Investment Strategy for New Attending

[GatorWade]

I am pretty much one step above clueless in my investing knowledge, so I apologize if these questions are overly basic or aren't worded correctly! The only book I've read so far is WCI, but just ordered others such as Boglehead's, 4 Pillars, etc. I'm about to graduate residency and begin a faculty appointment at an academic hospital in July where I'll make about 300k. I have about 250k in loan debt at 3% interest, but no other debt. How aggressively should I pay down the loans based on this interest rate and income?

 

I have three primary avenues to invest pre-tax dollars through work. The first is a 5% employee contribution with 8% match which I will obviously max out. The second and third are 403b and 457 plans (max 17k apiece). However, with these two plans, what's only been shown to me so far have been variable annuities where the Mortality and Expense Risk Charge is 0.80%. Does this make sense? I specifically asked them if plain old mutual funds were available and they said no. My limited knowledge tells me this isn't the wisest investment, but is this better than anything else I can do with the money? I've heard terms thrown around such as backdoor Roth IRA, SEP-IRA, and Solo 401k - are any of these applicable and/or good for me? I plan to read more up on these in the near future.

 

Thanks in advance!

[EDDOCMOM]

Congrats on the new job and finishing residency!  You're far ahead of your colleagues just by being here.  I wish I would have known about this stuff right out of residency - as it is I'm 4 years out and we're just getting a good handle on our finances.

 

I recommend paying off your student loans.  Others may give another opinion, especially since you have a low interest rate, but the freedom and advantage of being debt free is amazing.  Similarly, don't buy a "doctor's house" and a "doctor's car" and end up right back in debt.  It's ok to indulge a little, but living like a resident (on $50-$60K and using the remaining ~$150K to pay off loans) will set you up for a terrific career and leave plenty of time for investing for future and retirement.

 

I agree with doing the max for the 401K.  While I recommend paying off student loans quickly, putting this money in pre-tax and getting the match is worth it.  If you go ahead and pay down loans and max your 401K, you've got about 2 years to educate yourself and come up with an investing strategy that you're comfortable with.

[artemis]

You will want to do a backdoor Roth for sure, provided you don't already have a traditional IRA.  (If you do, you'll need to convert the traditional IRA to a Roth IRA first, which will cost you some money in taxes, before you can begin using the backdoor Roth trick.)  A backdoor Roth gives you an additional $5500/year in tax-advantaged investment space, and the choice of investments is 100% yours.  (A backdoor Roth is where you make a non-deductible contribution to a traditional IRA, then convert that contribution to a Roth IRA.  There are income limits for deductible contributions to traditional IRAs and for direct contributions to Roth IRAs, but anyone can make a nondeductible contribution to a traditional IRA and there are no income limits on Roth conversions.  So this is an indirect way to contribute to a Roth even though your income is in theory to high to do so.)

Is the 457 plan a governmental plan or a non-governmental plan?  That makes a difference!

Your investment options in both plans sound awful.  If you're truly limited to variable annuities, I'd put off investing in either until the student loans are paid off - and in the meantime I'd push hard to have your institution change the plans to add at least a few low-cost index fund options.

[GatorWade]

Thanks for the suggestions thus far. The 457 is governmental - how does that make a difference?

[artemis]

GatorWade wrote:

Thanks for the suggestions thus far. The 457 is governmental – how does that make a difference?

Click to expand...

A governmental 457 acts for all practical purposes like a 403b; it's got protection from creditors if your hospital goes belly up, and when you leave you can roll it over into an IRA.  A non-governmental 457 (which is what I have) has creditor risk; if my hospital goes bankrupt, I could lose some or all of my contribution.  And I cannot roll it over into an IRA when I leave my job; I'll either have to take a lump sum payment (BIG tax hit!) or receive the money over a period of years (during which time it's still subject to creditor risk).

About the only thing the two types of 457 share is the numbers in the name.  They're really entirely different beasts.

[notadoc]

A bit more depth

https://www.whitecoatinvestor.com/should-you-use-your-457b/

 

[ENT Doc]

GatorWade wrote:

I am pretty much one step above clueless in my investing knowledge, so I apologize if these questions are overly basic or aren’t worded correctly! The only book I’ve read so far is WCI, but just ordered others such as Boglehead’s, 4 Pillars, etc. I’m about to graduate residency and begin a faculty appointment at an academic hospital in July where I’ll make about 300k. I have about 250k in loan debt at 3% interest, but no other debt. How aggressively should I pay down the loans based on this interest rate and income?

 

I have three primary avenues to invest pre-tax dollars through work. The first is a 5% employee contribution with 8% match which I will obviously max out. The second and third are 403b and 457 plans (max 17k apiece). However, with these two plans, what’s only been shown to me so far have been variable annuities where the Mortality and Expense Risk Charge is 0.80%. Does this make sense? I specifically asked them if plain old mutual funds were available and they said no. My limited knowledge tells me this isn’t the wisest investment, but is this better than anything else I can do with the money? I’ve heard terms thrown around such as backdoor Roth IRA, SEP-IRA, and Solo 401k – are any of these applicable and/or good for me? I plan to read more up on these in the near future.

 

Thanks in advance!

Click to expand...

Highly suspicious of the variable annuity thing.  I'd ask to see all plan documents.  I would (in this order):

1. Live like a resident
2. Emergency Fund (high yield online account)
3. Max 401k
4. Max HSA (if qualify)
5. Possibly max contribute to the other plans, but I wouldn't until knowing more
6. Back-door Roth
7. Combo Taxable Account and pay off loans as soon as possible
8. 529 Plans?  (this may go above 7 for me)

[GatorWade]

ENT Doc wrote:

GatorWade wrote:

I am pretty much one step above clueless in my investing knowledge, so I apologize if these questions are overly basic or aren’t worded correctly! The only book I’ve read so far is WCI, but just ordered others such as Boglehead’s, 4 Pillars, etc. I’m about to graduate residency and begin a faculty appointment at an academic hospital in July where I’ll make about 300k. I have about 250k in loan debt at 3% interest, but no other debt. How aggressively should I pay down the loans based on this interest rate and income?

 

I have three primary avenues to invest pre-tax dollars through work. The first is a 5% employee contribution with 8% match which I will obviously max out. The second and third are 403b and 457 plans (max 17k apiece). However, with these two plans, what’s only been shown to me so far have been variable annuities where the Mortality and Expense Risk Charge is 0.80%. Does this make sense? I specifically asked them if plain old mutual funds were available and they said no. My limited knowledge tells me this isn’t the wisest investment, but is this better than anything else I can do with the money? I’ve heard terms thrown around such as backdoor Roth IRA, SEP-IRA, and Solo 401k – are any of these applicable and/or good for me? I plan to read more up on these in the near future.

 

Thanks in advance!

Click to expand…

Highly suspicious of the variable annuity thing.  I’d ask to see all plan documents.  I would (in this order):

1. Live like a resident
2. Emergency Fund (high yield online account)
3. Max 401k
4. Max HSA (if qualify)
5. Possibly max contribute to the other plans, but I wouldn’t until knowing more
6. Back-door Roth
7. Combo Taxable Account and pay off loans as soon as possible
8. 529 Plans?  (this may go above 7 for me)

Click to expand...

Thanks for the succinct advice above! Assuming the only plans offered for 457 and 403b are variable annuities, is the consensus then to steer clear and invest in the other items mentioned in this discussion? Even considering these are governmental? Will my money go further in the long run investing after tax dollars in other things?

[ENT Doc]

GatorWade wrote:

ENT Doc wrote:

GatorWade wrote:

I am pretty much one step above clueless in my investing knowledge, so I apologize if these questions are overly basic or aren’t worded correctly! The only book I’ve read so far is WCI, but just ordered others such as Boglehead’s, 4 Pillars, etc. I’m about to graduate residency and begin a faculty appointment at an academic hospital in July where I’ll make about 300k. I have about 250k in loan debt at 3% interest, but no other debt. How aggressively should I pay down the loans based on this interest rate and income?

 

I have three primary avenues to invest pre-tax dollars through work. The first is a 5% employee contribution with 8% match which I will obviously max out. The second and third are 403b and 457 plans (max 17k apiece). However, with these two plans, what’s only been shown to me so far have been variable annuities where the Mortality and Expense Risk Charge is 0.80%. Does this make sense? I specifically asked them if plain old mutual funds were available and they said no. My limited knowledge tells me this isn’t the wisest investment, but is this better than anything else I can do with the money? I’ve heard terms thrown around such as backdoor Roth IRA, SEP-IRA, and Solo 401k – are any of these applicable and/or good for me? I plan to read more up on these in the near future.

 

Thanks in advance!

Click to expand…

Highly suspicious of the variable annuity thing.  I’d ask to see all plan documents.  I would (in this order):

1. Live like a resident
2. Emergency Fund (high yield online account)
3. Max 401k
4. Max HSA (if qualify)
5. Possibly max contribute to the other plans, but I wouldn’t until knowing more
6. Back-door Roth
7. Combo Taxable Account and pay off loans as soon as possible
8. 529 Plans?  (this may go above 7 for me)

Click to expand…

Thanks for the succinct advice above! Assuming the only plans offered for 457 and 403b are variable annuities, is the consensus then to steer clear and invest in the other items mentioned in this discussion? Even considering these are governmental? Will my money go further in the long run investing after tax dollars in other things?

Click to expand...

Unfortunately I'm not sure where the efficiency trade off is between bad 401k/403b/457 plans with high fees and just putting the money into a taxable account.  Clearly, at some point the expenses will make the deductions at your marginal tax rate not worthwhile.  Not sure if anyone has any other advice on this.  I think that's absurd if that's the only product they have for you to invest in.

[DMFA]

Do you have any way of finding out what's in those variable annuities? Are there any other costs to it beyond the 0.8%? If the big drawback is just the fees, the tax advantage of the deduction and tax-deferred growth with those fees is still preferable to not taking the deduction and your dividends and turnover-based CGs being taxed while growing.

Can't do SEP or individual 401(k) if you're employed and they have an employer account available...unless you want to have a self-employed side job and open one, but then the contribution limits are based on that side job.

[GatorWade]

DMFA wrote:

Do you have any way of finding out what’s in those variable annuities? Are there any other costs to it beyond the 0.8%? If the big drawback is just the fees, the tax advantage of the deduction and tax-deferred growth with those fees is still preferable to not taking the deduction and your dividends and turnover-based CGs being taxed while growing.

Can’t do SEP or individual 401(k) if you’re employed and they have an employer account available…unless you want to have a self-employed side job and open one, but then the contribution limits are based on that side job.

Click to expand...

The link below is a comparison of all the options available to me. There are a bunch of numbers and terms I don't quite understand, but all seem to be variable annuities if I'm not mistaken.

http://www.state.nj.us/treasury/pensions/pdf/dspcompguide.pdf

[Zaphod]

Max out all tax deferred options available that arent absolutely terrible.

Consider taxable

Crush student loans in reasonable time frame that works for your with above as priority.

Live pretty chill with whats left over for a couple years and you'll be set.

[GatorWade]

Brief Update: Did a little more digging and found out the 457 plan offers some low fee plain old mutual funds options, so will definitely be maxing that out. The 403b plan is still only all variable annuities, but found out TIAA offers lower fees (on the order of ~0.4%) compared to MetLife at 0.8%.

 

Thanks again for all the helpful information above!

[DMFA]

Those aren't variable annuities...at least, they don't seem to be on a quick glance at the pdf you sent. I can probably get around to analyzing it tonight. There are some okay options in there, it seems.

[DMFA]

So I guess technically they are "annuities..." Now, you throw the word annuity out there, I go nuts; I go immediately to high fees, surrender costs, withdrawal penalties, liquidity issues, minimal control over holdings, worse growth than the market.  You've got a 403(b) option; those are classically referred to as "tax-deferred annuities."  It's kind of an antiquated term and it's tough to tell how much in-practice the account is actually like an annuity.  In lots of cases, it's in-name only...my wife's 403(b) runs just like a 401(k), for instance.

TIAA-CREF utilizes this terminology more as a label, although it does retain some functions of an annuity, like death benefit and fixed payment options.  A GSRA is "group supplemental retirement annuity," which is what your 403(b) would likely be, which does not have withdrawal or surrender charges on retirement/severance, so you can roll it over to another pretax account, like IRA or 401(k).  So should you choose them as your service provider, you would be able to choose your allocation among their funds which have expenses ranging from 0.16-0.22% for index funds.  There are some acceptable funds in there.  You could do standard three-fund with TISPX (500), TCIEX (int'l), and TBIIX (bond) if you want bonds, maybe TISBX for some small-cap tilt...and target-date funds if you're OK with paying higher fees for more simplicity (I wouldn't).

The ABP is a 401(a).  That's like a usual retirement account but with employer-defined contribution limits and possibly less choice of investments.

I would look into that and make sure that your money invested in those funds actually works that way, maybe get onto Bogleheads forum and make sure it really does work in that manner; everything I read seems to point to that on BH forum, NJ's publications you linked, and TIAA-CREF's site, although the latter has an obvious bias since it's theirs.