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  • Balancing Debt and Investment

    Hey all, hope everyone is having a healthy and improved 2021 compared to last year.

    My wife and I are in our 2nd years out as attendings; she's an OBGYN and I'm an ER doc. We graduated in 2019 and live in southern CA. My wife is a W-2 and I'm an independent contractor incorporated under an S-corp. We spent our first year out just saving our extra income to put 20% down on a house. Now, we're trying to figure out how to best allocate said income to put us in the best possible situation in the long-term. We could really use some advice in terms of what-to-put-where.

    Here are some numbers, all based on personal bookkeeping from 2020:

    Annual income: ~$500k

    Annual tax: ~$185k (it was actually closer to 170k last year, but I'm increasing it now that we have property taxes)

    Mortgage: $720k. We paid 20% down on a $900k home, our mortgage payments are about ~$3k a month on a fixed 30-year at 2.99%. I've included this payment in annual expenses below. We elected to do a 30 year over a 15 year given that it seemed wiser to put the difference down against our student loans (see below).

    Annual expenses: ~$132k (we'll actually be paying less in mortgage than we did in rent, not including upkeep and property taxes). Of note, this includes disability insurance for both of us, life insurance, and umbrella insurance.

    Retirement: I have an old 401k from residency that has about 17k in it; I have not yet set up/rolled over to a new retirement account. My wife has a 401k through her job that she has put some money into, probably worth about 20k, but she gets no match.

    Educational Debt: Extensive. I have about $470k and my wife has about $220k. I received some scholarship assistance for undergrad but still had to take out some loans to help with living expenses, and I received zero assistance (scholarship or family contribution) for medical school (and I didn't get in to any public medical schools in CA, where I'm from). My wife was able to receive some family assistance for both undergrad and medical school, but she still required loans.

    Obviously, the big issue is the debt. Currently, given certain global circumstances, it's collecting a 0% interest rate under Uncle Sam, but who knows how long that will last. Our plan is to aggressively pay that off first, but my big question is, how much (if any) should we be putting towards retirement instead, and if so, which accounts? My first thought is to at least fully fund my wife's 401k and open and SEP IRA or solo 401k for myself, so we can at least reap the tax benefits, but I don't know if this is the best option. Thoughts?

    Oh, and because I know it will be brought up, we DO NOT want children.

  • #2
    20%
    solo 401k only, never sep.
    are you pslf?

    Comment


    • #3
      Is an S-Corp the right choice for you?

      Comment


      • #4
        Thanks for the responses!

        1) Neither of us are PSLF.
        2) I have no choice on being an S-Corp given how my contract works with my group as a whole. But, given my wife and my income split (she makes about 200K, I make about 300K), it does seem to provide some tax benefits (albeit probably minimal).

        Comment


        • #5
          What will the rate on your student loans be when the 0% ends?
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6
            They’re all with the fed right now so around 5%; the plan will be to refinance as much of them as we can as soon as the 0% ends.

            Comment


            • #7
              I'm a big fan of investing > paying down debt, but you have a lot of debt. Definitely refinance student loans once 0% is over. What I would do is make sure you have a fair emergency fund, max out retirement funds (or at least 20% of your gross income), then plow everything else towards student loans until your net worth is closer to $0. Then you can re-evaluate and determine your risk tolerance to ask the age old question of invest vs pay down debt.

              On a side note, shouldn't a dual income physician couple make more than $500k? $300k seems ok for EM, but $200k for OB seems criminally underpaid. That's the other part of the equation that you can possibly improve your situation, get a bigger shovel if possible.

              Comment


              • #8
                If you can refi to a low rate (<3%) then investing probably makes sense assuming you are looking at math only. If emotions are tugging at you and it’s really bothering you to have that much debt (and it is a lot for earning only $500k as dual docs), then I would rethink that position and attack the debt more aggressively.

                Nysoz echoed my initial impression - why earning only $200k for an OBGYN? I first assumed she was raising kids, too, but re-reading, I realized kids are not part of the plan. So what’s going on for a new attending, assuming young, optimistic, and ready to put her skills to work? Is she on ptr track?

                In the long run, you should be fine, even at those numbers, but my goal would be to improve your projections in the shorter run.

                As always, I am not your financial planner and this is general advice only.
                Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                Comment


                • #9
                  Originally posted by Peds View Post
                  20%
                  solo 401k only, never sep.
                  are you pslf?
                  Gross - Retirement (20%)= spending.
                  $500k gross means $100k to retirement and max pretax (regardless of match or which person earns it).

                  The student loan debt is the big rock. The zero temporary interest vs advantage of fixed long term rate is questionable. We do have data (as opposed to emotion) the rates are going up. You may have missed a window or it may go farther.
                  I would consider refinancing a portion or at least get some quotes. $700k SL is not a small short term debt.
                  https://www.cnbc.com/quotes/US10Y
                  I think the interest rate risk on refi is real.
                  Throw every extra dollar after retirement you can at SL’s. Attack that, but not at the expense of retirement.

                  You have been overpaying taxes for two years by neglecting the retirement savings. Good luck with the SL’s.

                  Comment


                  • #10
                    Thanks for the comments, much appreciated!

                    In regards to income comments: our income level was closer to $550k in 2020, but I want to use conservative estimates. My wife gets a base of $210, but she’s in private practice, and COVID hit them hard. It hit (and is hitting) our ER volumes hard too, so I also want to be cautious regarding my own RVUs. Of course we’d love to make more, but talking to friends from residency, many can’t even get full time work right now, so although we’re never going to keep our eyes to the ground if a great opportunity comes around, we are grateful for the work we have now.

                    Comment


                    • #11
                      Your wife is poorly paid. Have you thought of geoarbitrage? Your debt load is mind boggling. Will your wife's income rise after Covid? Can you work extra? Better to do this when young. I would track my expenses. Fund retirement. Refinance loans. Do not even think about the Jones's.

                      Comment


                      • #12
                        Originally posted by MantisTobogganMD View Post
                        Hey all, hope everyone is having a healthy and improved 2021 compared to last year.

                        My wife and I are in our 2nd years out as attendings; she's an OBGYN and I'm an ER doc. We graduated in 2019 and live in southern CA. My wife is a W-2 and I'm an independent contractor incorporated under an S-corp. We spent our first year out just saving our extra income to put 20% down on a house. Now, we're trying to figure out how to best allocate said income to put us in the best possible situation in the long-term. We could really use some advice in terms of what-to-put-where.

                        Here are some numbers, all based on personal bookkeeping from 2020:

                        Annual income: ~$500k

                        Annual tax: ~$185k (it was actually closer to 170k last year, but I'm increasing it now that we have property taxes)

                        Mortgage: $720k. We paid 20% down on a $900k home, our mortgage payments are about ~$3k a month on a fixed 30-year at 2.99%. I've included this payment in annual expenses below. We elected to do a 30 year over a 15 year given that it seemed wiser to put the difference down against our student loans (see below).

                        Annual expenses: ~$132k (we'll actually be paying less in mortgage than we did in rent, not including upkeep and property taxes). Of note, this includes disability insurance for both of us, life insurance, and umbrella insurance.

                        Retirement: I have an old 401k from residency that has about 17k in it; I have not yet set up/rolled over to a new retirement account. My wife has a 401k through her job that she has put some money into, probably worth about 20k, but she gets no match.

                        Educational Debt: Extensive. I have about $470k and my wife has about $220k. I received some scholarship assistance for undergrad but still had to take out some loans to help with living expenses, and I received zero assistance (scholarship or family contribution) for medical school (and I didn't get in to any public medical schools in CA, where I'm from). My wife was able to receive some family assistance for both undergrad and medical school, but she still required loans.

                        Obviously, the big issue is the debt. Currently, given certain global circumstances, it's collecting a 0% interest rate under Uncle Sam, but who knows how long that will last. Our plan is to aggressively pay that off first, but my big question is, how much (if any) should we be putting towards retirement instead, and if so, which accounts? My first thought is to at least fully fund my wife's 401k and open and SEP IRA or solo 401k for myself, so we can at least reap the tax benefits, but I don't know if this is the best option. Thoughts?

                        Oh, and because I know it will be brought up, we DO NOT want children.
                        I'd max out space then the rest toward debt.

                        But your income also seems really low and I'd work to increase that. Probably biggest bang for your buck.

                        Comment


                        • #13
                          I’m getting a little exasperated with the income response. Yes, it’s always better to make more money. Yes, my wife is paid relatively low for her specialty. But she loves her job; the people, population, and quality of the work itself vibe very well with her. Yes, California is expensive. We tried living elsewhere and were never more depressed. Clearly not everyone’s decisions are fueled fully by financial reasons (I know those of you who chose to have had children have to understand that). But please, as per the initial post, I’m really looking for advice on the split with what to do with our additional outcome (and yes, of course we budget and track expenses, how do you think I generated those numbers?). If that’s not what people are willing to discuss, then fine, I’ll close this off as a possible source of information and just move on to a financial adviser. Thanks to those of you who provided meaningful and helpful responses.

                          Comment


                          • #14
                            Sorry if you're new to the forum and haven't read other threads much to get a feel of the room. We're a group of financially literate physicians and others (probably in the top 1-5% of physicians who are already in the top 5% of the population). We just try to give hard facts that work for the vast majority of physicians and steer them in the right direction. Recommendations or criticisms aren't personal in any way, but just things that need to be bluntly said or evaluated. Not everyone's situation is the same or the recommendations work for everyone but in general should work for most.

                            To sum up the recommendations, max 401k for both of you to leave open backdoor roth IRAs as well. Put in at least 20% of your gross salary ($100k) towards retirement which means maxing out that space then starting a taxable account if needed. The reason to max out 401ks and retirement buckets is to minimize taxes now and in the future to let your retirement fund grow faster now and later. The rest of anything else available should go towards paying down student loans until it's more reasonable.

                            Some of us just mention your wife's salary because it is below average. If she enjoys her job there and feels appropriately compensated, then that's fine. In another thread, we've argued how it doesn't make sense to live in the bay area and spend $2-3M on a house, but those are personal decisions that people are willing to work/compromise in other areas of life for.

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