Understanding the Financial Landscape for Physicians

This blog post summarizes the key insights from Volume 6 of the “Ask Me Anything” series. This series aims to answer real-world questions from physicians about their finances, providing clarity and actionable advice. I am covering topics ranging from debt management and retirement planning to choosing a financial advisor.

Diving into the White Coat Investor Financial Waterfall

What if you had a visual guide to help you prioritize your financial decisions? That’s the idea behind a financial waterfall. It’s a step-by-step approach, like a waterfall, guiding you on where to put your money first.

The original concept comes from SC Gutierrez from Aptus. We want to give her credit as the source of this insightful tool. It’s her waterfall, and we think it’s fantastic.

So, what are the core components of this waterfall?

• Get the Free Match: Always, always, always contribute enough to your 401k or 403b to get the full employer match. It’s free money!
• High-Interest Debt: Prioritize paying down debt with interest rates above 6%. This includes credit card debt and private student loans.
• Health Savings Account (HSA): If you have a high-deductible health plan, take advantage of the HSA’s tax benefits.
• Max Out Retirement Plans: Contribute the maximum amount to your retirement accounts.
• Backdoor Roth: Consider a Backdoor Roth IRA, especially if you exceed the income limits for a traditional Roth.
• Taxable Brokerage Account: Invest in a taxable brokerage account for additional growth opportunities.
• Alternative Asset Classes: Explore diversification beyond traditional stocks and bonds.
• Paying Down Low-Interest Debt: Finally, focus on paying down lower-interest debt, like your mortgage.

Overall, we don’t have a lot of complaints and think this is a great chart to live by!

High-Interest Debt: A Closer Look

High-interest debt can quickly eat into your savings and hinder your financial progress. That’s why it’s crucial to prioritize it.

Here’s how to think about prioritizing your debt:

• Focus on debts like credit cards and private student loans before mortgages or government student loans, especially if you’re pursuing Public Service Loan Forgiveness (PSLF).

Consider these strategic points:

• Mortgages: Your mortgage interest rate should ideally be lower than other forms of debt.
• Student Loans: If you’re on track for PSLF, these loans aren’t the biggest concern.
• Private Debt: Can carry very high interest rates.
• Credit Card Debt: Should be at the top of your priority list due to exorbitant rates.

Take action. List all your debts, note their interest rates, and create a plan to tackle the highest-interest ones first. Consider balance transfers or debt consolidation to potentially lower your interest rates.

The Undervalued HSA: Health Savings Account Deep Dive

The Health Savings Account (HSA) is a powerful tool that’s often overlooked. It offers triple tax advantages: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

The catch? You need a high-deductible health plan to be eligible.

So, is an HSA right for you? It depends on your individual circumstances.

We think it’s a very good tool, but only if a high-deductible health plan makes sense for your health insurance needs.

Here’s an actionable step: Evaluate whether an HSA is a good fit for your health insurance needs and financial goals. Even if you don’t need the money for medical expenses right now, you can invest it for future healthcare costs.

Umbrella Policies: Shielding Your Assets

An umbrella policy provides extra personal liability coverage. It sits on top of your homeowner’s/renter’s and auto insurance, offering an additional layer of protection.

Physicians often face a higher risk of lawsuits due to their profession, making umbrella policies even more crucial. This coverage protects your personal assets, but it’s important to remember that it doesn’t cover medical malpractice.

How much coverage do you need? Aim to cover your net worth. A good starting point is $1 million, and you can increase it as your net worth grows.

The cost for a million dollars in coverage is about $200 per year, but can vary depending on your state and other factors.

Review your property and casualty policies to avoid duplicate coverage. For example, you might be able to adjust your auto policy if your umbrella policy provides sufficient liability coverage.

Everyone should have an umbrella policy, regardless of their profession. It’s a smart way to protect yourself from unexpected events.

Contact your property and casualty insurance agent to get a quote for an umbrella policy. Shop around to ensure you get the best rates and coverage for your needs.

Backdoor Roth IRA: Navigating the 5-Year Rule

A Backdoor Roth IRA is a strategy that allows you to contribute to a Roth IRA even if you exceed the income limits.

The “Suze Orman Rule” states that any direct contributions to your Roth IRA, if it wasn’t a Backdoor Roth (5-year rule applies), can always be withdrawn penalty-free, which is why she likes to use this as an emergency fund for younger individuals.

However, with a Backdoor Roth, there’s a 5-year rule to consider. When you convert traditional IRA funds to a Roth IRA via the backdoor method, a 5-year clock starts.

This means that you may not be able to withdraw the converted funds penalty-free for 5 years, even though regular Roth IRA contributions can be withdrawn at any time.

This rule is often missed, but it’s crucial to understand.

Consult with a tax advisor to understand the implications of the 5-year rule for your specific situation. Keep detailed records of your Roth IRA contributions and conversions to easily track the 5-year rule.

Financial Advisor Titles: What to Look For

Here’s a troubling fact: Anyone can call themselves a “financial advisor,” even if they primarily sell insurance products.

Unfortunately, there’s no specific title that guarantees expertise or trustworthiness. Common titles include:

• Financial Advisor
• Financial Planner
• Wealth Manager

So, how do you find a qualified advisor? Don’t rely solely on titles. Instead, look for credentials, experience, and a strong ethical foundation. Credentials behind their name should signify a certain level of competence and commitment.

Research the backgrounds and qualifications of potential advisors before making a decision. Ask about their experience working with physicians and their understanding of your unique financial needs.

Should You Hire a Financial Advisor?

Is hiring a financial advisor a good idea? We believe so, but it’s not a necessity for everyone.

Even if you’re a confident DIY investor, consider a one-time financial plan to get a professional’s perspective. Physicians are undoubtedly intelligent, but time is often a limiting factor when it comes to effectively managing their finances.

A financial advisor can provide several benefits:

• Checking your work
• Ensuring you’re on the right track
• Fine-tuning your financial strategies

When should you consider hiring an advisor?

• Residents and Fellows: May not need complex planning.
• Attending Physicians: When income and financial complexity increase significantly.

Assess your current financial situation, your comfort level with managing your finances, and whether you would benefit from professional guidance. Start by seeking recommendations from colleagues or friends.

Finding the Right Financial Advisor: Personality & Fit

If you decide to work with a financial advisor, it’s essential to find the right fit.

Interview multiple advisors. Talking to several advisors is very important. The personality factor is crucial. You need to find someone you’re comfortable with and whose style aligns with yours. You have to be okay with how the advisor acts.

Aim for a long-term relationship, not just a quick fix. Hiring a financial advisor is a journey, not a one-time event.

Comprehensive financial planning involves a level of intimacy. It takes time to build a plan. Think of hiring a financial advisor like a marriage!

Transparency is paramount. Know what you’re paying and how the advisor is compensated.

Compensation models can vary:

• Flat Fee: You know exactly what you’re paying.
• Hourly Planning: You know the hourly rate and estimated time.
• Assets Under Management (AUM): Always calculate the actual dollar amount you’ll be paying.

Be cautious of commission-based advisors or complex financial products like annuities.

Prepare a list of questions to ask potential advisors about their experience, fees, and investment philosophy. Trust your gut. If something feels off, it’s okay to explore other options.

The Wrap-Up: Key Takeaways from Ask Me Anything Volume Six

You’ve navigated a wealth of information, so let’s recap the key takeaways:

• Prioritize your finances: Use financial waterfalls to guide your decisions.
• Protect your assets: Umbrella insurance is a crucial safeguard.
• Plan for retirement: Consider a Backdoor Roth IRA to maximize your savings.
• Find the right advisor: Prioritize a personality fit and transparent fees.

By taking these steps, you’ll be well on your way to building a secure and prosperous financial future.