The List of Investing Priorities

[westcoaster]

WCI has published several articles in the past that talk about investment priorities  -- but also makes a big point to "live like a resident" until student loans are paid off. Our situation is that we have some student loans but at a pretty favorable rate. I wonder what you would make of the following investment priorities in this case:

From WCI:

1) Pay off high interest debt.  Any credit cards or consumer debt at 8% or higher should be paid off ASAP.  Honestly you should have never accumulated this.  Live like a resident until it is gone.

2) Invest in tax-protected accounts.  If you are a resident max out your personal and spousal Roth IRAs.  If an attending, max out your 401K, SEP-IRA, HSA and any other retirement account that allows you full marginal tax rate deductions.

3) Pay off non-deductible loans between 5% and 8%.  These include most current student loans.

4) Consider investing in other accounts that offer a tax break, such as 529s (kid’s college accounts), UGMAs, and backdoor Roth IRAs if your circumstances merit.

5) Invest in risky assets in a taxable account (stock mutual funds or investment properties).

6) Pay off loans with after-tax rates of 3%-5%.  These include most mortgages.

7) Pay off loans with after-tax rates below 3%.

8) Invest in safe assets in a taxable account such as CDs, bonds, and savings accounts.  If these types of assets return to historic norms (4-5% returns) instead of their current 1-2% returns, then it is okay to invest in these prior to paying off very low interest debt.

9) Don’t carry any debt into retirement.  Losing the safety net of on-going employment income makes this a risky affair.  It’s one thing to get foreclosed on when you’re 30. It’s entirely different when you’re 70.

Maybe for us:

1. Credit card debt (none)


2. Tax Protected Accounts (401K him, 401k her)


3. HSA (him)


4. Backdoor Roth (him 5500, her 5500)


5. Non Tax Protected Retirement based savings (up to our goal of 13-15% per year of our combined salary)


6. 529 for Jr. (him, her contributions 14k)


7. Student Loan at 3.6%


8. 3.5% adjustable rate mortgage (on rental property) (we are unintentional landlords of our apt from residency)


9. Student Loan at 3.0%


10. More downpayment savings for future home downpayment (currently at 20-25% of downpayment) on our projected future home


11. Start a 529 for possible Jr#2??

I notice WCI combines mortgage and low student loans in a similar category -- although her argues for early pay off of loans over mtg in another article.

For us points 1-4 seem solid. I just wonder about prioritizing 529 over loans? or is it better to try and get our down payment for a house higher before tackling the loans? I'd love to get rid of the 3.6% debt but at 3.6% maybe it's more psychological than meaningful to tackle that. What do you all think?

[jfoxcpacfp]

You're kind of trying to reduce a financial plan into a linear list and it really doesn't work too well. Everyone's plan is different and other factors will impact your decisions and priorities:

• Your ages


• Age of child(ren)


• Amount owed on loans


• Earnings


• Other necessities in place (OO disability, plenty of life insurance, emergency fund)


• Other expenses coming up (car replacements, for example)


• Cost of house you plan to purchase


• Equity in current house


• Retirement savings balance


• Allocation of investment portfolio


• Are you planning to retire early? When?


• Are you employed or IC or both?


• Etc.

Don't see the rush for the 529 if kids are very young. I also disagree with the absolute "Don't carry debt into retirement" as I do with most absolutes. The list is a good starting point, not an absolute by any means.

[Zaphod]

jfoxcpacfp wrote:

You’re kind of trying to reduce a financial plan into a linear list and it really doesn’t work too well. Everyone’s plan is different and other factors will impact your decisions and priorities:

• Your ages


• Age of child(ren)


• Amount owed on loans


• Earnings


• Other necessities in place (OO disability, plenty of life insurance, emergency fund)


• Other expenses coming up (car replacements, for example)


• Cost of house you plan to purchase


• Equity in current house


• Retirement savings balance


• Allocation of investment portfolio


• Are you planning to retire early? When?


• Are you employed or IC or both?


• Etc.

Don’t see the rush for the 529 if kids are very young. I also disagree with the absolute “Don’t carry debt into retirement” as I do with most absolutes. The list is a good starting point, not an absolute by any means.

Click to expand...

So glad someone else disagrees with that absolute as well. Depending on the debt and how structured, it can be much more risky! Everything is nuanced.

[westcoaster]

Zaphod wrote:

jfoxcpacfp wrote:

You’re kind of trying to reduce a financial plan into a linear list and it really doesn’t work too well. Everyone’s plan is different and other factors will impact your decisions and priorities:

...

Don’t see the rush for the 529 if kids are very young. I also disagree with the absolute “Don’t carry debt into retirement” as I do with most absolutes. The list is a good starting point, not an absolute by any means.

Click to expand…

So glad someone else disagrees with that absolute as well. Depending on the debt and how structured, it can be much more risky! Everything is nuanced.

Click to expand...

Appreciate comments. Zaphod, can you clarify? What do you mean by how "Structured" and "more risky".

Say I have a student loan of 100k at 3.6%. Do you mean this is risky in terms of asset protection? (I'm still on the line for it after a divorce or a lawsuit)?

Thanks!

[Dicast]

I think your list is a fine way to approach investing priorities.  We do it just slightly different.

1) Max all retirement options, term life, disability, 2-3 months cash with other available emergency credit - all are pretty much absolutes for now

2) Fund 529 (12k per year total)

3) Pay down student loans 3.5% fixed and a variable just refinanced to 2.23% (thanks for the $200 back from SoFi).

4) Once student loans are finished we'll double our mortgage payments on our 15 year 2.875%.

5) What we have left over after doubling our mortgage payments we'll be putting into a taxable account.  We will be putting more to the taxable account than mortgage at that point.

6) We've got a car payment with 11k on it at 1.8% for the next 3 years.  I'm not really worried about near inflation loan interest.  Jim doesn't care for this debt and I may pay it off out of order just so I don't have to list it.

My wife and I have had many discussions about the order of priority.  We saved 20% for a house downpayment over paying student loans.  We value saving for college more than paying down student loans but we have sufficient funds to make very large payments to student loans (over 10k per month).  If we couldn't make large payments we would probably scrap the 529.  For everything else I had always liked the idea to just follow the math, pay in order of interest rates and most anything below 3% just let it ride, but over time it has become very clear that we are more debt averse than return hungry. To know that we owe someone money bothers us (except for my car, not sure how that mental accounting works).  We are both 33 and would like to be debt free including our mortgage by 40.  We should be free of student loan debt in less than 14 months and doubling the mortgage payment will get us our house by right at 40.  We have been back and forth on the house as it is a pretty amazing rate but eventually decided that a 6-7 year payoff splitting the difference with a taxable account is where we are comfortable.  All of this has gone into our written financial plan.

I see funding 529 plans as a limited time opportunity and one that is probably better to pre-fund than try to catch up later.

We did the house before loans but if you have a decent rental situation I don't see what the rush to buy is.  You'll have to bump the downpayment savings priority up higher though if you want ever get a house.  We kept our savings in a online high yield savings account (0.9%) while we were stockpiling it.

 

[Zaphod]

westcoaster wrote:

Zaphod wrote:

jfoxcpacfp wrote:

You’re kind of trying to reduce a financial plan into a linear list and it really doesn’t work too well. Everyone’s plan is different and other factors will impact your decisions and priorities:

…

Don’t see the rush for the 529 if kids are very young. I also disagree with the absolute “Don’t carry debt into retirement” as I do with most absolutes. The list is a good starting point, not an absolute by any means.

Click to expand…

So glad someone else disagrees with that absolute as well. Depending on the debt and how structured, it can be much more risky! Everything is nuanced.

Click to expand…

Appreciate comments. Zaphod, can you clarify? What do you mean by how “Structured” and “more risky”.

Say I have a student loan of 100k at 3.6%. Do you mean this is risky in terms of asset protection? (I’m still on the line for it after a divorce or a lawsuit)?

Thanks!

Click to expand...

Student loans should be retired before you do ideally. More risky means putting your retirement and day to day needs of cash flow at risk. If its structured as part of a smart overall plan rather than out of dire need to have a debt than I think its prudent. I think the most obvious is a mortgage (which itself may not even be be the best move). Its great and possible to be totally paid off if youre long term home already, but I often see an all cash buy as the advised way to go, even on tight retirement budgets. Which is a poor best use of funds with low overall return, inflation, etc....you have to really start thinking about how much time you have left and what is the best overally use of your money. Side note, that shouldnt apply to anyone here but it is often advised as a rule out here in the interwebs. You have much more flexibility etc...without that giant hole in your portfolio and accessing home value is neither simple or fast.

[HookEM]

Hey all,

Sorry to hijack this, but I felt like it was in a similar vein and didn't think I needed to start a new thread. I've read the WCI book and have been a huge fan of his site, but would like some actual feedback if possible. Anyway, here are our expenses in no particular rank or order.

We are both 31 and 32 yo, fresh out of fellowship and no kids yet (perhaps in 2 years)

I have loans at 170K refinanced at 3%. She's got none.

- Income: my wife and I are both docs and bring in combined around ~500K pretax (300k and 200k).

- Loans: repay with near minimum payment month ($4k) and will be paid off in ~3.5 years

- Emergency fund: Aiming to put $45k in the bank within a year

- Retirement:

• i've got an employer 401k without match and I'm going to max that out; Backdoor roth


• She's got no employer 401k until year 1. so is the only option here to do a backdoor roth?


• We've nearly maxed out our roths through residency and fellowship (5 years worth)

- Home:

• Renting this year downtown and livin it up for a year (our treat for fellowship/residency)


• Plan on buying a starter home around 1-1.2x our income hopefully sooner rather than later via physician loan since we don't have a downpayment saved just yet (or would you advise saving for a down payment and renting?) We plan on being in the home at least 5-7 years.

- Vehicles:

• One beater (old toyota with 150k miles on it)


• One nicer car valued around 10k on KBB


• Plan is to trade in the nicer car which requires higher maintanance and premium gas to one more economical and less annoying

Let me know if you think I'm missing anything. I'd love to know. Thanks!

 

 

[jfoxcpacfp]

1. Your wife can do a backdoor Roth and then put money in a taxable account.


2. Recommend you save for a downpayment and get your student loans paid off (or w/i a year of payoff) before buying a home. Enjoy your splurge year downtown, save your emergency fund, then scrimp for a couple of years. At income of $500k, you should be able to save $125k in a decent amount of time. Buy a house when you start your family.


3. Buy a good umbrella insurance policy, $1M enough for now.


4. Buy OO disability insurance for both - there are several good companies recommended on this site.


5. No need to buy term life insurance until you: have a baby, buy a house, or both but put that in your future budget.

[westcoaster]

 

HookEM wrote:

We are both 31 and 32 yo, fresh out of fellowship and no kids yet (perhaps in 2 years)

Click to expand...

I think we're in a pretty similar spot -- although we are a couple years older (longer fellowship?). Your priorities match up with ours pretty closely.

1. The 401k gap year: agree with jfox. put the retirements savings in taxable (we try to save 15-17% for retirement)
2. I would advise saving a down payment and renting until you have 20% down or kids who need the space. We have our 20%+ saved and are now house hunting.
3. you can use regular gas in most premium gas only cars -- the exception would be a high-performance race car. I didn't believe it either until I read this
4. Great job on your loan repayment!


Some things to think about:
1. If you are both young and healthy, I am a big fan of using your HSA as a retirement vehicle. WCI has an article on it
2. Also agree with Umbrella policy. It's cheap and you have to recognize you are now a target.
3. My wife and I have gone back and forth on disability insurance. For dual physician couples, it is clearly possible for us to all live off one persons salary and in essence we can "get away with" not insuring for the unlikely disability. It seems unlikely that we would both be disabled to the point of not being able to work. We do both carry life insurance and umbrella. Our work provides us with 60% salary coverage in the event of group LTD -- which is clearly limited (not own occupation, for instance) and one that I would not want to exclusively rely on.

 

 

 

 

[jfoxcpacfp]

westcoaster wrote:

you can use regular gas in most premium gas only cars — the exception would be a high-performance race car. I didn’t believe it either until I read this

Click to expand...

That was an interesting article, especially the section on Top Tier fuels. My husband has always insisted we buy Shell gasoline (regular) and I thought he was being a little silly about it - now I'll have to tell him he is right (darn it :-) )!

[Craigy]

jfoxcpacfp wrote:

1. Your wife can do a backdoor Roth and then put money in a taxable account.


2. Recommend you save for a downpayment and get your student loans paid off (or w/i a year of payoff) before buying a home. Enjoy your splurge year downtown, save your emergency fund, then scrimp for a couple of years. At income of $500k, you should be able to save $125k in a decent amount of time. Buy a house when you start your family.


3. Buy a good umbrella insurance policy, $1M enough for now.


4. Buy OO disability insurance for both – there are several good companies recommended on this site.


5. No need to buy term life insurance until you: have a baby, buy a house, or both but put that in your future budget.

Click to expand...

#5 - Term life is so cheap, why not buy it now and lock-into a great rate?  By comparison, disability insurance is tremendously expensive, and either one could live off of the other if needed.

[jfoxcpacfp]

Craigy wrote:

#5 – Term life is so cheap, why not buy it now and lock-into a great rate?  By comparison, disability insurance is tremendously expensive, and either one could live off of the other if needed.

Click to expand...

Good point that you and westcoaster make about disability. Depends on their long-term goals but I concede the point that they could live on one salary, if they remain married and both continue working full-time after starting a family.

As for term, I don't generally recommend buying a product before there is a need and there is no need in this case. The premiums should remain low for several years. Again, depends upon goals and personal situation.

[Craigy]

westcoaster wrote:

 

HookEM wrote:

We are both 31 and 32 yo, fresh out of fellowship and no kids yet (perhaps in 2 years) 

Click to expand…

Some things to think about:
3. My wife and I have gone back and forth on disability insurance. For dual physician couples, it is clearly possible for us to all live off one persons salary and in essence we can “get away with” not insuring for the unlikely disability. It seems unlikely that we would both be disabled to the point of not being able to work. We do both carry life insurance and umbrella. Our work provides us with 60% salary coverage in the event of group LTD — which is clearly limited (not own occupation, for instance) and one that I would not want to exclusively rely on.

Click to expand...

I feel the same way.  For the single-income household disability insurance is a lot more important, but the risk for responsibly living dual-income households is far less catastrophic.  If I became disabled or if my wife became disabled, we could live off of the other very comfortably.  Plus, all joking aside, we'd have social security disability benefits from the disabled person which is a fairly decent supplement.   In the exceedingly rare instance where both of us become disabled I suppose it would be rough, but it would be livable and we luckily have family that could support us if they had to.

Even outside of insurance salesmen, there are so many advisors and pundits who either espouse disability insurance or treat it as an absolute necessity that I feel guilty or less responsible for not purchasing it, but so far I just can't bring myself to do it.

The only way that disability insurance becomes an attractive move for me is if I know I have some condition or predisposition or other risk that will make it more likely for me to collect.  And in that event I'm potentially defrauding the insurer.  :P

The premiums are simply very, very high, and we do very well with that money ourselves without having to pay an insurance company for the actuarial risk, costs of administration, a very hefty commission to the salesman, and finally profit for the shareholders.  The costs are so high, the markup is so high and the fraud is so rampant that I know that actuarialy I'm far, far better off putting my own money away and self-insuring against that risk.  If we're disabled tomorrow, I guess it hurts, but if we become disabled mid-career or even early-career, we've already put away enough extra money that we have the added wherewithal to simply take the hit with no big deal, or at the very least cushion the blow.  And if we never become disabled during the policy coverage period (which is the most likely scenario) we have a tremendous amount of extra savings and investments come retirement.

Also great article on octane ratings  

[HookEM]

Thanks for the replies!

• Looking into umbrella policy as we speak.


• Is this disability different than the Short and longterm provided by my employer?


• I've read the WCI section on physician loans and it seems as though it's a toss up between pros/cons. Is there anything I'm missing as far as why I should just be saving and putting a down payment? I feel as though I can get a physician loan with a good rate and just start owning my own home instead of paying someone else? Would love some input. Thanks.

Thanks!

 

 

[jfoxcpacfp]

HookEM wrote:

Thanks for the replies!

• Looking into umbrella policy as we speak.


• Is this disability different than the Short and longterm provided by my employer?


• I’ve read the WCI section on physician loans and it seems as though it’s a toss up between pros/cons. Is there anything I’m missing as far as why I should just be saving and putting a down payment? I feel as though I can get a physician loan with a good rate and just start owning my own home instead of paying someone else? Would love some input. Thanks.

Thanks!

Click to expand...

• The disability you will get on your own will be superior to what is available at work. There are many excellent posts on the website about buying disability.


• WCI post on physician loans will help you understand when to use a doctor loan if you haven't gotten to this post yet. If you're still not sure, read


• Why Physician Home Loans Fail by Josh Mettle for the opposing viewpoint (short book)

Can't give you a definitive answer on the home loan without actual financial planning, but you should be able to figure out what is best for your family with the above info.