my situation and your advice/thoughts

[noraz123]

Welcome to the forums! And congratulations in the impending addition to your family!  Very exciting.

First, by coming to the forums and this website, you're already making huge ahead of many. Dr. Dahle's blog is a great resource.  If you don't already read the Bogleheads website, I would highly recommend checking out their website (www.bogleheads.og).  They have forums and very good wiki on many investing topics.  I am a subscriber to their investment philosophy (https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy), and Dr. Dahle is seemingly a believer, too.

My recommendations:

• Pay down credit card debt immediately once there is interest due.


• Max out your tax-deferred investments (IRA, 401(k), HSA) [more below].  This is probably the biggest improvement you can make right now.


• Consider managing your finances yourself vs. using a financial advisor.  If you need a financial advisor, make sure that they are a fiduciary.  Most are not.  Many of the best financial advisors charge an hourly rate and not a % of AUM.  Don't be scared by someone charging a high hourly rate. Dr. Dahle recommends many on this site.


• Ensure your equity investments are well diversified and have low fees. For example, Vanguard Total Stock Market Index fund (Admiral Shares) has an expense ratio of 0.05%.  This is the gold standard of diversification and low cost for personal investors. If you are paying more than 0.5% for any stock market investment, ask why.


• Look into whether you should keep the variable life insurance policy.  These are notorious for being horrible investments (horrible for the investors, great for the people that sell them to you, because they have high fees for you and high commissions for sales people).  Chances are it is best to get out now.  You will likely have lost thousands of dollars.  Read more White Coat Investor blog articles to determine if you should dump it. I recommend "How To Dump Your Whole Life Policy" (https://www.whitecoatinvestor.com/how-to-dump-your-whole-life-policy/).
  
  
  
  • If you need more help, a highly recommended resource is James Hunt (www.evaluatelifeinsurance.org). As a personal note - I found White Coat Investor when I was researching how to unwind my wife's indexed universal life insurance policy.  She was sold not one, but two crappy policies by her crappy, and now fired, financial advisor. I then used James Hunt's service to determine if it was best to dump the policies (one was, one wasn't).
  
  
  
  


• Pay down down student loan debt.  This is a guaranteed 4.5% return.  Not a bad  this low rate environment. However, for being a doctor, only having 190K in student loans is great.  And you are paying them off in 10 years.  Even better.

 

As for maxing out your tax deferred investments, it sounds like you have more options at your disposal than you are taking advantage of.

• First, max out your 401(K). You are likely doing this.


• You have 1099 income.  It is likely better to setup a solo 401(k) rather than a SEP-IRA.  You should be able to contribute more than you can to a SEP.  Max out these contributions as well. I'd recommend using a low cost provider for this, such as Vanguard or Fidelity.


• If you can setup a solo 401(k), rollover your SEP-IRA to this account. This will allow you to make backdoor Roth contributions without any prorata tax.


• If you do have access to good investments in your 401(k), you may be able to rollover your SEP (not the other way around!). Why? This would allow you to do a backdoor Roth IRA, and some plans can have access to better investments than in your own plan.  For example, my wife's medical group uses Fidelity for their 401(k). They have access to funds with a 0.01% expense ratio (Blackrock target date funds) that would not be available to personal investors.


• Max out your HSA.  Don't use it for medical expenses now, rather use a fund to invest for retirement.  Make sure your HSA provider offers access to low investments.

 

Another good resource that I recently came across (recommended on the Bogleheads website), is a short, free booklet called "If You Can." It is available here:etf.com/docs/IfYouCan.pdf

You are well on your way to being in great financial shape.

[jfoxcpacfp]

(Post removed due to duplicates resulting from bug in forum files)

 

[jfoxcpacfp]

(Post removed due to duplicates resulting from bug in forum files)

[Rando]

removed-duplicate

[Dicast]

see above, duplicate from glitch.

[Dicast]

I'm in a very similar situation in life, 33, ER, out for 3.5 years.  I think you already know that your car purchases were probably a significant step in the wrong direction.  However, with your level of income there should be plenty of room to start getting things paid off.  I think the first step is to see where your money is going.  I tend to think of my finances as below.

Gross Income 500k, subtract the following

53k to IRA = 447

HSA 5K? = 442

Taxes at worst $135k? = 307

Home loan 3.5Kx12? 42k per year = 265

Student loan 2kx12 24k per year = 241

Car payments 2.3kx12 27k per year= 214

 

After all of this you still have your term policy, disability?, and the regular expenses of life.  I'd say there should be considerable room.  Even if you are spending 10k a month on expenses, then you would have at least $100k a year to use to knock out debts.

I personally like to keep things simple.  I rolled my prior retirement accounts into my SEP IRA at Vanguard.  Because of this I do not use a Backdoor Roth.  I think it just depends on how much work you want to put into stuffing extra money into retirement accounts.  I have a friend who is a WCI follower who semi regrets the headaches of the backdoor roth (but he still does them).

Life insurance seems to be a personal comfort level thing.  I have a 2 million term plan as well.  My personal thought is that as long as you don't leave your family in a deep hole when you die then you have enough.  That 2 million only has to cover the house and cars and then cushion the income for your wife.  She should be able to earn some income if you are not around.

My priority would be the student loans at 4.5%, even consider using the taxable account to mostly wipe them out.  You could also consider selling off your cars, buying cheaper and using the difference to pay off debts as well.

I just sold all of my individual stocks (all long term holdings) in September because I didn't want the hassle/guesswork of them anymore.

 

Kudos on keeping your mortgage much less than your income.

[Don]

One more thought, which should be very high on your list. You mentioned life insurance but didn't say anything about disability insurance. Probably the biggest financial disaster you could have with all that debt is to become disabled. If you died the student loan debts would go away and the house and cars could be sold, but if you were disabled you would still have the debts, no income, and might be around for a long time watching the financial disaster unfold. Disability insurance is much more important than life insurance; make sure you have enough to support your family's lifestyle (or at least some non-indigent, non-homeless lifestyle) if you should become disabled. It will be expensive, but you can always drop it once your live-like-a-resident lifestyle and savings/debt reduction efforts have given you enough of a portfolio that you don't need it any more.

[Don]

My thoughts:

1. You have WAY more debt than you should have.

2. If you make $500K and your wife works, you are probably paying 45-50% in marginal taxes.

 

Therefore, in order of importance, I personally would:

I. Immediately start adhering to the fundamental WCI principle: LIVE LIKE A RESIDENT! Although it is obviously a bit too late at this point, I wouldn't start spending money on expensive houses and cars until all the other debt was paid off. The toys will come eventually. My approach to cars has always been that I would never take out a loan to buy a rapidly depreciating asset (unless there was an interest rate substantially lower than what I could get on my investments), so I always save up to buy my cars with cash. I mentally depreciate cars at $5K per year, and I am willing to sell and replace them when they are fully "depreciated" (i.e., I have driven my usual $30K cars for 6 years each, but my current car cost $60K so I will be in it for a looooong time), but if I still like the car I am happy to keep it and save the money until I find something I a) want, and b) can pay cash for.

II. Having a 6-month emergency fund is probably a good idea, although with the payments you have on your various loans a 6-month emergency fund is going to be a lot bigger than you would like. If you start living like a resident, you may be able to add to this fund, and if you can pay off some of the debt using the money you save by that lifestyle, your 3-month emergency fund may grow into a 6-month fund on its own.

III. Since you are in such a high tax bracket, any money you put into a tax-advantaged account automatically gives you close to a 50% return, so I would definitely contribute to those first.

IV. Next, following the principles in I and II, I would pay off the debts which are probably costing you more than you are likely to make in the market over the next few years.

V. After that, you have plenty of options. I started UGMAs for my kids when they were tots, so putting a few hundred a month into their accounts allowed me to easily accumulate an in-state university tuition by the time they were ready to start. My deal with the kids was that I would give them five years tuition and support for the top state school, so if they went there and were reasonably conservative they would leave school with a nest egg but if they went to a private or out-of-state school they would have to work or take out loans to make up the difference. Surprisingly (NOT), they all went to the state school and graduated with substantial nest eggs!

Good luck!

[czeckers]

500K/year and assuming you end up paying 40% in taxes, that leaves about $25,000 month.  If your fixed expenses are about $11,000/month, that still leaves a hefty $14,000.  You say you're setting aside 25-30% for retirement (not sure if you're counting that as a percentage of gross or net income) which is quite good.  You also have a $30,000 emergency fund which is excellent.  Overall, I'd say that you are doing great for someone just a couple of years out of residency.  Yes, the car debt is significant, but you also have a considerable income.

As your post indicates, your issue is not how to save for retirement but rather how to best direct your disposable income.  Clearly you have a dilemma of whether to save more, or pay down more debt.

I've always considered it a bit of a fallacy to compare riskier stock returns to the guaranteed return on debt pay down.  I think comparing the interest on your 10-year student loan to the yield on a 10-year treasury note is a more fair comparison.  That yield is 2.15% currently so the return on paying down your 4.5% student loan is by far your best bank for your buck at today's rates.

If I were in your shoes, I would set a goal of eliminating all non-mortgage debt in the next 6 years.  At that point you'll be 39.  Having your cars, credit cards, and student loans paid off will significantly improve your cash flow situation and will allow you to decide to either cut back on working hours or save for an early retirement, or pay cash for the next set of wheels.  You're already on track to have your cars paid off by then.  Even though your credit cards are at 0%, you'll want those gone ASAP so you don't get hit with unexpected fees.  I'd calculate how much extra to put on the student loans to have them eliminated by then and make the extra payment every month.  I'd also work on increasing the emergency fund to at least 6 months.  (Think how long it would take to get re-credentialed at a new institution should you lose your job).  Finally, with little ones in the picture, starting 529s is definitely a good idea, particularly if you live in a state that gives you a tax break on contributions.  Right now, your cash flow situation is probably a bit tight, but if you do this, you'll be in great shape in 6 years.  Make sure you don't take on any additional debt such as putting a vacation on a credit card.  Also, your housing costs seem reasonable.  I would avoid the temptation to upgrade your house.  I've seen this many times when children enter the picture.

As far as your advisor, if s/he is directing you into individual stocks, that's bad advice.  Rolling your 401k into your IRA is also bad advice as it eliminates the backdoor Roth.  I recommend rolling the IRA into your 401k if possible, and then do the $11,000 backdoor Roth each year.  With current market valuations being down, now might be a good time to sell the individual stocks as you probably won't have much to pay in the way of capital appreciation taxes.  For a taxable account you want to look at something like Vanguards total US stock market and total international stock market mutual funds.  These are very tax efficient.

[jfoxcpacfp]

@PhysicianOnFire - I disagree with rolling into current er's 401k. @luckbeatsme can have a SOLO-k and control his own investment portfolio (or have advisor do it) and have far more selection and flexibility. Unfortunately, must wait 1 year to do so. SOLO-k does beat SEP IRA in every way but one (ability to contribute 9.5 mos after EOY).

[jfoxcpacfp]

@luckbeatsme - see the attached. Having trouble posting.

[scbunker]

Joseph wrote:

162k here while 132k in cars. That is a major dilemma. Fire your advisor.

Click to expand...

Translation: It seems obvious to us here that you should use your taxable investment monies to pay off loans. But your adviser has conflict of interest. If he recommends you pay off loans, then he removes $133K+ from his management, which reduces his AUM fee.

[noraz123]

Congrats on the soon increasing family!

A few thoughts:

• Max out your tax deferred accounts as much as possible. This means max out your 401k. You have 1099 income, and are using a SEP IRA.  That is great. But consider moving current SEP IRA and future contribution to a solo 401k.  You will likely have more room for investing, and the solo 401K will allow you to do a backdoor Roth.  I would recommend a low cost provider for the solo 401k, such as Vanguard or Fidelity.


• Consider dumping the Variable Life Insurance Policy.  These are notoriously bad investments, with high (yet hidden) fees. Read this site's blog article, "How to Dump Your Life Insurance Policy".  If you need more assistance, checkout EvaluateLifeInsurance.Org, a website highly regarded by Bogleheads, and recommended in the comments in the above mentioned blog article.


• Consider dumping your financial advisor. If your financial advisor sold you a variable life insurance policy, s/he wasn't a good advisor. The majority of the really good advisors don't charge a % of assets, but rather charge by the hour.  Don't be scared by a high hourly rate.


• Consider going it alone (no financial advisor).  Chances are you don't need an advisor.  Read the Bogleheads website wiki, this site, and check out If You Can - https://www.etf.com/docs/IfYouCan.pdf.


• 
  
  And last, this is just me being judgmental, get tens of thousands of dollars of enjoyment from your cars, or buy more affordable ones.

You are doing well, and way ahead of many others.  Keep reading this site, and you'll be in great shape in no time.

[noraz123]

Congrats on the soon increasing family!

A few thoughts:

 

• Max out your tax deferred accounts as much as possible. This means max out your 401k. You have 1099 income, and are using a SEP IRA.  That is great. But consider moving current SEP IRA and future contribution to a solo 401k.  You will likely have more room for investing, and the solo 401K will allow you to do a backdoor Roth.  I would recommend a low cost provider for the solo 401k, such as Vanguard or Fidelity.


• Consider dumping the Variable Life Insurance Policy.  These are notoriously bad investments, with high (yet hidden) fees. Read this site's blog article, "How to Dump Your Life Insurance Policy".  If you need more assistance, checkout EvaluateLifeInsurance.Org, a website highly regarded by Bogleheads, and recommended in the comments in the above mentioned blog article.


• Consider dumping your financial advisor. If your financial advisor sold you a variable life insurance policy, s/he wasn't a good advisor. The majority of the really good advisors don't charge a % of assets, but rather charge by the hour.  Don't be scared by a high hourly rate.


• Consider going it alone (no financial advisor).  Chances are you don't need an advisor.  Read the Bogleheads website wiki, this site, and check out If You Can - https://www.etf.com/docs/IfYouCan.pdf.


• 
  
  And last, this is just me being judgmental, get tens of thousands of dollars of enjoyment from your cars, or buy more affordable ones.

You are doing well, and way ahead of many others.  Keep reading this site, and you'll be in great shape in no time.

[Ivy]

Definitely more new and/or expensive cars in your future!  AFTER you're out of debt and can pay cash for them.  

I neglected to address life insurance. I'd probably bump up another 1 (maybe even 2) more million for the next 10 years or so.  20-25 years from now you probably will have enough money you won't need any life insurance.