Use It?

    What is a 457b Plan & How Should Physicians Use It?

    A 457b deferred compensation plan is a tax advantaged retirement plan similar to a 401k or a 403b plan. Just like those accounts a 457b allows you to save for retirement with pre-tax or after-tax (Roth) contributions. Although similar to the more widely known 401k and 403b, a 457b plan has a few differences you need to be aware of before incorporating it into your financial plan.

    Key Points

    • 457b plans are similar to 401k/403b plans. They allow you to make pre-tax contributions and invest those in a tax-advantaged plan.
    • There are two main types of 457b plans: governmental and non-governmental plans. It’s important to understand the type of 457b plan you have because non-governmental plans have additional restrictions, and can be riskier than governmental plans.
    • A 457b plan is an additional retirement account bucket you can fill up alongside your 401k/403b, providing you the opportunity to save an additional $22,500 in a tax-advantaged retirement account.
    • 457b plans can allow penalty-free early withdrawals before reaching 59 ½. There are additional tax consequences to prepare for though, so have a plan for early withdrawals.

    How is the 457b plan different from the 401k/403b

    Most people are familiar with what a 401k and 403b plan are. They are very similar plans allowing you to contribute up to $22,500 (this is the limit for 2023, this amount can increase each year based on inflation) to a tax-advantaged plan for retirement savings. The 401k is offered to employees of for-profit companies and the 403b is offered by non-profit/governmental employers.

    Within these plans you can make pre-tax or after-tax contributions, your earnings grow tax-free, and you can make withdrawals without penalty after you reach the age of 59 ½.

    A 457b plan is typically offered by an employer as an additional retirement savings account in addition to a 401k/403b. Which is great because the contributions to your 401k/403b don’t count against your 457b contributions, and vice versa. With access to a 457b plan you could contribute an additional $22,500 each year to your tax-advantaged retirement accounts.

    The key difference with a 457b plan

    One main difference between a 457b plan and a 401k/403b plan is included in its full name: The 457b Deferred Compensation Plan. The money that you contribute to your 457b plan is considered deferred compensation and belongs to your employer until you withdraw it after leaving or retiring from your employer.

    Another difference is that money can be withdrawn from a 457b plan much earlier without penalty than with 401k/403b plans. If you leave a job, and are younger than 59 ½, you have the option to begin withdrawing the funds from your 457b plan without the 10% penalty that you would face when taking an early withdrawal from a 401k/403b plan.

    You need to be aware of the tax consequences of withdrawing from a 457b plan, because the withdrawals are treated as income (hence the name deferred compensation), and plans vary in their withdrawal options. Some funds force you to take everything in a lump sum which depending on the size of your 457b could cause quite the tax headache.

    What are the two types of 457b plan?

    457b plans are offered in two flavors and there are key differences between the two: governmental and non-governmental plans.

    Governmental 457b plans

    Governmental 457b plans are typically offered to employees of state and local governments. These are seen as a “less risky” version of the 457b plan since they are backed by the government rather than an individual business.

    While you are an employee the money in your 457b is held in a trust. After leaving your employer, funds in these plans can be rolled over into an IRA or 401k, avoiding the possible tax headaches that come with distributions from a non-governmental 457b plan.

    Non-Governmental 457b plans

    Non-Governmental 457b plans are offered by non-profit employers such as hospitals, not state and local governments. These plans are considered riskier because the plans rely on your employer’s solvency, not the government.

    With a non-governmental 457b plan, rather than making contributions out of your paycheck, contributions are made by your employer and it is technically money that you haven’t earned yet, hence the name deferred compensation. Rather than sitting in a trust as with a governmental plan, the 457b in this case still belongs to your employer, not you, until you transfer or withdraw the funds.

    This can be helpful and protect you in the case of a personal bankruptcy, as your 457b funds belong to your employer and are not subject to your creditors (+ for asset protection). But the funds are also subject to your employer’s creditors in a situation where your employer goes under. This is not as big of a risk when it comes to an established hospital or company but is still something to consider.

    Another potential downside for non-governmental 457b plans has to do with their distribution or rollover options. These plans can only rollover into another non-governmental 457b plan, and only in limited situations. That means that rolling over into a 401k or IRA is not an option.

    When you leave an employer funds must be distributed within 10 years. Most 457b plans allow you to make distributions over 5-10 years, but some make you take a lump-sum distribution upon leaving your employer. A lump-sum, or even 5 years of distributions could create quite the tax headache if not planned for properly.

    457b plan is a great early retirement tool

    The 457b plan can be a great supplemental retirement savings account, but can be especially impactful for individuals pursuing early retirement. Having a 457b in addition to a 401k/403b doubles your annual contribution limit for retirement accounts, $22,500 => $45,000 in pre-tax or Roth contributions each year.

    Because of their status as deferred compensation and the lack of an early withdrawal penalty, 457b plans can build a great bridge between your early retirement years and when you turn 59 ½ and can withdraw from your 401k/403b penalty free.

    Should I contribute to my 457b, 401k, or 403b first?

    When considering which retirement plans to contribute to, and which one you should focus on first, the 457b tends to come in as an afterthought when compared to your 401k/403b and IRA/Roth IRA accounts. This makes sense, as most people haven’t even heard of a 457b before finding out they have access to one.

    The first account to fund should be whichever one is providing you an employer match. If your employer 100% matches the first 5% you put into your 401k, do that first. It’s hard to beat a 100% return on your money. After that it usually makes sense to max out your contributions to your 401k/403b before making additional contributions to your 457b.

    All of the above recommendations may vary based on the available cash flow that you can contribute to these accounts, as well as the other tax-advantaged accounts that you have access to and want to fund to meet your goals: your HSA, 529 education account, IRA/Roth IRA, etc.

    You will want to compare your available plans for any differences in investment options, fees, or vesting schedule (how long you need to remain at your company until the money is yours with no strings attached) before making your final decision.

    Another difference with 457b plans is that you have a total contribution limit of $22,500 which any employer contributions also count against. Where employer contributions to your 401k/403b count against your total $66,000 contribution limit, and you can still contribute your full $22,500. It’s a minor difference, but still one to keep in mind.

    In either case, the great thing with the 457b is that it resides in its own bucket and doesn’t impact how much you can contribute to your 401k/403b. Allowing you to contribute an additional $22,500 to a tax-advantaged retirement account.

    401k and 403b Catch-Up Contributions vs 457b Catch-Up Contributions

    401k and 403b plans allow individuals who are 50 or older to make additional catch-up contributions of $7,500 per year. The contribution limit for a 457b plan is doubled for the three years prior to the plan-specified retirement age. Based on current contribution limits you could make $45,000 in annual contributions in the three years before you retire.

    Pros and Cons of 457b plans

    Pros

    • Provides another tax-advantaged retirement account bucket for you to contribute to
    • Ability to make early withdrawals without penalty after you leave your employer
    • Can roll funds in governmental 457b plans into another retirement account (401k/IRA)
    • Allows larger catch-up contributions in the 3 years before the plan specified retirement age

    Cons

    • Riskier option compared to a 401k/403b if you are contributing to a non-governmental plan
    • Can’t rollover a non-governmental plan into another retirement account (401k/IRA)
    • Some plans have limited withdrawal options, such as requiring a lump sum withdrawal that could cause a major tax headache
    • Can (sometimes) have less investment options available for you to choose from

    Wrap up

    A 457b plan is a great retirement savings tool to have access to, providing an additional bucket of tax-advantaged savings to contribute to outside of your 401k/403b. But before you start using your 457b you need to understand the type you have: governmental or non-governmental, along with other details to make sure it fits in your financial plan correctly.

    Using a 457b plan correctly can help you turbocharge your retirement savings, and provide an income bridge for those pursuing early retirement. It’s hard to overstate the additional flexibility that a governmental 457b plan provides. With the option to early withdraw funds penalty-free or roll them over into another 401k/IRA, they are one of the best accounts out there.

  • Financial Planning, Student Loans

    The Physician’s Guide to Student Loans, Public Service Loan Forgiveness and More

    What You Need to Know About Student Loans

    Student loans, federal student loan forgiveness, and Public Service Loan Forgiveness are all hot topics these days, especially if you have as many loans as the typical resident. The average med school graduate owes $250,990 in total student loan debt. Yikes! That amount of debt is daunting no matter how much you expect your eventual salary to be.

    It hurts even more when you consider most docs will make around $65k during their years of residency. Understanding the different types of student loans you have and the payment/forgiveness programs you qualify for is crucial to managing your debt and building a solid plan to deal with it.

    Types of Student Loans

    There are two main types of student loans, Federal and private. Federal loans are made by the federal government and private loans are made by private banks or lenders. Federal loans can be consolidated into private loans. Private loans cannot be changed into federal loans so if you have federal loans and are considering consolidating them into a private loan you must be sure because there are no take-backs after you do.

    Federal Loans

    Federal student loans are loans made by the federal government to both undergraduate and graduate borrowers. There a couple different types of student loans: subsidized, unsubsidized, Perkins loans, FFEL loans. The type of federal student loans that you have can depend on your financial need, if you will use the loans for undergraduate or graduate schooling, or if you are a parent getting a loan for your child.

    The names of the types of loans don’t always make intuitive sense so be sure to do your homework on exactly what types of loans you have and which repayment plans those loans qualify for.

    Direct Loans

    The two broad types of federal direct loans are direct subsidized student loans, and direct unsubsidized student loans.

    Direct Subsidized Loans

    Direct subsidized student loans are offered to undergraduate students on the basis of need based on the information that you entered into your FAFSA. Subsidized loans are exactly that, they are subsidized by the federal government on your behalf. How this works is that the government pays the interest on these loans while you are in school (attending at least half-time), for the first six months after leaving school, and during a period of deferment where payments are postponed due to financial hardship.

    Direct Unsubsidized Loans

    Direct unsubsidized student loans are the other main type of direct student loan offered by the federal government, and they are available to both undergraduate and grad students. As unsubsidized loans they accrue interest as soon as you receive them.

    To determine whether or not you have direct loans you should visit the StudentAid.gov site and create an account using your Federal Student Aid ID. Using the site you will be able to see a summary of your federal loans and their type.

    Stafford Loans

    The term Stafford Loan may refer to a subsidized or unsubsidized Federal Stafford Loan that was made under the Federal Family Education Loan (FFEL) Program. This program has not operated since 2010, however some people and schools still use the term “Stafford Loans” when referring to direct subsidized or direct unsubsidized loans.

    Perkins Loans

    A Perkins loan is another type of subsidized federal loan that is made available to students that have demonstrated exceptional financial needs. The reason this isn’t considered a “Direct Loan” is that it is a loan made from the school and the borrower makes payments back to the school.

    Parent PLUS or Grad PLUS Loans

    PLUS loans are unsubsidized federal student loans made to parents of undergraduate dependent students which are known as Parent PLUS loans, or when made directly to graduate or professional students known as Grad PLUS loans.

    Direct Consolidation Loan

    With federal student loans you have the option to consolidate them into a Direct Consolidation Loan. There are pros and cons for making this decision. Certain federal loans don’t qualify for some of the federal repayment plans like REPAY or PSLF, while consolidated loans do.

    You may also lose some benefits and protections for certain loans with consolidation. After consolidation you have one loan with one interest rate that is the weighted average of your individual loans. Because you only have one loan now you lose out on the opportunity to pay off your loans individually with methods like:

    • Snowball method, where you focus on paying off your loan with the smallest balance first. Once that loan is gone you use the extra cashflow to pay off your next smallest loan, and repeat until they are all gone.
    • Avalanche method, where you pay off your loan with the highest interest rate first since it is costing you the most. Then when that loan is paid off you move to the next highest interest rate debt and repeat until finished.

    Private Loans

    Private loans are made by private banks or lenders and the details can vary widely. They generally cost much more than a federal loan, and are used when a borrower can’t access federal loans. The payments, interest, and terms and conditions on these loans can vary widely based on the borrower and institution. Interest also accrues on private loans while the student is still in school.

    *A note on refinancing*

    It’s important to remember that while you can refinance your federal student loans into a new private loan, you can’t reverse the process and change private loans into federal loans. You need to be mindful of this as you approach any sort of loan refinancing decision. You may have a good reason to refinance – such as getting a lower interest rate, or a lower payment – but you also lose out on the protections and repayment options that are available with federal student loans.

    Repayment Programs

    With Federal Student Loans there are many different payment programs, like IBR or PAYE, that you can use to manage your payments and repay your loans. Most of these plans forgive the remaining balance on your loan after 20 or 25 years of making payments, but the amount that is forgiven is treated as taxable income and you need to prepare for it.

    You can use one of these payment programs at the same time you are pursuing loan forgiveness under the Public Service Loan Forgiveness (PSLF) program, which exists in its own little category that we will explain more further down this article.

    Standard Repayment Plan, Graduated Repayment Plan, Extended Repayment Plan

    With these plans, monthly payments are calculated to pay off your entire loan balance over a period of 10 to 30 years. Payments are fixed under the standard plan, and can increase over time under the graduated and extended plans. These plans differ from the following plans we will discuss in that your income isn’t taken into account when calculating your monthly payment, and the plan is designed to pay off the entire loan balance by the end of the plan, i.e. there is no loan forgiveness as a part of these plans.

    Income Driven Repayment Plans

    There are several different Income Driven Repayment Plans. The plans vary on: eligibility depending on when you received and what types of loans you have, payback period length, payment amounts, and more. Your loan payment while in one of these plans is based on a percentage of your discretionary income, meaning it could change as your income and tax filing status changes.

    Each of these plans has a set repayment period and your loan balance at the end of the repayment period is forgiven, but remember that forgiven amount is taxable as income so you need to be prepared for the tax bill that comes with it.

    Income Contingent Repayment – ICR

    Payments are the lessor of 20% of your discretionary income or your payment under a 12-year fixed payment plan. The repayment period is 25 years. The ICR payment plan is rarely used.

    Income Driven Repayment – IBR

    There is an “old” IBR and a “new” IBR. There are slight differences and you can’t qualify for the new IBR if you had any loans prior to July 1, 2014.

    OLD: Payments are the lessor of 15% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 25 years. You must demonstrate a financial hardship to qualify.

    NEW: Payments are the lessor of 10% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 20 years.

    Pay As You Earn – PAYE

    Payments are the lessor of 10% of your discretionary income or the 10-year standard repayment plan payment, and the repayment period is 20 years. You must demonstrate a financial hardship to qualify.

    Revised Pay As You Earn – REPAYE

    REPAYE is similar to PAYE but you may have higher payments than with PAYE. Payments are 10% of your discretionary income, even if it’s higher than the 10-year standard repayment plan payment. The repayment period is 20 years for undergraduate loans and 25 years for graduate or professional loans.

    NEW REPAYE

    An updated REPAYE plan was proposed as part of the federal student loan forgiveness announcement in 2022. This plan has not been finalized or approved yet, but we are including the highlights below and will update this post if things change.

    • Borrowers will use 225% of the federal poverty limit when calculating discretionary income, up from 150% used for current REPAYE.
    • Undergraduate student loan borrowers will calculate their payments as 5% of their discretionary income. Graduate loans will still use 10% of their discretionary income to calculate payments. Borrowers that have a mix of graduate and undergraduate loans will calculate payments based on a weighted average of their loans.
    • Married borrowers will be able to exclude their spouse’s income from their loan payment calculation by filing taxes Married Filing Separately (MFS).
    • A big change is that interest will no longer accrue in excess of a borrower’s calculated payment. This means that your loan balance will not continue to grow even if your calculated payment does not cover the entire monthly interest due on the loan. This means that borrowers seeking loan forgiveness will have a lower amount forgiven, and a lower tax bill due, at the end of the loan.

    Public Service Loan Forgiveness

    PSLF isn’t exactly a payment program. You can enroll in REPAYE or IBR or any of the other payment programs while you are pursuing PSLF. But it is a very important program that you need to know about because it could save you hundreds of thousands of dollars if you qualify. If you work in the public sector or for a qualifying nonprofit you can have your entire loan balance forgiven after 10 years (120 qualifying payments).

    The requirement for PSLF include:

    • Must work “full time” for a qualifying entity – these include public health, nonprofits, public school teachers, etc.
    • Must have federal direct loans (if your loans aren’t direct you may be able to consolidate them into federal direct loans).
    • Must make 120 qualifying payments – note the language isn’t 10 years of payments, but 120 qualifying payments.

    If you are pursuing PSLF you should definitely enroll in an income-driven repayment plan to reduce your monthly payments as much as possible and increase the amount that will ultimately be forgiven.

    Summing Up

    There are many factors to take into account when considering student loans and your best strategy to deal with them. Refinancing, consolidation, seeking loan forgiveness, choosing a particular income-driven repayment. All of these decisions come with consequences that are helpful to understand so you can make the optimal decision for your situation.

    Making a plan to deal with as much student loan debt as the typical med school grad has can feel daunting. Not creating a good plan to manage it can lead to serious problems with your finances in the future.

    There is a lot of helpful information on the federal student aid website about repayment plans and consolidation faqs. If you feel overwhelmed talking to a financial advisor with experience dealing with student loans can be a big help.

  • Financial Planning, Insurance

    WHAT PHYSICIANS SHOULD KNOW ABOUT DISABILITY INSURANCE

    Why Disability Insurance is Important: Protecting Your Greatest Asset

    As a physician one of your greatest assets is your ability to earn a substantial income once you have completed your training and residency, and you should protect it with disability insurance. Most physicians will graduate with a healthy amount of student loan debt from years of schooling, likely totaling in the hundreds of thousands of dollars. And while this might be a daunting amount to have to pay back, the opportunity to earn a great income throughout your working career makes the investment worthwhile.

    If your ability to practice medicine in your chosen field and use the skills that you have gained during your years of school and training were to disappear, the ability to pay off your student loans, not to mention being able to achieve your goals and live a life that you enjoy would be drastically reduced. Insurance companies estimate that as many as one in seven doctors will be disabled at some point during their career. The importance of your future income and the high likelihood of needing to rely on disability insurance are the reasons why it is such an important topic for all physicians to understand.

    Short-Term vs Long-Term Disability Insurance

    There are different variations of disability insurance: short-term and long-term disability insurance policies. The benefit period – or how long you receive payments if you become disabled – can last up to two years for short-term policies. Long-term policies are designed to cover your working career, with most policies ending at the age of 65. For this article we will be focusing on the more important of the two, long-term disability insurance (LTD).

    The Benefits and Drawbacks of Employer-Provided/Sponsored Group Long-Term Disability Insurance

    Many employers offer a group long-term disability insurance to employees. This is a great first step in protecting your long-term earning potential, but relying solely on employer-provided coverage can come with some drawbacks.

    Some of the benefits of employer sponsored long-term disability insurance are:

    • Lower cost
    • Easier to qualify for (usually does not require medical screening)

    The list of potential drawbacks for employer-provided coverage is longer, but that doesn’t mean that employer-provided disability insurance is a bad thing it just means you have some extra homework to do when choosing an individual long-term disability insurance policy to make sure you are getting the correct coverage.

    Potential drawbacks are:

    • Any occupation definition of total disability
    • No portability if you leave your employer
    • Benefits are taxable (when employer paid)
    • Offsets with other benefits such as social security
    • Capped benefit amount

    An employer-provided group long-term disability policy is a great place to start when it comes to coverage, but you are almost certainly going to want to supplement that coverage with an individual policy that provides a full level of income replacement as well as the ability to maintain coverage if you switch employers in the future. Let’s look at an example of the benefits from a group policy and why you would want to supplement with an individual policy as well.

    Employer provided long-term disability coverage typically has a maximum monthly benefit cap along with only replacing a percentage of an employee’s. Also since this is usually a benefit provided by your employer on a pretax basis, the employee ends up paying income tax on the benefit they receive, so for example:

    Let’s say Doctor Doom earns $400,000 per year and is covered by a LTD plan that covers 60% of income up to a maximum of $15,000 per month. Under the plan they are insured as if they are making $300,000 (60% of $300,000 provides for $180,000 or $15,000 per month, the plans monthly benefit). Dr. Doom would also still owe income tax on the $180,000, lowering their benefit further.

    Important Contract Provisions and Riders

    There are different provisions and riders that are included in a disability insurance policy that may affect the cost and benefits that you are entitled to receive should you need to make a claim. The list below contains a few of the most important provisions and riders to understand when choosing a policy.

    Definition of Total Disability: Own-Occupation vs Any Occupation

    The definition of disability is an important distinction within the policy. Under an own-occupation definition, someone would be considered disabled if they could not perform the functions of their occupation, whereas with an any occupation definition as long as they could perform the functions of any occupation, they would not be considered disabled.

    A basic example would be if a surgeon who through illness or injury lost their fine motor control and could no longer perform surgery (their occupation), but could still work an office job, they would be considered disabled under an own-occupation definition but not an any occupation definition.

    Residual Disability

    This is a provision that allows a partial benefit to be paid if someone is not totally disabled but are in a situation where they cannot perform all the duties of their occupation or cannot work as many hours and suffer a reduction in income.

    Elimination Period

    This is the period of time before you are able to start taking benefits. You can think of this as being similar to the deductible in a health insurance plan. 90 days is a typical length for most long-term policies, but elimination periods of 0 days, 180 days, or longer can also be selected.

    Benefit Period

    The benefit period is the period of time that the policy will pay out disability benefits. This can range in time from two years all the way up to the insured’s lifetime. The most common benefit period is up to age 65

    Recovery and Transition Benefits

    Policies can offer a recovery or transition benefits to continue paying benefits to someone after the insured has fully recovered. For example, in the case of a solo-practitioner who has been disabled for a significant period of time and eventually recovers. They will likely have seen a number of their patients leave and find other physicians. Transition benefits could be used to supplement their income as they build back their patient base and income.

    Non-Cancellable and Guaranteed Renewable

    When a policy is both non-cancelable and guaranteed renewable it means that the insurer cannot change the policy terms or increase the premiums as long as the insured pays the scheduled premium. This offers the insured the greatest amount of protection. There are policies that are only guaranteed renewal (not non-cancellable) which allow the insurer to change premium rates in the future. This may provide the insured with savings on the initial premiums but leaves them open to rate increases in the future.

    Future Increase Option, Benefit Increase Rider, Benefit Purchase Rider, Benefit Update

    These options allow the insured to increase benefits or purchase more coverage in the future. Importantly the insured is able purchase additional benefits without undergoing additional medical underwriting. These are beneficial options for physicians early in their career as they can purchase increased benefits to keep up with their increases in salary without having to go through the medical underwriting process again.

    Catastrophic Coverage

    A catastrophic disability benefit rider allows you to receive an additional monthly benefit if you are unable to perform 2 or more functions of daily living (dressing, bathing yourself, etc), total and permanent loss of sight or hearing, or cognitive impairment. The reasoning behind this rider is that the additional benefits could be used to pay for someone to provide in-home care or medical expenses not covered under your traditional health insurance.

    Cost of Living Adjustments

    COLA is a rider that provides increased cost of living adjustments for claim payments to keep up with inflation. This is especially important the younger you are when purchasing your policy as inflation can take a toll on benefit payments over time.

    Long-Term Disability Insurance Cost

    Long-term disability insurance for physicians can be expensive. Premium costs tend to be in the range of 2-6% of income, and traditionally policies are much more expensive for women than men. This is primarily due to the higher risk of disability for women due to pregnancy and pregnancy related illnesses. According to the Journal of the American Society of Certified Life Underwriters a 35-year old woman is three times as likely as a man of the same age to become disabled for 90 days or more.

    Graded vs Level Premiums

    Graded premiums start out lower than level premiums and increase over time, whereas level premiums will remain the same for the life of the policy. If you are hell-bent on paying off your student loans, saving a ton and becoming financially independent early in your career then the graded premiums might make sense. But for most physicians, getting coverage early in their careers and choosing level premiums is the better bet.

    Premium Frequency

    Insurers offer a few different payment frequency options: annual, quarterly, monthly. With more frequent payments costing more than making one annual payment. This can usually be changed without affecting the policy so starting out with monthly payments early in your career and then switching to an annual payment once you can afford it is a good option.

    This article provides an overview on the basics of disability insurance and is by no means an exhaustive guide. When selecting a disability policy make sure to get multiple quotes and understand the specifics of your policy and what it covers. Your skills and your income, especially at the start of your career, are your most important asset. Make sure to protect it by including disability insurance in your financial plan.

  • Home Buying

    SHOULD YOU REFINANCE YOUR MORTGAGE?

    Mortgage rates have been trending down and the US National average for a 30-year mortgage hit 3.45% last week, a full percentage point lower than where it was the same time last year (4.41%). A lower rate means lower payments. If you bought a house today you’d pay $166 less per month on interest versus a year ago.

    But, assuming you already have a home, the drop in interest rates is leading many people to ask themselves if now is the right time to refinance their existing mortgage.

    There are many reasons why a homeowner may want to refinance a mortgage, locking in a lower interest rate is only one of them.

    Getting a lower payment.

    This is typically the biggest driver towards refinancing. By getting a new mortgage at a lower rate you can lower your monthly payment. With this type of refinance you are usually extending the amount of time and interest you will end up paying on your home.

    Extracting equity out of your home.

    By refinancing you can take advantage of property appreciation and/or your principal payments on your home and cash out some of the equity you’ve built up to use for home improvement projects or other uses.

    Reducing interest paid.

    Refinancing at a lower interest rate can save you on the total interest paid over the life of the loan.

    Refinancing to a shorter loan term.

    A shorter loan term can help you save on the total interest paid over the life of the loan albeit with higher monthly payments. Lower interest rates can help bring the monthly payments for a shorter term loan within reach.

    Locking in a fixed rate.

    Many adjustable rate loan options exist with the interest rate fluctuating over the life of the loan. Locking in at a fixed rate can give you peace of mind that your loan payments will not rise if interest rates do in the future.

    The refinancing process can look much like the process you went through when first buying your home and applying for a loan. Your mortgage lender will look at your credit score, income, savings and may ask for a new appraisal of the property. You can expect to pay closing costs on the new loan that can range from 1%-5% of the cost of the loan depending on the lender. Before starting the process, ask yourself a few questions first.

    How long do I plan to stay in this current home?

    This is a big one. Whether you are living in your forever home or if you plan to move within a few years will have a big effect on refinancing being a good financial decision. A lower monthly payment may seem enticing, but you need to run the numbers to see if you will break even after factoring in the closing costs at the beginning of the loan.

    How long do I have left on my current mortgage?

    The longer that you pay on a loan the more of your payment goes towards the principal versus interest. In the beginning most of your payment goes to interest and at the end the majority goes towards the principal. If you are closer to the end of your loan there may not be as much of a benefit to getting a lower interest rate. People also derive psychic income from paying off a large debt, so if you are close to having your mortgage paid off you may feel better having it gone rather than extending it and getting a lower payment.

    Am I still paying PMI on my loan?

    If you have to pay for private mortgage insurance on your loan because you borrowed more than 80% of your home’s value you may be able to get rid of PMI on your new loan by refinancing. You also may be able to stop paying PMI on your current loan if your home has appreciated and/or you’ve built up enough equity in your home. Usually this will require a new appraisal so check with your mortgage lender to be sure.

    How much equity do I have in the home?

    If you want to get cash out during a refinance then you will need to have the equity in your home to do so. Also, many lenders like you to have at least 80% equity in your home before going forward with a refinance.

    What interest rate do I think I will qualify for?

    If your financial situation has changed significantly since you applied for your original loan; making more money, paid off debt, increased your credit score. You could qualify for much better loan terms during your refinancing.

    Do I have any big financial decisions coming up soon?

    Don’t forget to consider any big life decisions you may have coming up. If your job situation is up in the air and you might have the opportunity to take a role that requires a move or more travel, then sitting tight might be the safest decision for now. Or if you thinking of starting a family or a business and your income may fluctuate in the near future, then it may be the right decision to take advantage of your current stability to lock in a new loan now at a lower rate.

  • 401k

    WHAT SHOULD I DO WITH MY 401K RIGHT NOW?

    The swift drop in the stock market from all-time highs into a bear market has left investor’s heads spinning. Almost before anyone had time to fully process the fall, the market started to rebound. Down 30%+ from the peak, the stock market started to recover and as of the beginning of May was only around 15% below the all-time high in February.

    Good and bad headlines continue to alternate in the news. Historic unemployment numbers, better than expected results due to people socially isolating, infection hot spots popping up due to delayed action, and general unease and uncertainty about how long it will take for things to return to normal.

    So, what should investors expect for the future and more importantly what should they do about it? With regards to both the coronavirus and its impact on the economy and the stock market: Is the worst behind us or are we in store for more bad news before we start to turn the corner? I can’t answer these questions, but I can provide some advice for how to prepare your finances for the future.

    Take stock of your personal finances

    First things first, do what you can to make sure your day to day and month to month expenses are covered. If you are lucky enough to have a stable income coming in at this time, now is the time to review your emergency savings and make sure it is adequate. Most financial advisors recommend between 3-6 months of expenses, but the ultimate number is whatever allows you to sleep soundly at night. If your employment situation is shaky or uncertain no one is going to razz you for having 9 months’ worth of cash in a savings account right now.

    If you are in an industry that has been hit hard by the effects of the coronavirus shutdown and you have or are in danger of losing your income, now is the time to prepare. The stimulus and increased unemployment benefits from the recently passed CARES act can help build a savings buffer, and federal student loan deferred payments may help some as well. If you are worried about missing payments for rent, your mortgage, or other essential services, reach out to your landlord, bank, or creditor before you’ve missed a payment to understand what options you may have for credits or deferral.

    If you feel secure about managing your cash flow then you can move onto the next level and consider what to do about your retirement investments.

    Continue your 401k contributions

    If your personal finances are locked down, you are able to continue working, and have an income coming in, then the right answer for almost everyone is to continue making your contributions as normal. No one can predict with any certainty if March was the low point for the stock market this year or if the worst is yet to come. During these times of market stress, our fight or flight instincts start to kick in and it can feel like you have to do something. But reacting based on your gut is rarely the right move and you should instead listen to Richard Bogle: “Don’t do something. Just stand there!”

    If you are in the early or middle stage of your career and still have a while to go before retirement then this is likely not the last time you will experience a market drop of 30% or more. This is just another example of the volatility you will need to live with to enjoy the returns that come with owning stocks, as well as an opportunity to buy them at a lower price than you could just two months ago. It’s better to focus on your time in the market rather than timing the market.

    If your company has cut matching 401k contributions because of worries about the economy you might want to review the available investments in your 401k and if they are high fee or otherwise don’t meet your needs you could shift your contributions to an IRA or Roth IRA. Just set a reminder to turn your 401k contributions back on when your company begins offering a match again.

    If you are able to increase your contribution, now is probably a good time to do it. Market crashes hurt while they are happening, but they do increase the forecast for future stock returns.

    Create a Financial Plan

    If you have a financial plan in place, now is the time to review it and reassess some of your original assumptions. Were you optimistic or pessimistic regarding your emergency fund, too conservative or aggressive in your asset allocation and risk tolerance, were you focusing on the right goals?

    The steady upward market climb during the past decade had the effect of lulling investors into a false sense of security, where every time the market dropped a few points investors started to scream “BTD!” (that’s “buy the dip!” for those of you who aren’t a part of fintwit). We haven’t seen it for a while, but the market can remain lower and decide not to hit new all time highs for a lot longer than we’ve experienced recently.

    If you don’t have a financial plan now is the time to put one together. As the saying goes, the best time to plant a tree was 30 years ago, the second-best time is today. The same sentiment applies to financial plans. The best time to put together a plan was in the middle of the 10-year bull market we just experienced, the second-best time is today.

    Consider your risk tolerance and asset allocation. If you were invested 100% in stocks or in an 80/20 stock/bond portfolio, how do you feel? If you were comfortable with the volatility and the drop in your portfolio’s value then that’s probably the right allocation for you. If, however you had some sleepless nights, it might be a good time to reconsider the level of volatility you can live with. The stock market will probably not be as rosy as the period from 2009-2019, so you need to make sure you can handle volatility when it comes. Some of the worst financial decisions happen when investors’ emotions get the better of them.

    Another option is to get some help from a financial advisor as you put together your financial plan. One of the biggest benefits from working with an advisor is having an experienced person to talk to and help guide you toward what the right decision is for your specific situation and then help you stick with it.

    With social distancing and stay-at-home orders in effect, many advisors are adding the ability to meet virtually with clients, while some have been working virtually with clients for years 😉

    Have questions about your specific situation?

  • Saving

    WHAT SHOULD I DO WITH EXTRA SAVINGS?

    Covid-19 has impacted society and how we go about our day to day lives in many ways, and we will discover more changes as long as it remains a threat without a successful treatment or vaccine. Quarantines, reopening, subsequent outbreak related shutdowns, and looming waves of infection all have the capacity to change our behavior in ways we can’t predict. We have already seen the largest spike in unemployment in the history of the U.S. and some of the largest bailout/stimulus/aid packages passed in record time.

    One somewhat surprising financial effect has been the increased personal savings rate. The rate jumped from 8% in February up to 13.1% in March and according to the U.S. Bureau of Economic Analysis it hit a record 33% in April. I guess an increase shouldn’t be too surprising given that due to stay at home orders people weren’t able to spend at many of the places they usually do like restaurants and bars, and people with small kids didn’t have to pay for childcare (but still had to find a way to care for kids and get work done, if this is you, I’m in the same boat and I feel for you). Still, the magnitude of the increase is a bit shocking.

    If you are part of the lucky group with stable employment and you’ve seen your savings balance go up, what should you do now? Blowing it on stuff you don’t need from Amazon might seem appealing, but there are probably better uses for your excess cash.

    Create an emergency fund

    Step number one in all of personal finance is earn more than you spend, and step two is to set some cash aside in case of future emergencies. If you are someone that’s been operating right on the edge between income and spending, take this time to build up a cash cushion. The old statistic that 40% of people can’t afford a $400 emergency is said to be false, but that doesn’t mean that everyone is sitting pretty with plenty of savings, or wouldn’t be in a bad spot if they had to replace the transmission in their car tomorrow.

    The recommended emergency fund amount is between 3-6 months of expenses depending on your personal comfort level and situation. Chances are that the increased savings you may be experiencing is not enough to fully fund 3-6 months of expenses and that’s ok. Start by making a deposit to this fund and continue adding to it over time.

    If you already have an emergency fund that you felt comfortable with heading into 2020, right now when the world is so uncertain is the perfect time to re-evaluate. Make sure your risk tolerance and comfort level aligns with the amount you have in savings. I think it’s helpful to think back to how you felt when the shutdowns started and everything was so uncertain when considering the correct emergency fund amount for you. I am not advocating for people to pull all of their money out of the stock market and keep it in cash, but having a decent emergency savings account, might come in handy and help you sleep much better in the coming months. Especially when it seems extremely likely that we will continue to deal with more uncertainty going forward.

    Review your spending habits

    It’s rare in life that someone or something mandates that you stop doing anything inessential. But that’s exactly what happened when the coronavirus shut downs occurred. Most of us had between 1 to 3 months of time where we were not allowed to do much outside of the basic functions of eating, sleeping, working, and caring for our children.

    It was definitely frustrating in the moment when you couldn’t go out and grab a meal at your favorite restaurants or get coffee in the morning before heading to work the way you would normally do. But it also offers an opportunity to take a look at your spending pre-shut down and more mindfully consider what actions you want to continue or change now that life is moving back in the direction of normal, or at least our new normal.

    Maybe during quarantine you discovered how much you like cooking for you and your family at home during the week. Or maybe you discovering how much you were spending on snacks and coffee and other things throughout the throughout the week. Or maybe you’re surprised that the extra money you have in your bank account because you were not able to head to happy hour for drinks 2 to 3 times a week like you previously were. On the flip-side you might realize just how much you relied on your weekly yoga session to destress after your work week, or how much your weekly date nights out helped you and your partner connect.

    The quarantine has provided a great chance to review how you spent your money and time before and consider if there are any changes worth noticing. It’s perfectly fine not to make any changes after life gets back to normal, the important part of this process is taking a mindful look at how you were spending in both situations and making sure that you’re aligning your money with your goals to live your best life.

    Give to those that need it the most

    If you’re fortunate enough to be in just as secure a financial position today as you were in February 2020 that’s great, but the effects of coronavirus and the shutdowns have impacted some people much more than others. The economic effects have impacted people unequally based on race, income and education. Those with higher income and higher education levels have seen minimal effects to their financial well-being. They have been able to continue working and in many cases working from home. The shutdown has more severely impacted communities of color and less educated workers who have seen a much higher rate of unemployment since the start of the shutdowns.

    If you are in a position to donate, now is a great time to give to charities that are helping those hit hardest during this time. There are many organizations that could use your help supporting the work they do. World Central Kitchen has been working to feed people during the coronavirus crisis, you can also support Feeding America or use their site to find local food banks that would gladly accept your help as well.

    Along with the increased economic impact that they have to deal with, minority communities have been disproportionately hit with the health impact of coronavirus as well. Blacks and Latinos are more likely than Whites to be infected by the coronavirus and are more likely to die as a result as well. The protests around the murder of George Floyd have helped shine a light on the systemic racism and injustice that these communities must deal with everyday. One small way you can help is by donating to Black Lives Matter, the NAACP Legal Defense and Education Fund, and the Loveland Foundation or another charity working to promote racial equity in the U.S.

    There are many causes and people that can use your help even more these days than in the past. I strongly recommend finding a way to support organizations like these or others that are important to you if you are able.

    Plan for future goals

    One of the most impactful things that you can do with any unanticipated cash is to you give yourself a head start on achieving your future goals. Putting a healthy chunk into savings account for a future house down payment, or maxing out your Roth IRA contributions for the year as well as getting a start on next years are great uses of excess funds.

    As they say compound interest is one of the most powerful forces in the universe, and it’s made even more powerful the earlier you put it to work. Giving yourself a head start on savings allows compound interest to work for you for longer and potentially reach your goal much more quickly.

    Don’t Look Back With Regret

    However you choose to spend your coronavirus savings windfall please do it wisely. There are still plenty of ways to spend and as the U.S. opens up it will be tempting to go wild or fall back into default spending patterns without realizing it. The worst outcome financially would be to look back at this time with regret that you wasted this opportunity to build up your savings, help others or set your future self up for success.

  • Investing

    A late Christmas gift from Uncle Sam! Higher IRA and 401k contribution limits for 2019

    With all of the hubbub around the holiday season you probably missed a nice gift you received from Uncle Sam. And, like the forgetful uncle that he is, he forgot to give it to you until January, but as they say, it’s the thought that counts.

    So, what present am I talking about? Why, the $500 increase in IRA and 401k contribution limits of course!

    Contribution Limits for 2019

    For 2019 the maximum you can contribute to an IRA has increased to $6,000, up from $5,500 last year ($7,000 for individuals 50 or older). And for a 401k the maximum employer contribution increased to $19,000 up from $18,500 (this also applies to 403b, most 457 plans and the governments Thrift Savings Plan). Individuals 50 or older contributing to these plans (401k, 403b, 457, TSP) can still contribute an additional $6,000.

    What also increased were the income limits for the phaseout of when you can and can’t contribute to IRAs and Roths. You can find the full rundown of the changes on the IRS’s website here: IRA increases contribution limits for 2019.

    But don’t forget about 2018

    You also still have the option to contribute to your IRA or Roth for 2018. You can contribute right up to April 15. So, if you haven’t yet contributed this year you still have time to sock away up to $5,500 ($6,500 if your 50 or older) into your IRA and count it against 2018’s taxes.

    If your income is above the Roth contribution limits, you are unfortunately too late to enact a backdoor Roth contribution for 2018 since you had to complete those by Dec 31 2018. Maybe a financial planner could have helped make sure your financial tasks were completed on time wink, wink?

    What is the impact of that extra $500?

    You may yawn and think, “big whoop, an extra $500, what will that get me?” Well I’m glad you asked. Even though it might not seem like much, given it’s only an extra $41.67 a month. Depending on your investing time frame that $500 could add up to a serious bump in your portfolio over time.

    If We assume 7% growth within a tax advantaged account, after 10 years you would have an additional $6973. After 20 years it would be $20,624 and after 30 that would grow to $47,479. All from contributing just an extra $500 a year.

    Upping your contribution

    Now is the perfect time to increase your contribution for 2019 or make one for 2018. If you’re a W-2 employee you should receive your copy in the mail any day now.  By comparing your earned income in box 1 of your W-2 to the income limits at the link mentioned above you can figure out if you qualify to contribute to an IRA, Roth, or both. And if you plan to earn the same amount for 2019 this will help you decide where to contribute for the coming year as well.

    Another decision to make is when to make your 2019 contributions: in one $6,000 chunk or by dollar cost averaging with an automatic monthly contribution.

    The upside with automatic monthly investments is that you don’t have the worry about contributing $6,000 in one chunk then watching the market drop the next day. The downside is if the market decides to move steadily upward throughout the year, the impact of your monthly contribution is reduced each month.

    Historically the stock market finishes the year higher than where it started about ¾ of the time. Given this info you are likely better off making the lump sum contribution at the start of the year. But if it helps you to sleep at night by making the monthly contributions then go that route. We humans tend to feel the pain of loss much more acutely than the joy from a gain.If you are in Boise or beyond and would like to talk with a fee-only advisor about your IRA or 401k funding questions, or anything other questions you might have, give us a call. We are happy to help.

  • 401k, Investing

    MILLENNIALS HAVE HOW MUCH IN THEIR 401(K)?!

    A recent article in Investor’s Business Daily got a lot of attention online. The subject of the article was how much the average 401(k) balance has increased over the past 10 years split out by generations. Millennials had an average balance of $137k in 2019 up from $10,500 in 2009. While Boomers had an average of $366k up from $98k 10 years ago.

    It seemed that most people responding to the article on social media had a similar reaction along the lines of, “that’s crazy, there’s no way that’s true”. And turns out they were mostly right. The data was taken from a fidelity survey of their 401k plan participants, but what wasn’t stated in the article was that these numbers only considered those individuals that had their same 401k account open for the past 10 years. Once you hear this detail the numbers start to make a bit more sense.

    The majority of millennials are still in the early stage of their careers which is typically a time where people take the opportunity to jump around between jobs, companies, and different places to live and see what fits them best. This is especially true for this generation as we have pushed marriage and home buying later either because of preferences, opportunities or both. It makes sense that those that have had a stable job with the same 401k for the past 10 years would have a much higher balance than the overall average. It’s probably a pretty limited set of the millennial cohort included in this data set, but I think there are a few points we can take away from this info, even if the article seems to have been constructed in a way to get people worked up and share it purely from a “would you look at this *#$&?!” angle.

    Just stick with it

    The accounts included in this group have been open for at least 10 years, which illustrates the amazing effect you can have by continuing to do the little things right month after month and compound them over time. Continuing to contribute to your 401k plan, paycheck after paycheck, is a great first step towards building up your retirement savings. Especially given the benefits that a 401k typically provides vs an IRA: employer matching, higher contribution limits, additional after-tax contributions if available.  

    It can be tempting when moving from one job to another to cash out your 401k rather than roll it over into a new 401k or IRA. There are a few times where cashing it out makes sense from a financial planning perspective, such as in the case of extreme hardships, but it’s typically a much better option to roll it into another plan and continue making your contributions and grow your funds for the future.

    The benefits of having a 401k 

    If your employer didn’t offer a 401k and you only had access to investing within an IRA (with contribution limits below $7k/year for the past decade) you would be hard pressed to grow your account in the same way without maxing out your IRA contribution every year over the past 10. However, with a 401k you could contribute up to $16,500 yourself and $49k total between you and your employer in 2009, and those numbers increased over the decade to $19,000 and $56k respectively. It’s obvious with a 401k that you could contribute much more, especially as your income grows, than with only an IRA, not to mention the benefits of receiving employer match contributions.

    If you don’t have access to a 401k consider asking your employer to offer one. Many small businesses do not offer a 401k because of concerns about cost and matching contributions, but in recent years 401k plan administration costs for small businesses have decreased and companies do not need to offer a full or even any match if they don’t want to. 401k plans have been shown to be great for retention of employees and I’m sure the individuals in the fidelity study are glad that they had the opportunity to invest in theirs over the past decade.

    What else can you do

    So, what can you do if you don’t have a 401k and it doesn’t look like you will get access to one anytime soon?

    • If you are a 1099 employee consider setting up a SEP-IRA. With a SEP you can contribute up to 25% of your earnings or $57k, whichever is lower, for 2020. This can be a way to goose your contribution above the traditional IRA limit of $6k. If you are not a 1099 employee but are considering it make sure to consult with a tax professional whether or not it makes sense to switch from a W-2 to self-employed because there are additional tax consequences to consider.
    • If you can, contribute to an HSA. Stack that on top of your IRA adds an additional $3,550 ($7,100 if you are married) that you can contribute to tax advantaged accounts. HSAs are also one of my favorite stealth retirement accounts because they are triple tax efficient if used correctly. You can contribute tax-free, the funds grow tax-free inside the account, and the funds can be withdrawn tax-free if used for qualifying medical expenses.

    So, there are steps you can take if your 401k or other retirement savings accounts aren’t at the level of those in the article, or otherwise where you’d like them to be. And if you’d like someone to help you put together a plan to boost your 401k or IRA contributions consider reaching out to a fee-only financial planner today.