“Dr. Lee” 1


rage_drlee

“Dr. Lee” was my junior resident when I was in training. He was 2 years behind me so he was kind of the perfect person to test my worksheet on. He and I talked a lot during residency about non-medicine related stuff and for the most part we agreed on how we wanted to approach life after finishing residency, especially financially. During the last half of his fellowship I had him fill out this “facts sheet” so we could try to get a plan in place for him. I have included section by section commentary (C) and recommendations (R).

 

WORKSHEET

Age: 32
Married or Single: married
Children: 1
Goal for retirement: unsure

C: My friend describes what I would consider a “stereotypical” resident/fellow coming out of training. Someone in their early 30s, married, a kid or one on the way. Of course, at this point, he has no idea of when he wants to retire. Not many people think about such a thing when they are just getting started.

R: Although it may seem early, now is the time to sit down with your wife and try to make plans for when you both want to retire. Choosing a retirement age doesn’t need to be set in stone, but a simple “earlier or later” is something to consider. Do you want to be 55 or 65… or even 70? Being able to set goals based on a retirement age is important to keep you on track. Obviously, retiring earlier with the same lifestyle will require more savings. However, this needs to be a plan both you and your spouse agree on wholeheartedly.

 

Annual Salary: $74000, will be changing to $275000.
Spouse Salary: $0, stay at home mom, will be working part time if possible after job relocation.
State of Residence: NY
Checking: $16000
Savings: $50000
Goal ($ and time) to have in savings: Would like to have a full salary worth in savings to buffer any unforeseen circumstances (sickness, job loss) etc. Close to goal.

C: His current salary is pretty high for a fellow, but that is probably related to a high cost-of-living in his area. Obviously his salary will increase significantly in July when he starts working as an attending, which is typical. Making 3x-4x more versus residency/fellowship is expected. He has done very well to save $50k in savings and $16k in checking while still a fellow. His wife was working full time while he was a resident/fellow, which certainly helped a ton. However, now she is a stay at home mom, and while she may work part time after relocation, her “potential” income should not be counted on and for all intents and purposes should be considered extra.

R: Assume your wife will be a stay at home mom for the time being. I would recommend she keep any certifications/licenses up to date as well as her CV in case her dream job comes up and she feels the want/need to go back to work full-time. This also will depend on how much she makes versus the cost of full-time child care. This will vary widely depending on region. I applaud that you have been able to save so much during residency/fellowship. Quite frankly, I am jealous. Rule of thumb is to keep 6 months of monthly costs available in savings that is not touched as an emergency fund. If we consider his $50k to be an emergency fund, he is good for 6 months of ~$8k a month in expenses, which is more than enough.

At this point it might be worthwhile to look at a credit union or some other local bank to hold your savings to get a higher APR since this money you won’t touch unless absolutely necessary. I assume by “full salary worth of savings, he means the $74k a year he makes as a resident. Honestly, that’s probably too much. Even $50k might be too much, but still reasonable. I think anything above $50k he can put into other avenues like a CD or Money Market or something. Potentially you could also put it into index funds yourself if you’d like, but that would only after maxing your 401k/403b, discussed below.

CD: $21000
Roth IRA:0
401k/403b/457:~$16000
Pension:$0
Time to Vest:unsure
Goal (as %) to save of your income: 25-35%

C:  Having $21k in CD and $16k in a 401k/403b/457 before starting his first job is phenomenal. This is most likely from his wife’s job mostly. I am jealous once again.

R: Wow… forget what I said above. He has already done what I alluded to by putting whatever he had above $50k into a CD. This isn’t a huge increase in interest, but it is safe, especially if he wants to buy a house sometime in the next 3-5 years. If he isn’t planning to buy a house for more than 3-5 years, could consider putting it into some index funds. Now we need to look into more things a little more deeply. The goal to save 25-35% of income is admirable. But how do you plan to do it? And where will you put it?

The $16k in the 401k/403b/457 is in what fund? This isn’t that important, but it will make a difference in the long run, especially if they expense ratios of that fund are high.

One thing that is very important to consider as this is his first “real job” after finishing fellowship, is he doesn’t start working until July. I would HEAVILY advise people to max any 401k/403b/457 in a new job in the remaining calendar year. This does two things. It allows you to put money away pretax for this “half year”, but also continues your “resident/fellow lifestyle” for a few extra months to ease the transition into attending money. This 2nd point is very important.  However, please make sure you check to see if you contributed anything to a 401k/403b/457 at your fellowship. Also, note that you can max a 401k or 403b WITH a 457. This means $18k a year to 401k or 403b (not both), and an additional $18k to a 457.

Credit Card Debt (and %): $500
College Debt (and %): $0
Medical School Debt (and %): ~$24000
Other School Debt (and %):$0
Other Debt (and %): $0
Goal for being debt free: Within 5 years of graduation

C: I am not sure if you just meant what was currently on your credit card or if you keep a $500 balance. I am thinking it is the former. And dude… seriously? Only $24k in medical school debt?

R: I am assuming you don’t carry the $500 on your credit card and pay it off AUTOMATICALLY every month. However… just in case I will say this: Credit cards are CANCER to your financial health. They are priority one above everything else to be rid. “Should I buy a Big Mac Combo or pay off my credit card debt? PAY THE CREDIT CARD DEBT.”

Ok man, you seriously have $24k in medical school debt? I actually asked him about this because I couldn’t believe it and I was so jealous. He confirmed that is how much debt as he had one to a public medical school, and his wife was helping to pay off his loans while he was in residency/fellowship. … UMMM… OK…

BUY THAT WOMAN SOME ROSES AND SOME JEWELRY. Seriously bro, she deserves it. She is a keeper for sure. A woman who stands by you like that in residency/fellowship is worth her weight in gold. Make sure she knows it.

The decision on how to pay off your loans is based on how much debt you have, their % interest, and other variables. Just remember that whatever interest you owe on your loans that you pay off is interest YOU MADE. So as a general rule of thumb, I would recommend paying off anything over 7% as quickly as possible, as it is essentially impossible to get a guaranteed 7% in any stock market. 4-7% is probably smart to pay as well, but not as aggressively as the 7%+ loans. A less than <4% loan is… don’t be scared by what I have to say next.

It is of lower priority. It is not unimportant,but it isn’t a high priority. Of course pay the interest and maybe a little more if possible… and if you have extra money sure throw it that way, but there are other places to put your money. As for you, my good friend, these days, $24k in debt these days is nothing. Honestly, regardless of its rate, it’s more of an annoyance than anything. Keep paying whatever you feel like then make plans to make it go away your first full year as an attending. The other alternative if you don’t care about it if it’s a really low rate, like <2% or something, just do a long 30 year plan and keep it on autopay and don’t worry about it.

Life Insurance: 1 million
Disability Insurance: $55000/yr
Car Insurance: $1400 per year for two cars
Umbrella Insurance: unsure
Malpractice Insurance: unsure

C: I’m glad to see you have both life insurance and disability insurance in place. That is very important. I will do a more in depth post about each of those things at a later date.

R: Consider increasing your life insurance to $2 million since you will be at attending salary now and in the event that you needed to use it, $2 million is a more reasonable sum, especially if your wife isn’t working. Your disability insurance is great for a fellow. Talk to your insurance agent about increasing your coverage. Depending on which company you went with, they may accept your new contract and let you upgrade all the way to that level of coverage, or they may require you to work a full year at the new salary in order to give you that benefit. Also, keep in mind when/if you get a raise, revisit this once again with your agent in order to get maximum disability. This early in your career life and disability insurance are extremely important.

For car insurance you will want to get enough coverage that will allow you to get umbrella insurance. Not getting umbrella insurance is ok for most people. However, your level of income will necessitate umbrella coverage. Long story short, it covers you above the normal car insurance costs, like if there was accidental death, or you end up getting sued for more than your car insurance covers you for, that is what this “umbrella” is for. For someone of your income potential, I consider this essential. Everyone is a nice person, but once a personal injury lawyer is involved and sees you are a “rich doctor”, they will go after you. This is not something you want to deal with.

Malpractice insurance comes in two flavors, occurrence or claims made. Find out which your group uses. If they use occurrence coverage, then great, there is nothing to worry about it. However, if they use claims made coverage, you need to learn about who covers tail. This becomes more important the longer you stay with that group.

Current Vehicle: Hyundai Elantra 2004 and Nissan Altima 2004
Payment(s): $0
Plans to buy/lease another: subaru forester vs honda crv vs toyota rav4 vs toyota highlander 2010-2013 models

C: Having two dependable cars already paid off is a great move.

R: I applaud the plan to buy a used a car. Of course this will vary by region, but also make sure the car you are buying is practical. If you will be in a snowy region, like the northeast, having a 4WD or AWD vehicle with good ground clearance is also important. The model year of 2010-2013 is also a good range, I would skew more toward something more than 3 years old, but less than 5 years old, and ideally at least the 2nd or 3rd year of that generation. I usually try not to buy the first year of any new generation of vehicles to give them a year to get the kinks out. Using Carmax or Autotrader is a good option, just keep an eye out and keep your options flexible.

Plans to buy a house: 1-5 years
Expected Rent: $1500 not counting utilities
Renter’s Insurance: none

C: Your rent is very reasonable, and I am assuming is very practical. This will serve you well, especially as you transition into a new place.

R: Keep your rent as low as possible, $1500 is great, but anything less than <$2000 is still very reasonable. Make sure you get renter’s insurance. Some places don’t require it, but you should always get it. In the case some freak accident happens that was your fault, like a short from your computer or hair dryer causing a fire or something. Once again, something you don’t want to deal with so you can sleep easy.

When to buy a house? This question is highly variable, but I recommend at least 2-3 years in an area before you start looking into buying a house, especially if your rent is relatively low. Waiting does many things, but the most important thing is that it establishes whether you want to live there long term. You have enough time to see all the advantages and disadvantages of the area you live in. It also helps give you an idea of what area you want to live, what school you want your kids to go to, and a host of other things.

We can revisit this later, with an update afterwards. One thing to remember… renting is not “throwing money away”, you are paying money for a service, namely, shelter. True you aren’t building equity or whatever a realtor would have you believe, but you’re not just burning $2000 a month in a fireplace. Many doctors are so eager to buy houses after we finish our training because of the delayed gratification we all face. This leads to mistakes regarding a house… big mistakes and huge mistakes. There are no “small mistakes” when it comes to houses. I’ll discuss this further in a future post.

Expected Child Care Costs:  unsure, will need to look into daycare/costs etc.
Flexible Spending Account (FSA): 0

C: Primarily, this area is to bring to light whether you will be using a daycare or nanny or not and remember to budget that cost into your monthly expenses.

R: Nanny versus Daycare is a personal choice. There are no wrong answers. However, whether you do either of those things, having a Flexible Savings Account (FSA) is important if you will be using child care for an extended period of time. An FSA allows you to pay for childcare with pretax dollars, I believe up to $5000 a year. Usually, you pay your provider with post-tax dollars and then you are reimbursed the difference. This isn’t a huge amount, but every little bit helps.

Public School or Private School: most likely public
529: $0

C: Public versus Private school is a struggle for many families. Once again, this is simply to get you thinking about how to budget that into monthly expenses again.

R: 529 are state-based savings plans for the college for your children. The college costs for your children this money can be used for is very flexible. It can be used for housing, books, and most things related to college. Start one of these as soon as you are able. In your case, you should start as soon as you make attending money. There is a calculator for how much you should put aside a month in order to pay for their college, but I wouldn’t worry too much about that.

Choose a nice round number and stick to it. $500 a month is great if you can swing it. Also, remember, you don’t have to use YOUR state’s 529. You can use any state’s 529. There is a list of all the plans, but overall I think the Utah and Nevada plans are really good. As you guys may be able to tell, I favor index funds and I like Vanguard for their low expense ratios. Multiple future posts will also address this in significant depth.

Health Insurance: subject to change soon, currently $180/month
Dental Insurance: subject to change soon, current $22/ month
Vision Insurance: none
Health Savings Account (HSA):0

C: Not much to say here. You may be locked into whatever Health insurance your job provides. I think getting Dental and Vision insurance on your own is probably a good idea though.

R: However, if your health insurance is a high deductible insurance, consider putting some money into a Health Savings Account (HSA). This is like the FSA I mentioned above, but specifically for health related expenses. Any co-pays, medications, or other health expenses you pay out of pocket you can pay with pre-tax money. However, you need a general idea of how much you think you will need ahead of time. Some plans allow some degree of carryover, but some are capped on carryover to the next year. Check your plan.

Will: none.
Asset Protection: none
Estate Plan: have not done this yet.

C: No one likes to think about the 3 things above… which is exactly why I brought them up.

R: Once you start your new job, go talk to a local lawyer and make a will. Or, if you are pretty comfortable with getting a will done you can use an online preparer like legalzoom.com or something.

Asset protection is not a huge deal yet, because you don’t have any assets to protect. However, keep this in your mind. Once you are relatively stable with more than a nickel to your name and have “something to lose”, revisit asset protection.

Estate planning is for the people who are really thinking far into the future, for what to leave their children and the best way to leave it to them. This will be dependent on you. Do you want to pay for college and then the kids are on their own? Put money away for your children in a trust fund? Plan to leave your house or house(s) to your children? Again, just something to keep in mind once you are more settled.

Currently, if I recall correctly, the number to remember is $5 million. If you plan to leave more than that, then you will want to look into estate planning. This seems astronomically high to the you right now, but the you 30 years from now with 30 years of inflation behind him may have more than that to leave behind. This is just another thing to keep on your ever-growing list of things to look into every year.’

-Sensei


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