Financial Priorities as a New Attending – Podcast #219

Becoming a new attending is a complicated time in your financial life. That first year out of training is probably the most important year of your financial life. What you do with your financial life in that first year, can predict the next 30 or 40 years of your financial life with surprising accuracy. In this episode we go over the financial priorities of a new attending, what you should be focusing on and in what order, from insurance and student loans to retirement accounts and mortgages. For those who don’t fall into this category, we answer listener questions about asset allocations for 529 accounts, having multiple 401k(s), benefits of a side gig as a business owner, improving your cyber security and avoiding identity theft, and if the pandemic continues to affect the income recertification for IDR.

 

 

What Should a New Attending Prioritize Financially?

Let’s talk about some of the things you ought to be thinking about as a new attending. Tick these off in your mind as we go down the list and make sure you have them all taken care of. If you don’t, start working on them today.

 

How Much and What Kind of Insurance Should an Attending Doctor Have?

The first one is probably going to be upgrading your disability insurance. Most of the time as a resident, you can only buy $5,000, maybe $7,500 worth of coverage. Most attendings probably want and need more coverage than that in the event that they get disabled. Typical attending amounts seem to range from $10,000 to $20,000. Now, remember you have to not only be able to live off that amount, but you have to also be able to save for retirement because this policy is only going to pay until you’re 65 or 67.

So, take a look at your disability insurance. If you don’t have it yet, go get it. You should have bought it as an intern, but if you still don’t have it, go get disability insurance. Make sure you have enough. Maybe you buy another policy. Maybe if your health has changed or you took up some dangerous hobbies, exercise your future increase option, and get that in place.

Same thing for life insurance. If you have anyone else depending on your income, you need term life insurance, big fat policy, some sort of seven-figure policy. Maybe you had a million dollars as a resident. Maybe it’s time to bump that up to $3 million or something like that. Take a careful look at that as a new attending. While disability insurance is kind of expensive, life insurance is pretty cheap. No reason not to have enough.

Likewise, while we’re talking about insurance, it’s a good time to put an umbrella policy in place. Remember an umbrella is an excess personal liability policy, that stacks on top of your auto insurance and on top of your homeowners’ insurance. You usually buy it from the same people that you’re getting those policies from. Instead of having a $50,000 limit, you now have a million-dollar limit or a $3 million limit or a $5 million limit.
These are pretty cheap, just a few hundred dollars a year gets you way more coverage than your state minimums on your auto policy. About 80% of umbrella policy claims are actually auto-related. So, it’s really mostly an excess auto liability policy.

Use one of our recommended insurance agents to help you get these insurances in place.

 

Managing Your Student Loans as a New Attending

Next up is your student loans. If you don’t already have your student loans taken care of, now is the time to make sure you have a plan in place. If you need help putting that plan in place, we recommend studentloanadvice.com. If you’ve already got it figured out, chances are good that you need to refinance. If you haven’t refinanced private loans already, make sure you do that. You might want to do it again now that you’re an attending and qualify for better rates.

If you’re not going for PSLF, this is the time to refinance your federal loans. Go get a cash bonus, get a free Fire Your Financial Advisor course, get a lower rate, get better service and get those suckers refinanced. It’s not unusual at all for me to see people take loans from 6% to 2%.

The shorter the term, and, if you’re willing to run the interest rate risk yourself with a variable rate loan, the better rate you get.

Now is a great time to start paying on those student loans. The whole point of “live like a resident” is to get that schooling paid for. You’re not really done with medical school until you’ve paid for it. So, let’s get it paid for. If you’re like most doctors, average doctor, average debt, you should be able to wipe out that medical school debt in two to three years of living like a resident.

Then you’re done. You’re free from it. If you want to change careers, you can. If you want to cut back, you can. If you want to rush toward financial independence, you can. If you just want to live a good life, you can, because you don’t have those loans hanging over you every month.

That $2,000 – $3,000 – $4,000 – $5,000 – $6,000 a month, whatever you’re paying toward them every month, you can now redeploy towards your other financial goals or you can just take a really great trip every single month. It’s really up to you, but get that knocked out of your life.

 

You Need a Budget

This is a good time if you don’t already have it in place, and I hope you already do, but if you don’t, put a budget or spending plan in place. You need to be “living like a resident” at this point in your life. If you come out of residency, this is the “live like a resident” period of two to five years. You don’t have to live exactly like a resident, you can give yourself a tiny raise, but don’t grow into your attending income all at once. Take the difference between your attending income and your resident lifestyle, and use it to build wealth, pay off student loans, save up a down payment on your dream home, max out retirement accounts, build an emergency fund, all that kind of stuff.

The issue with most new attendings is you have more good uses of money than you have money. You have to prioritize those according to what your priorities are, but eventually the money is going to run out, probably before your good uses for it. That is why “living like a resident” matters, because it gives you way more money to spread among all those great things you have to use your money for.

Make sure you have a written financial plan in place. If you don’t know how to put that plan in place, try the Fire Your Financial Advisor course. If that doesn’t work, at least the course will teach you how to find a good financial planner that can help you do that.

 

Paying Off Debt

If you have credit card debt, you are not unusual. Many new attendings have been dragging credit card debt all the way through medical school and residency, just making minimum payments. Now is the time to wipe that stuff out. As an attending every month, you’re having $15,000 to $40,000 hit your checking account. Wipeout those credit cards. How big can they be at this point? Do you really have more than $5,000 or $10,000 or $30,000 in credit cards? You can wipe those out in just two or three months.

Same thing with your car loan. You have some $8,000 car loan because you had to replace a car in residency? Go knock that out and be done with it. Get it out of your life, simplify your life. If you’re driving some terrible car, right now is the time to start saving up for a better one. Save up so you can pay cash for the car you want to drive.

 

Take Advantage of Roth Accounts

Another great thing to consider when you are a brand new attending is Roth accounts. In general, Roth is good for residents unless you’re playing games with your student loans, trying to get more of them forgiven. You want to use Roth accounts in your lower earnings years. That includes residency years, fellowship years, and the year you come out of training. Remember you have half a year of low income as a trainee and half a year of higher income. That’s still lower than your peak earning years. It’s a good year to use Roth accounts. Also, it may be a good year to do a Roth conversion. If you had a tax-deferred 403(b) or something during residency, if you have the money to pay the taxes, consider converting it to a Roth IRA right now at a lower tax bracket than you’ll be in next year.

 

Buying a Home

Make sure your job is working out. Make sure the job likes you and you like the job. That usually takes a few months, maybe 6 months, maybe 12 months, and then start working toward buying a house. You don’t have to wait until you have the cash to buy a house. It’s okay to use a mortgage. You don’t even have to have the cash to make a 20% down payment. I’m okay with you buying a house using a doctor mortgage. Less than 20% down, they will work with you based on your contract income rather than your actual tax statements or your actual pay stubs.

They’ll only look at the required student loan payments that you have to make rather than the total amount you owe. You don’t have to pay private mortgage insurance, PMI, that mortgage insurance that they make you pay when you put down less than 20% in order to protect the lender from you defaulting. Doctor mortgages don’t require you to pay that. So go ahead and buy a house once you’re in a stable personal and professional situation. Use one of our recommended loan officers.

 

How Big Should Your Emergency Fund Be?

Get a real emergency fund. You probably had some tiny little thing as a resident. If you had a $2,500 emergency fund as a resident, maybe now’s the time to bump that up to $10,000 or $15,000. The usual guidelines are three to six months’ worth of your living expenses. So, look at what you spend, multiply it by three, that’s your emergency fund.

 

Understanding Your Retirement Accounts

Figure out your retirement accounts. You have a new employer, maybe you’re self-employed and you want to open an individual 401(k). Figure out what’s available to you and start maxing the amount. If you start saving for retirement from day one, you would probably work half as long as your peers that don’t do that. Those early dollars really become the largest part of your portfolio down the road. So, get those retirement accounts going.

You should be able to do that even while you’re paying off student loans, even while you’re building an emergency fund, even while you’re paying off credit card debt, because you’re living like a resident. So, you have this huge amount of money between your attending salary and your resident lifestyle.

 

Setting Your Priorities

We hope that helps and gives you some financial priorities as a new attending. It’s hard to say, prioritize your emergency fund over your credit card debt or your student loans over maxing out retirement accounts. Our hope is that by living like a resident, you’ll be able to do it all at once.

 

Reader and Listener Q&As

How to Improve Your Cyber Security and Avoid Identity Theft

“I have a lot of things squared away as far as insurance and emergency fund and starting to have a good savings rate. So, I find myself, like a lot of other people, kind of wondering what’s next. Something that I feel like I’ve been ignoring for a while is cybersecurity. It certainly seems when you look into it that there’s a lot higher risk of a cyber breach than there is over policy limits judgements. I find myself looking for information about password managers, password randomizers, authenticators. I was just wondering if you had any thoughts on cybersecurity, getting good management of your passwords and making sure that there isn’t a bad case of identity theft that could ruin someone’s finances.”

I am not an expert in this. In fact, we brought on our Chief Technology Officer last year and the first thing he did was pull his hair out at our password practices. We revised everything at the White Coat Investor and in our personal lives. We have authenticators now. You have to have two methods in order to log into something. Not only do you have to know the password, but you have to have a device like your phone in order to log in to something.

We started using LastPass, which is our password generator, and we made long, randomized passwords for everything. Obviously, I can’t remember all these passwords, but it does demonstrate to me just how insecure everything at the hospital is by comparison. You actually have to remember your passwords there. I can’t use LastPass or similar technology there. No one there is using any sort of reasonable password security at all compared to what you do at home.

So, the main thing is to do the basics. The basics are not logging into your financial accounts at the library or at the hospital. Maybe if you want to be extreme, like some people, you have a dedicated laptop that only does your finances. Make sure the laptop has a password on it, make sure you keep it secure. I would probably spend the money on something like LastPass. We should have done that long before we did, for both personal and business purposes. As much as you can, use those passwords. If you’re using the same password for everything, you are putting everything at risk.

Now, is it worth buying insurance against this sort of stuff? These identity theft insurance products out there? I don’t know that I know enough yet. My thought is that is something that I can probably afford to self-insure. My general rule with insurance is not to buy insurance for something that I can afford to self-insure. I suppose those people who offer these services for insurance will also offer them if I pay them cash. I want their services in the event that there is a breach.

A lot of people ask should they split their money between two brokerage accounts or two mutual fund houses in order to reduce the risk of Vanguard or Fidelity being hacked. I think that’s probably not as important as a lot of people think, but naturally that happens to me. I’ve got money at Schwab in one 401(k) and some money at Fidelity in another 401(k) and some in the DSP in another 401(k) and some accounts at Vanguard.  So just naturally, I think for a lot of us, that happens automatically, but whether that’s worth the additional complexity or not, it comes down to how paranoid you are about cybersecurity. Maybe you want to do that.

But mostly it is just doing the basics. Password security and using an authenticator.

Recommended Reading:

Why Protecting Your Online Security Can Significantly Affect Your Wealth

 

Did the Pandemic Affect Income Recertification for IDR?

“My question is regarding income-driven repayment and the COVID pandemic. I graduated medical school last year and consolidated my loans right away and entered repayment in REPAYE. So, I’ve been making $0 payments since then. And now that it’s been a year since I consolidated, I recently submitted my income recertification. However, fed loans is saying that they won’t process the IDR request until January of 2023. I just got off the phone with them. They said that because of the pandemic, they’re extending the $0 payments until that time, or they’re not processing the income recertification. So, they’re saying that I don’t have to pay an increase in my student loan payments this year or next year until January of 2023. Is this something you’ve heard of? Have other people experienced this or did I hit a flaw in the system?”

This is kind of classic for the student loan servicing companies. You call them up tomorrow, ask the same questions, you’ll get a different answer. No, the 0% deal has not been extended into 2023. It runs out, under current law as of today, October 1st, 2021. That’s when your payments will start being more substantial and interest will start accruing.

Now, I don’t know what your income has been, what your calculated IDR payment is. Maybe it’s $0. Maybe that’s the case, but I suspect it won’t be, if you’ve had a full year of being an intern, you’ll probably owe something on those payments. But what are they talking about? I have no idea. That’s why I’d call back and get another answer. Maybe they’re going to consider your income to still be what it was in 2021. I don’t know. But that’s not what they’re supposed to be doing.

What they’re supposed to be doing is each year looking at your income and determining your payments based on that. There’s only supposed to be 0% interest through this October. After that, your payments are going to start accruing. If you’re not paying on them, the loan is going to be getting bigger.

So, no, I haven’t heard what they’re talking about. I think someone gave you bad information. That’s not unusual when you call up student loan servicing companies. So, when in doubt, escalate your questions to the next level. When in doubt, call back, make sure you’re getting the same answer. Keep track of all your paperwork, all your payments, even $0 payments, every certification form you do, keep all that stuff. You might need it, especially if you’re going for public service loan forgiveness.

Now, if you end up refinancing your loans and paying them off anyway and not going for forgiveness, this isn’t going to matter all that much. It saves you a little bit of interest to have 0% for a while, but for the most part, you’re paying all those loans back. So, no big deal. But if you are going for PSLF or even IDR forgiveness, which I’m not a huge fan of because it takes so long, then you want to keep really careful records of all of these payments you’re making. Let me know if you learn more about it.

 

Benefits of a Side Gig for a Business Owner

“I have a side business doing some lectures for a pharmaceutical company. I started doing this in 2019 and I had some 1099 income. Since this is totally unrelated to my work in my primary care internal medicine office, which I own, I thought this would be a great opportunity to start an individual 401(k). I remember when I posted this idea in the forum, the comment was made that because I own greater than 80% of my business, that is my primary care practice, it is in a controlled group with my side gig. It was further commented that because of this controlled group, I am not eligible to form or to contribute to this individual 401(k).

Now, my question is, besides the actual income that I’ll get from the speaking events, is there any other benefit to doing a side gig? I’m in about the 32% tax bracket, maybe a little bit higher this year. And I was wondering, are there any other benefits to doing this side gig or is it not worth it from a retirement planning point of view?”

First of all, you got good advice on the forum. That’s true. If you own the practice and you get some 1099 income, it’s all looked at as one business, as far as how many 401(k)s you can have. Yes, you can have more than one 401(k), but you can only have one 401(k) per unrelated employer.

And in your case, because you own the whole business, the whole 1099 business, and you own your whole practice, those are the same employer, essentially. You can’t do something for yourself that you’re not offering to your employees in the practice. They are trying to protect those employees from the owners just hosing them and taking advantage of all of these great retirement accounts.

So, that advice was good. Then you ask, is it worth it? Well, if the only reason you’re doing a side gig is to put more money into a solo 401(k), it may not be worth it. But remember, because you usually max out the 401(k) at your main gig, assume it’s a W-2 gig at a hospital. The only amount you’re putting into an individual 401(k) from a side gig is about 20% of your net profit, net of all business expenses, including the employer half of payroll taxes.

If all you’re getting is that in there, then obviously that can’t be the main reason you’re doing it. 80% of the profit has to go somewhere else. You have to spend it, or you invest it in a taxable account, or you can use it to go in your HSA or whatever.

But truthfully, the main benefit to you, retirement-wise, of having additional income is that you can save additional income. Just because you can’t do it in a retirement account, it doesn’t mean you can’t save it. You can always save it in a taxable account. There may be some non-monetary benefits as well. Maybe it makes you more excited about work. Maybe you learn some new skills about it that you can apply in your main job. Lots of non-monetary benefits to having a side gig as well. If nothing else it diversifies your income a little bit.

But as far as retirement goes, no, you’re not going to be able to use another retirement account because of the side gig.

Recommended Reading:

Multiple 401(k) Rules

 

What Is a Leveraged 3X ETF?

“What are your thoughts on HEDGEFUNDIE’s excellent adventure portfolio? There is a post on Bogleheads in 2019. It consists of 60% UPRO and 40% TMF, which are 3X leveraged S&P 500 and long-term treasury funds respectively. Viewing it on portfolio visualizer, it has returned almost 30% annually since 2009, which was when UPRO was introduced. Admittedly, that is a period where the S&P 500 did very well and interest rates fell, which is the best case for this scenario. Recently, I saw a post on Optimized Portfolio, which simulated data back to 1987 and found that it beat the S&P 500 by about 7% over that timeframe. I understand that 3X leverage is daily. And so, on an annual basis, the performance is almost certainly not reacting. Also, I think it’s crazy to put everything into this portfolio since the leverage introduces additional volatility, but probably more importantly, just the risk of it falling out. However, the historical performance is strong. Putting 10% of your portfolio into this, especially inside of a Roth account to mitigate the tax inefficiency of all that leverage, seems reasonable. What do you think?”

This is a complex question. This is a poster on the Bogleheads forum that goes by the handle HEDGEFUNDIE. He decided to take an excellent adventure where he put a bunch of money into these 3X ETFs. He put some into an ETF that basically leverages up the return of the S&P 500 by 3X, the daily return leveraged 3X. The other fund leverages up the return of long-term treasuries 3X. So, it’s tons of leverage, and he tries to backtest it and show that it’s awesome.

He shows how he invested in this in February of 2019. He put $100,000 in it. And by August of that year, he gained $43,000. So, that’s great for him, he went from $100,000 to $143,000.

If that changes your life, then go for it. That’s pretty much what I say, but I think it’s dumb. The reason why is because I don’t think these are good long-term investments.

As a general rule, something that’s designed to be traded and to be held the day, which is basically how these things are set up, because they’re leveraged by the day. They’re supposed to give you three times the return of the S&P 500 every day. It is really not a long-term holding. These are kind of gimmicky ETFs, and I’m not a big fan of holding them.

No matter what you combine them with, I just don’t think they’re a good investment. This feels more like playing in the markets. It feels like gambling in the markets. Remember, when you’re leveraged 3X, a 33% drop in the fund wipes out your entire investment. That’s the problem with leverage. They backtested it, and this is the classic error with backtesting. You find something that did really well in the past, and you assume that whatever caused it to do well in the past is going to continue into the future.

Well, what did well over the 10 years prior to 2019 when he put this post up there? The S&P 500 did really well and long-term treasuries did really well. So, is it any surprise that if you combine these two and add some leverage that you had a pretty good return? Well, no, that’s not surprising at all.

If you go back to the decade prior to that, when the S&P 500 didn’t actually make much at all, you may not like the return of this portfolio very much at all. I don’t recommend these sorts of schemes to try to boost your returns. I think there’s better ways to use leverage, if you want to use leverage in your portfolio, than using these leveraged ETFs. This is probably not the time to be implementing some sort of highly leveraged market portfolio. It’d be interesting to look at how that 3X treasury fund did, particularly as interest rates went up a little bit this year. It probably got hammered pretty hard, I would imagine.

But no, I don’t really recommend this portfolio. I would not put it on my list of reasonable portfolios.

Recommended Reading:

How to Tell If Your Investment Plan Is Reasonable

150 Portfolios Better Than Yours

 

Asset Allocation for 529 Accounts

“Can you talk about 529 asset allocation on your podcast? Should money in a 529 account be treated as one of your personal buckets and as such be invested at your personal asset allocation? Alternatively, if not, do you believe in a blended approach that changes over time and increases fixed income allocation closer to college, treating it similarly to a retirement account with a target date, or instead just go aggressive the whole way and supplement college payments with personal funds if the time for college happens to coincide with a bear market?”

It is my firm belief that you can take a lot of risk with a 529. So, I take a lot of risks with our 529. They are 100% equity. And in fact, 50% of the 529 is in small value funds and the rest in international funds.

The reason I believe you can invest those aggressively is because the consequences of a shortfall, at least in my case, are so minimal. Think of all the other ways you can pay for college in the event that the returns you’re hoping for don’t materialize in the 529.

  1. Your kid can go to a cheaper school.
  2. They can earn some money during the summers and while they’re at school to help supplement the costs.
  3. Your cash flow. You’re still making money. You’re still working. You can help pay for school with your cash flow.
  4. Your other savings. You have some money probably in a taxable account. You wouldn’t even have to raid retirement accounts to get it.

There are a lot of other things you can do to pay for school in the event of a shortfall. So, the consequences are lower than they are when it comes to your retirement portfolio. No one is going to give you a loan for retirement, and you don’t have this other bucket of money or these other earnings you can use to pay for retirement. So, I actually think you can take more risks saving for college, despite the shorter time horizon, than you can saving for retirement.

Now, if you don’t feel the same way, you can do what most 529s do, which is get less aggressive as you get closer to the years you’re going to spend it. If you buy the equivalent of a target-date fund in your 529, that’s what it’ll do. When the kid is four, it’s pretty aggressive, by the time the kid is 14, it’s much less aggressive. And by the time the kid is 18, it’s hardly aggressive at all.

But the truth is if the kids go to undergraduate and professional school for four years, some of that money when they’re 18, isn’t going to be spent for seven more years. That’s assuming no gap years. So, some of you have quite a bit of time to let it sit in there in the event of a bear market and see if it recovers. I don’t think you ever have to have it all in cash, even if they’re 18, but you can be less aggressive as you go along.

So, no right answer there. Do what’s right for you. Our asset allocation is pretty aggressive, but I would treat it as a separate allocation than your retirement money. For me, I have a different asset allocation for every financial goal I have. And so, college goal, pretty aggressive. My kid’s 20s fund, pretty aggressive. Our retirement goal, aggressive, but not as aggressive as those.

If I was saving up money to buy a Tesla next year, it wouldn’t be very aggressive at all. It’d probably all be in cash. But for college, we can take significantly more risk for that.

Recommended Reading:

Three Reasons Why You Can Take More Risks with a 529

 

This episode of The White Coat Investor is sponsored by Biohaven Pharmaceuticals. Biohaven is a commercial-stage biopharmaceutical company with innovative therapies designed to improve the lives of patients with debilitating neurological and neuropsychiatric diseases, including rare disorders. Biohaven offers a broad pipeline of late-stage product candidates across three distinct mechanistic platforms, including developing therapies for patients with Amyotrophic Lateral Sclerosis (ALS), Alzheimer’s, and obsessive compulsive disorder (OCD). The FDA also recently gave Biohaven’s Nurtec® ODT (rimegepant) its second indication. To discover more about Nurtec ODT and Biohaven’s neuroinnovative portfolio of treatments in development, visit www.biohavenpharma.com.

 

Milestones to Millionaire Episode

#22 – Family Doc Pays Off $230K in 6 years

It took this doctor 6 years to pay off her student loan debt because she muddled around for a while before getting tired of the loans and getting more aggressive, throwing $3-4K a month at them. It was harder than she thought to pay them off. It is hard to make sacrifices. But she enjoys work so much more now that she is not obsessed with the debt.

 

Quote of the Day

Our quote of the day comes from William Bernstein. He said,

“How do we know that economists have a sense of humor? The answer, they use decimal points. There are just too many variables to pretend great precision. You might as well try to mathematically model your love life.”

There is quite a bit of truth to that. The social sciences themselves are not physics by any means. Finance certainly has a lot of things coming into it and going out of it all the time that are influenced by people.

 

Full Transcription

Intro:
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle.

Dr. Jim Dahle:
This is White Coat Investor podcast number 219 – Financial priorities as a new attending.

Dr. Jim Dahle:

Now one medication is proven to treat and prevent, Nurtec ODT Rimegepant – 75 milligrams. To learn more about this exciting news visit nurtec-hcp.com.

Dr. Jim Dahle:
All right, welcome back to the White Coat Investor podcast. We’ve missed you guys. It’s been a week, right? Actually, we’re recording this the same day as the last one we have recorded. It’s only been about an hour for us, but for you it’s been a week. So here we go.

Dr. Jim Dahle:
This one we’re recording June 17th. It’s going to run on July 15th. So, if it sounds out of date, that’s why. It’s about a month before it actually runs. But I think most of what’s going to be in this podcast, is going to be just as up to date a month from now as it is today.

Dr. Jim Dahle:
All right, let’s do a quote. This one’s from William Bernstein. He says, “How do we know that economists have a sense of humor? The answer, they use decimal points. There are just too many variables to pretend great precision. You might as well try to mathematically model your love life”.

Dr. Jim Dahle:
And I think there’s quite a bit of truth to that. The social sciences themselves are not physics by any means. And finance certainly has a lot of things coming into it and going out of it all the time that are influenced by people. When you put people in the mix, things get weird. Those of you who practice medicine, especially psychiatry, know that very well.

Dr. Jim Dahle:
Thanks for what you do by the way. Whether you are exercising today, out hiking, whether you are racing the Tour de France as one of our recent listeners is, whether you are going to work, coming home, whatever, thanks for what you do. Your work is hard and someone will tell you thanks for doing it.

Dr. Jim Dahle:
All right. In case you are not aware, we are giving away Fire Your Financial Advisor to anybody who refinances $100,000 or more of student loans through the White Coat Investor links. This is a win-win-win deal. If you’re not going for forgiveness with your student loans, you can get a lower rate, you get cash back, you get a free Fire Your Financial Advisor online course and you get better service than you’re probably getting from your prior student loan companies. So, it’s really a pretty great deal.

Dr. Jim Dahle:
Not only will you get the amazing cash rebates we’ve negotiated, but now you’ll also get another $799 in value with that course. So, join more than 5,000 other professionals who have created their own financial plan with the help of the White Coat Investor.

Dr. Jim Dahle:
That’s valid for loans initiated from May 1st through October 31st, 2021. You have to claim the course within 90 days of loan disbursement. You can do that at whitecoatinvestor.com/refibonus.

Dr. Jim Dahle:
All right, let’s talk a little bit about financial priorities as a new attending. It’s a really complicated time of your financial life actually. Probably the most important year of your financial life is that first year out of training. In fact, if you tell me what you do with your financial life in that first year out of training, I can predict the next 30 or 40 years of your financial life with surprising accuracy.

Dr. Jim Dahle:
So, let’s talk about some of the things you ought to be thinking about. It’s July, right? We’ve got a bunch of new attendees out there. Tick these off in your mind as we go down this list and make sure you’ve gotten them all taken care of. If you don’t, start working today on those that you don’t have taken care of.

Dr. Jim Dahle:
All right, the first one is probably going to be to upgrade your disability insurance. Most of the time as a resident, you can only buy $5,000, maybe $7,500 worth of coverage. And most attendings probably want and need more coverage than that in the event that they get disabled.

Dr. Jim Dahle:
Typical attending mounts seem to range from $10,000 to $20,000. Now, remember you have to not only be able to live off that amount, but you have to also be able to save for retirement because this policy is only going to pay until you’re 65 or 67.

Dr. Jim Dahle:
So, take a look at your disability insurance. If you don’t have it yet, go get it. You should have bought it as an intern, but if you still don’t have it, go get disability insurance, but it’s a good time to take a look at it. Make sure you have enough. Maybe you buy another policy. Maybe if your health has changed or you took up some dangerous hobbies, exercise, your future increase option, and get that in place.

Dr. Jim Dahle:
Same thing for life insurance. If you have anybody else depending on your income, you need term life insurance, big fat policy, some sort of seven-figure policy. Maybe you had a million dollars as a resident. Maybe it’s time to bump that up to $3 million or something like that. So, take a careful look at that as a new attending. While disability insurance is kind of expensive, life insurance is pretty cheap. No reason not to have enough.

Dr. Jim Dahle:
Likewise, while we’re talking about insurance, it’s a good time to put an umbrella policy in place. Remember an umbrella is an excess personal liability policy, the stack on top of your auto insurance, and on top of your homeowners’ insurance. You usually buy it from the same people that you’re getting those policies from. And instead of having a $50,000 limit, you now have a million-dollar limit or a $3 million limit or a $5 million limit.
And these are pretty cheap, just a few hundred dollars a year gets you way more coverage than your state minimums on your auto policy.

Dr. Jim Dahle:
About 80% of umbrella policy claims are actually auto-related. So, it’s really mostly an excess auto liability policy. But think about it. You run over some CEO driving a Tesla, $50,000 isn’t going to go very far. That’s not even going to pay for the car, much less the medical bills, and then the lost earnings from that person you hit. You need more liability covers in that.

Dr. Jim Dahle:
Next thing is your student loans. If you don’t already have your student loans taken care of, now is the time to make sure you have a plan in place. If you need help putting that plan in place, we recommend studentloanadvice.com. If you already got it figure it out, chances are good that you need to refinance. If you haven’t refinanced private loans already, make sure you do that. You might want to do it again now that you’re an attending and qualify for better rates.

Dr. Jim Dahle:
But this is also the time if you’re not going for forgiveness, this is the time to refinance your federal loans. Go get a cash bonus, get a free Fire Your Financial Advisor course, get a lower rate, get better service and get those suckers refinanced. It’s not unusual at all for me to see people take out loans from 6% to 2%.

Dr. Jim Dahle:
The shorter the term, and if you’re willing to run the interest rate risk yourself with a variable rate loan, the better rate you get. And what’s interesting is people who took that advice in the last few years and then had rates fall on them, ended up having student loan rates under 1%, which is pretty phenomenal, right? Almost everything you’re paying at that point is going toward principal rather than interest. So that’s a good thing.

Dr. Jim Dahle:
This is a good time if you don’t already have it in place, and I hope you already do, but if you don’t, put a budget plan in place, a spending plan. You need to be “living like a resident” at this point in your life. If you come out of residency, this is the “live like a resident” period of the last two to five years. You don’t have to live exactly like a resident, you can give yourself a tiny raise, but don’t grow into your attending income all at once. Take the difference between your attending income and your resident lifestyle, and use it to build wealth, to pay off student loans, save up a down payment on your dream home, max out retirement accounts, build an emergency fund, all that kind of stuff.

Dr. Jim Dahle:
The issue with most new attendings, is you have more to do, more good uses of money than you have money. And so, you have to prioritize those according to what your priorities are, but eventually the money’s going to run out probably before your good uses for it. And that’s why “living like a resident” matters because it gives you way more money to spread among all those great things you have to use your money for.

Dr. Jim Dahle:
If you have credit cards, if you have credit card debt, you are not unusual. Many new attendings have been dragging credit card debt all the way through medical school and residency, just making minimum payments. Now is the time to wipe that stuff out, right? As an attending every month, you’re having $15,000 to $40,000 hit your checking account. Wipe out those credit cards. How big can they be at this point? Do you really have more than $5,000 or $10,000 or $30,000 in credit cards? You can wipe those out in just two or three months.

Dr. Jim Dahle:
Same thing with your car loan. You’ve got some $8,000 car loan because you had to replace a car in residency? Go knock that out and be done with it. Get it out of your life, simplify your life.

Dr. Jim Dahle:
Make sure you have a written financial plan in place. If you don’t know how to do that, to put that plan in place, try the Fire Your Financial Advisor course. If that doesn’t work, at least the course will teach you how to find a good financial planner that can help you do that. You can find financial planners as well at the White Coat Investor website under our recommended tab.

Dr. Jim Dahle:
And of course, now is a great time to start paying on those student loans, right? The whole point of “live like a resident” is to get that schooling paid for. You’re not really done with medical school until you’ve paid for it. So, let’s get it paid for. If you’re like most doctors, average doctor, average debt, you should be able to wipe out that medical school full debt in two to three years of living like a resident.

Dr. Jim Dahle:
And then you’re done. You’re free from it. If you want to change careers, you can. If you want to cut back, you can. If you want to rush toward financial independence, you can. If you just want to live a good life, you can, because you don’t have those loans hanging over you every month.

Dr. Jim Dahle:
And that $2,000 – $3,000 – $4,000 – $5,000 – $6,000 a month, whatever you’re paying toward them every month, you can now redeploy towards your other financial goals or you can just take a really great trip every single month. It’s really up to you, but get that knocked out, out of your life.

Dr. Jim Dahle:
Another great thing to consider when you are brand new attending is Roth accounts. In general, Roth is good for residents unless you’re playing games with your student loans, trying to get more of them forgiven. You want to use Roth accounts in your lower earnings years. That includes residency years, fellowship years and the year you come out of training. Because remember you got half a year of low income as a trainee and half a year of higher incomes. That’s still lower than your peak earning years. It’s a good year to use Roth accounts. Also, it may be a good year to do a Roth conversion, right? If you had a tax deferred 403(b) or something during residency, if you have the money to pay the taxes, consider converting it to a Roth IRA right now at a lower tax bracket, then you’ll be in next year.

Dr. Jim Dahle:
All right. Make sure your job is working out. Make sure the job likes you and you like the job. That usually takes a few months, maybe 6 months, maybe 12 months, and then start working toward buying a house. You don’t have to wait until you have the cash to buy a house. It’s okay to use a mortgage. You don’t even have to have the cash to make a 20% down payment. I’m okay with you buying a house, using a doctor mortgage. Less than 20% down, they will work with you based on your contract income rather than your actual tax statements or your actual pay stubs.

Dr. Jim Dahle:
And they’ll only look at the required student loan payments that you have to make rather than the total amount you owe. That’s what a doctor’s mortgage is. And you don’t have to pay a private mortgage insurance, PMI, that mortgage insurance that they make you pay when you put down less than 20% in order to protect the lender from you defaulting, doctor mortgages don’t require you to pay that. So go ahead and buy a house once you’re in a stable, personal and professional situation.

Dr. Jim Dahle:
Get a real emergency fund. You probably had some tiny little thing as a resident. If you had a $2,500 emergency fund as a resident, maybe now’s the time to bump that up to $10,000 or $15,000. The usual guidelines are three to six months’ worth of your living expenses. So, look at what you spend, multiply it by three, that’s your emergency fund.

Dr. Jim Dahle:
Figure out your retirement accounts. You’ve got a new employer, maybe you’re self-employed and you want to open an individual 401(k), whatever, figure them out. Figure out what’s available to you and start maxing the amount. If you start saving for retirement from day one, you would probably work half as long as your peers that don’t do that. Those early dollars really become the largest part of your portfolio down the road. So, get those retirement accounts going.

Dr. Jim Dahle:
You should be able to do that even while you’re paying off student loans, even while you’re building an emergency fund, even while you’re paying off credit card debt, because you’re living like a resident. So, you have this huge amount of money between your attending salary and your resident lifestyle.

Dr. Jim Dahle:
And if you’re driving some terrible car right now is the time to start saving up for a better one. Saving up so you can pay cash for it, not going out and buying $120,000 Tesla in credit, but saving up to pay cash for the car you want to drive. And maybe you take a little trip, reward yourself for finishing residency. I’m not saying you got to have full on austerity measures, but that’s the general concept. You live about like you were as a resident while earning like an attending.

Dr. Jim Dahle:
All right. I hope that helps and gives you some financial priorities as a new attending. It’s hard for me to say, prioritize your emergency fund over your credit card debt or your student loans over max out retirement accounts. My hope is that by living as a resident, you’ll be able to do it all at once.

Dr. Jim Dahle:
Let’s take our first question from Dan Barbera. This one’s about cyber security and identity theft.

Dan Barbera:
Hi Jim. My name is Dan Barbera. I’m an Air Force flight surgeon down in Hurlburt Field, Florida. I’ve been a longtime fan of the website and the podcast, and I really appreciate your help over the years. Thanks to you and the Physician Father, who kind of got me off on the right foot as far as financial education, I have a lot of things squared away as far as insurance and emergency fund and starting to have a good savings rate. So, I find myself like a lot of other people kind of wondering what’s next.

Dan Barbera:
Something that I feel like I’ve been ignoring for a while is cybersecurity. It certainly seems when you look into it that there’s a lot higher risk of a cyber breach than there is over policy limits judgements like you talk about on the podcast or any of those other things. But I just haven’t gotten around to doing it.

Dan Barbera:
I find myself looking for information about password managers, password randomizers, authenticators. I do see that you actually had a guest post in February of this year, although I don’t think that was highlighted on the podcast yet.

Dan Barbera:
But I was just wondering if you had any other thoughts or if you wanted to highlight any of the tips from the guest post on cybersecurity, getting good management of your passwords and making sure that there isn’t a bad case of identity theft that could ruin someone’s finances. Thank you for all that you do.

Dr. Jim Dahle:
Great question, Dan. And I am not an expert in this. In fact, we brought on our CTO Chief Technology Officer last year and the first thing he did was pull his hair out at our password practices. And we revised everything at the White Coat Investor and in our personal lives. We have authenticators now, right? And so, you have to have two methods in order to log into something. Not only do you have to know the password, but you have to have a device like your phone in order to log in to something.

Dr. Jim Dahle:
We started using LastPass, which is our password generator, and we made long passwords, randomized passwords for everything. And so, obviously I can’t remember all these passwords, but it does demonstrate to me just how insecure everything at the hospital is by comparison. Because you actually have to remember your passwords there. I can’t use LastPass or similar technology there. I have to actually be able to remember my passwords. Nobody there is using any sort of reasonable password security at all compared to what you do at home.

Dr. Jim Dahle:
So, the main thing I think is to do the basics. And the basics are you not logging into your financial accounts at the library or at the hospital. Maybe if you want to be extreme, like some people, you have a dedicated laptop that only does your finances. Make sure the laptop has a password on it, make sure you keep it secure. Those sorts of things.

Dr. Jim Dahle:
I would probably spend the money on something like LastPass. I probably should have done that long before we did, for both personal and business purposes, as much as you can, and use those passwords. If you’re using the same password for everything, you are putting everything at risk. And it’s interesting now that we have somebody watching this stuff, it’s not unusual for us to have 35,000 attempts to hack the White Coat Investor in a single day. And I suspect that lots of other websites are having similar issues as hackers out there prowl around and try to see what they can get into. And so, it is worth securing yourself against.

Dr. Jim Dahle:
Now, is it worth buying insurance against this sort of stuff? These identity theft insurance products out there. And I don’t know that I know enough yet. My thought is that’s something that I can probably afford to self-insure. And my general role with insurance is not to buy insurance that I can afford to self-insure. And so, I suppose those people who offer these services for insurance will also offer them if I pay them cash. And I want their services in the event that there is a breach.

Dr. Jim Dahle:
A lot of people ask about, should they split their money between two brokerage accounts or two mutual fund houses in order to reduce the risk of Vanguard or Fidelity being hacked. I think that’s probably not as important as a lot of people think, but naturally that happens to me. I’ve got money at Schwab in one 401(k) and some money at Fidelity in another 401(k) and some in the DSP in another 401(k) and some accounts at Vanguard and 529s over the Utah 529. So just naturally I think for a lot of us that happens automatically, but whether that’s worth the additional complexity or not, it comes down to how paranoid you are about cybersecurity. And maybe you want to do that.

Dr. Jim Dahle:
But mostly it’s just let’s do the basics, right? Which is password security, which is computer security and those sorts of things. And if it’s really important, use an authenticator. And so, that’s a special kind of software that you load an app on your phone and it gives you a code. So not only do you have to put in your password, but you also have to put in this code that gets sent out to it. It’s a lot like the text message you get when you log into Vanguard, if you have an authenticator that way.

Dr. Jim Dahle:
All right. I hope that’s helpful. Let’s take our next question from Encore.

Encore:
Hey, Dr. Dahle. This is Encore from Florida. My question is regarding income-driven repayment and the COVID pandemic. I graduated medical school last year and consolidated my loans right away and entered repayment in REPAYE. So, I’ve been making $0 payments since then.

Encore:
And now that it’s been a year since I reconsolidated, I recently submitted my income recertification. However, fed loans is saying that they won’t process the IDR request until January of 2023. And I just got off the phone with them. And they said that because of the pandemic, they’re extending the $0 payments until that time, or they’re not processing the income recertification. So, they’re saying that I don’t have to pay an increase in my student loan payments this year or next year until January of 2023. Is this something you’ve heard of? Have other people experienced this or did I hit a flaw in the system? Thanks.

Dr. Jim Dahle:
This is kind of classic for the student loan servicing companies. You call them up tomorrow, ask the same questions, you’ll get a different answer. No, the 0% deal has not been extended into 2023. It runs out under current law as of today. I mean, who knows what’s going to happen, but as of today, it ends October 1st, 2021. That’s when your payments will start being more substantial and an interest will start accruing.

Dr. Jim Dahle:
Now, I don’t know what your income has been, what your calculated IDR payment is. Maybe it’s $0. Maybe that’s the case, but I suspect it won’t be, if you’ve had a full year of being an intern, you’ll probably owe something on those payments. But what are they talking about? I have no idea. That’s why I’d call back and get another answer. Maybe they’re going to consider your income to still be what it was in 2021. I don’t know. But that’s not what they’re supposed to be doing.

Dr. Jim Dahle:
What they’re supposed to be doing is each year looking at your income and determining your payments based on that. And they’re only supposed to be 0% interest through this October. After that, your payments are going to start accruing. If you’re not paying on them, the loan is going to be getting bigger.

Dr. Jim Dahle:
So, no, I haven’t heard what they’re talking about. I think somebody gave you bad information. That’s not unusual when you call up student loan servicing companies. Remember, they got some $11 hour employees sitting behind the phone, making up answers. So, when in doubt escalate your questions to the next level. When in doubt, call back, make sure you’re getting the same answer. Keep track of all your paperwork, all your payments, even $0 payments, every certification form you do, keep all that stuff you might need it, especially if you’re going for public service loan forgiveness.

Dr. Jim Dahle:
Now, if you end up refinancing your loans and paying them off anyway and not going for forgiveness, this isn’t going to matter all that much. It saves you a little bit of interest to have a 0% for a while, but for the most part, you’re paying all those loans back. So, no big deal.

Dr. Jim Dahle:
But if you are going for PSLF or even IDR forgiveness, which I’m not a huge fan of because it takes so long, then you want to keep really careful records of all of these payments you’re making. I hope that’s helpful. Good luck with that. Let me know if you learn more about it.

Dr. Jim Dahle:
All right, the next question comes in from Ricardo about solo 401(k)s and controlled groups. Let’s take a listen to that.

Ricardo:
Hey Jim, this is Ricardo again. I had another question unrelated to my first one. It was regarding a side business that I have doing some lectures for a pharmaceutical company. I started doing this in 2019 and I had some 1099 income.

Ricardo:
Since this is totally unrelated to my work in my primary care internal medicine office, which I own, I thought this would be a great opportunity to start an individual 401(k). I remember when I posted this idea in the forum, the comment was made that because I own greater than 80% of my business, that is my primary care practice, it is in a controlled group with my side gig. It was further commented that because of this controlled group, I am not eligible to form or to contribute to this individual 401(k).

Ricardo:
Now, my question is besides the actual income that I’ll get from the speaking events, is there any other benefit to doing a side gig? I’m in about the 32% tax bracket, maybe a little bit higher this year. And I was wondering, are there any other benefits to doing this side gig or is it not worth it from a retirement planning point of view? Thanks.

Dr. Jim Dahle:
Okay. Great question, Ricardo. First of all, you got good advice on the forum. That’s true. If you own the practice and you get some 1099 income, it’s all looked at as one business, as far as how many 401(k)s you can have.

Dr. Jim Dahle:
If you have questions about this topic, if you’re thinking about using a second 401(k), go to my post called Multiple 401(k) Rules. If you Google anything like that, it’ll pop right up on Google and it goes through the rules for having more than one 401(k). Yes, you can have more than one 401(k), but you can only have one 401(k) per unrelated employer.

Dr. Jim Dahle:
And in your case, because you own the whole business, the whole 1099 business, and you own your whole practice, those are the same employer essentially. And so, you can’t do something for yourself that you’re not offering to your employees in the practice. And so, that’s mainly what they’re trying to protect is protecting those employees from the owners, just hosing them and taking advantage of all of these great retirement accounts.

Dr. Jim Dahle:
And so, that advice was good. Then you ask, is it worth it? Well, if the only reason you’re doing a side gig is to put more money into a solo 401(k), it may not be worth it. But even so remember, because you usually max out the 401(k) at your main gig, assume it’s a W2 gig at a hospital. The only amount you’re putting into an individual 401(k) from a side gig is about 20% of your net profit, net of all business expenses, including the employer half of payroll taxes.

Dr. Jim Dahle:
If all you’re getting is that in there then obviously, that can’t be the main reason you’re doing it because 80% of the profit has got to go somewhere else. You got to spend it, or you got invested in a taxable account, or you can use it to go in your HSA or whatever.

Dr. Jim Dahle:
But truthfully, the main benefit to you, retirement wise of having additional income is that you can save additional income. Just because you can’t do it in a retirement account, it doesn’t mean you can’t save it. You can always save it in a taxable account. There may be some non-monetary benefits as well. Maybe it makes you more excited about work. Maybe you learn some new skills about it that you can apply in your main job, whatever. Lots of non-monetary benefits to having a side gig as well. If nothing else it diversifies your income a little bit.

Dr. Jim Dahle:
But as far as retirement goes, no, you’re not going to be able to use another retirement account because of the side gig. And if that keeps you from wanting to do it, well, quit doing it.

Dr. Jim Dahle:
All right, the next question comes from an anonymous caller. Let’s take a listen.

Speaker:
Hello. What are your thoughts on HEDGEFUNDIE’s excellent adventure portfolio? There is a post on Bogleheads in 2019. It consists of 60% UPRO and 40% TMF, which are 3X leveraged S&P 500 and long-term treasury funds respectively. Viewing it on portfolio visualizer, it has returned almost 30% annually since 2009, which was when UPRO was introduced.

Speaker:
Admittedly, that is a period where the S&P 500 did very well and interest rates fell, which is the best case for this scenario. Recently, I saw a post on Optimized Portfolio, which simulated data back to 1987 and found that it beat the S&P 500 by about 7% over that timeframe.

Speaker:
I understand that 3X leverage is daily. And so, on an annual basis, the performance is almost certainly not reacting. Also, I think it’s crazy to put everything into this portfolio since the leverage introduces additional volatility, but probably more importantly, just the risk of it falling out.

Speaker:
However, the historical performance is strong. Putting 10% of your portfolio into this, especially inside of a Roth account, mitigate the tax inefficiency of all that leverage seems reasonable. What do you think? Thanks for all that you do.

Dr. Jim Dahle:
All right. This is a complex question. I know what you’re talking about. Cindy just told me while we had this turned off that she’s like, “I have no idea what he’s asking about”. Well, this is a poster on the Bogleheads forum that goes by the handle HEDGEFUNDIE. And he decided to take an excellent adventure where he put a bunch of money into these 3X ETFs.

Dr. Jim Dahle:
He put some into an ETF that basically leverages up the return of the S&P 500 by 3X, the daily return leveraged 3X. And the other fund that leverages up the return of long-term treasuries 3X. So, it’s tons of leverage and he tries to back test it and show that it’s awesome.

Dr. Jim Dahle:
He shows how he invested in this in February of 2019. He put $100,000 in it. And by August of that year, he gained $43,000. So, that’s great for him, that he made a bunch of money. He went from $100,000 to $143,000.

Dr. Jim Dahle:
Well, you know what? Great for you. If that changes your life, then go for it. That’s pretty much what I say, but I think it’s dumb. And the reason why is because I don’t think these are good long-term investments.

Dr. Jim Dahle:
As a general rule, something that’s designed to be traded and to be held the day, which is basically how these things are set up, right? Because they’re leveraged by the day. They’re supposed to give you three times the return of the S&P 500 every day is really not a long-term holding. These are kind of gimmicky ETFs, and I’m not a big fan of holding them.

Dr. Jim Dahle:
No matter what you combine them with, I just don’t think they’re a good investment. This feels more like playing in the markets. It feels like gambling in the markets. It doesn’t feel like something that I can buy and then go to the Grand Canyon for three weeks.

Dr. Jim Dahle:
Remember, when you’re leveraged 3X, a 33% drop in the fund wipes out your entire investment. That’s the problem with leverage. So, they back-tested it, right? And this is the classic error with back testing. You find something that did really well in the past, and you assume that whatever caused it to do well in the past is going to continue into the future.

Dr. Jim Dahle:
Well, what did well over the 10 years prior to 2019 when he put this post up there? Well, the S&P 500 did really well and long-term treasuries did really well. So, is it any surprise that if you combine these two and add some leverage that you had a pretty good return? Well, no, that’s not surprising at all.

Dr. Jim Dahle:
If you go back to the decade prior to that, when the S&P 500 didn’t actually make much at all, you may not like the return of this portfolio very much at all. And if I had to guess what the 2020s are going to contain compared to the 20 teens, I would guess it’d be more like the 2000s than the 2010s. But obviously my crystal ball is cloudy, and I have no idea what the future holds.

Dr. Jim Dahle:
But no, I don’t recommend these sorts of schemes to try to boost your returns. I think there’s better ways to use leverage if you want to use leverage in your portfolio, then using these leveraged ETFs. I find it very ironic that in his original post, he says, this was inspired by Market Timers, famous thread on his leveraged life cycle investment strategy during the financial crisis. And I watched that one real time back in 2008 as this other Boglehead post by the name of Market Timer, not only went broke, but went way below broke while he was in graduate school.

Dr. Jim Dahle:
Fortunately, it eventually had a happy ending. He ended up paying off all that debt. He got trying to use leveraged investing in the 2008 global financial crisis. But there’s some pretty significant lessons learned that maybe this isn’t the best way to invest, especially in today’s market when there’s so much speculation, so much fervor and froth going on.

Dr. Jim Dahle:
This is probably not the time to be implementing some sort of highly leveraged market portfolio. It’d be interesting to look at how that 3X treasury funded, particularly as interest rates went up a little bit this year. It probably got hammered pretty hard, I would imagine.

Dr. Jim Dahle:
But no, I don’t really recommend this portfolio. I would not put it on my list of reasonable portfolios. If you’ve seen that blog post 150 Portfolios Better Than Yours, this one is definitely not on it because I don’t think it’s a reasonable portfolio. I think you have to avoid it, but maybe I’m just an old stick in the mud. And I don’t understand the times and the benefits of using all these 3X leveraged ETFs. But in my experience, they’re a great way for day traders to get into trouble and not really something for long-term investors to be using.

Dr. Jim Dahle:
All right, the next question comes from email. “Can you talk about 529 asset allocation on your podcast? Should money in a 529 account be treated as one of your personal buckets and as such be invested at your personal asset allocation? Alternatively, if not, do you believe in a blended approach that changes over time and increases fixed income allocation closer to college, treating a similarly to a retirement account with a target date, or instead just go aggressive the whole way and supplement college payments with personal funds if the time for college happens to coincide with a bear market?”

Dr. Jim Dahle:
Well, I think long-term blog readers know where I stand on this issue. Whether that’s the right stance, it can be argued for sure. This is a controversial topic. Most people don’t actually agree with me on this one, including the people who run 529 plans.

Dr. Jim Dahle:
But it is my firm belief that you can take a lot of risk with a 529. And so, I take a lot of risks with our 529. They are 100% equity. And in fact, 50% of the 529 is in small value funds, but the rest being in international funds. And that’s the way my kids 529s are invested. And that paid off really well. More recently, a small value has done very well. But for the 10 years prior to that it hasn’t necessarily done as well as it would have, it just stuck with the total market fund.

Dr. Jim Dahle:
But at any rate, the reason I believe you can invest those aggressively is because the consequences of a shortfall, at least in my case, are so minimal. Think of all the other ways you can pay for college in the event that the returns you’re hoping for don’t materialize in the 529.

Dr. Jim Dahle:
Number one, your kid can go to a cheaper school is probably the most significant thing. Number two, they can earn some money during the summers and while they’re at school to help supplement the costs. Number three is your cash flow. You’re still making money. You’re still working. You can help pay for school with your cash flow. Number four is your other savings. You’ve got some money probably in a taxable account, somewhere in a savings account. You wouldn’t even have to raid retirement accounts to get into.

Dr. Jim Dahle:
And of course, the government is ever ready to loan your child money to go to school. They may not qualify for that based on your income, and it may not be an actual financial need there, and I’m not a big fan of it anyway. But the truth is there’s a lot of other things you can do to pay for school in the event of a shortfall.

Dr. Jim Dahle:
So, the consequences of risk showing up are much lower than they are for risk showing up when it comes to your retirement portfolio. Nobody’s going to give you a loan for retirement and you don’t have this other bucket of money or these other earnings you can use to pay for retirement. So, I actually think you can take more risks saving for college, despite the shorter time horizon than you can saving for retirement.

Dr. Jim Dahle:
Now, if you don’t feel the same way, you can do what most 529s do, which is get less aggressive as you get closer to the years you’re going to spend it. If you buy the equivalent of a target date fund in your 529, that’s what it’ll do. When the kid is four, it’s pretty aggressive, by the time the kid is 14, it’s much less aggressive. And by the time the kid is 18, it’s hardly aggressive at all.

Dr. Jim Dahle:
But the truth is if the kids go to undergraduate and professional school for four years, some of that money when they’re 18, isn’t going to be spent for seven more years. That’s assuming no gap years or any sabbaticals or anything like that. So, some of you have quite a bit of time to let it sit in there in the event of a bear market and see if it recovers. So, I don’t think you ever have to have it all in cash, even if they’re 18, but you can be less aggressive as you go along.

Dr. Jim Dahle:
So, no right answer there. Do what’s right for you. Our asset allocation is pretty aggressive, but I would treat it as a separate allocation than your retirement money. For me, I have a different asset allocation for every financial goal I have. And so, college goal, pretty aggressive. My kid’s 20s fund, pretty aggressive. Our retirement goal, aggressive, but not as aggressive as those. And we go from there.

Dr. Jim Dahle:
If I was saving up money to buy a Tesla next year, it wouldn’t be very aggressive at all. It’d probably all be in cash. But for college, we can take significantly more risk for that. I hope that’s helpful to you. If you want to read more about that, I have a blog post called “Three Reasons Why You Can Take More Risks with a 529”. Go ahead and check that out.

Dr. Jim Dahle:
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Dr. Jim Dahle:
All right, don’t forget we’re giving away Fire Your Financial Advisor to anybody who refinances more than $100,000 in student loans through the WCI links between now and the end of October. That’s a $799 value. You can join more than 5,000 other professionals who have created their own financial plan with the help of the White Coat Investor.

Dr. Jim Dahle:
Thanks to those of you who have left us a five-star review or told your friends about the podcast. Our most reasonable one says, “Easiest way to understand finances. At first, I dreaded finances because I didn’t want to get taken advantage of, but didn’t know how to go about it. After listening to the podcast over the past year, I’ve set goals, started to feel confident in the financial world. I’ve been able to help coworkers understand how they can do the same. My more relaxed retirement and passive income is due to this podcast. Thank you for everything and all the hard work. This is a must listen podcast”.

Dr. Jim Dahle:
Thank you for your kind words, nacho2056, I think is your name. And thanks to all of you for listening. We appreciate your support here at the White Coat Investor. We love your feedback. Please send us feedback. You can email [email protected] You can get your questions on the podcast. Go to whitecoatinvestor.com/speakpipe.

Dr. Jim Dahle:
And most importantly, keep your head up, shoulders back. You’ve got this and we can help. We’ll see you next time on the White Coat Investor podcast.

Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.

 

 


Originally posted at https://www.whitecoatinvestor.com/financial-priorities-as-a-new-attending/

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