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First Real Job Starting in August, where do I put money first?

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  • First Real Job Starting in August, where do I put money first?

    I am starting my first post-residency job in August. Base salary $350k with a 15% "incentive compensation" at each anniversary.  My wife doesn't work and we have 3 kids. Here is my scenario:

    Debt:

    $300k in DRB, refinanced at 4% for 10yrs

    Retirement:

    401k and 457b available. 3% of salary match on 401k as long as I contribute a minimum of 5% of my income plus a 3.5% employer contribution vested after 3 years of work.

    Mortgage:

    $350k at 4% for 30yrs.

     

    I am just wondering where I put my money first, second, third, .... then last. Right now here is my plan, please correct me if I am off track.

    1. Max out 401k at $18k and get the match.

    2. Max out 457b at $18k.

    3. Max out HSA at $6750.

    4. During my first six months contribute $5500 to a Roth IRA for my wife and I since my total yearly income for the first year will be just under the limit.

    5. Contribute $5500 to traditional IRA to Backdoor Roth conversion for both my wife and I. (Can I even do this if a do a Roth IRA contribution first? If I can't, then I do the Roth IRA during the first six months and then do a backdoor conversion in January of next year and every year following.) I will then do this each January as per WCI.

    6. I then plan on making regular payments on my DRB loan so that it would be paid off in 5 yrs, not 10. But then also plan on putting any extra overtime work @$200/hr and the year end bonus towards the loans. In reality, I should be able to pay them off completely in about 3-4 yrs or less depending on overtime.

    7. Make after tax contributions into a Vanguard fund to round out a total of 20% of income put into retirement.

    This still leaves me with a comfortable month to month budget. It isn't luxurious by any means, but it is still way better than residency.

    I am open to suggestions. Thanks in advance.

     

     

     

     

     

  • #2
    You are certainly on the right track.

    With 3 children, I am assuming that you have done some or all of these things but you should also:

    1. Make sure to purchase individual disability and term life insurance (possibly establish an Irrevocable Life Insurance Trust to be the owner and beneficiary of the policy, depending upon the amount of coverage).

    2. Purchase or increase the limits on your Umbrella or "Excess Liability" policy. Increase the deductibles on your auto and homeowner's insurance policies to at least $1,000 to reduce your premium rates and fund some or all of the cost of the Umbrella policy.

    3. Contribute to 529 Plans - especially if there is tax savings associated with your state of residence.

    4. Create an Emergency Fund of 3-6 months of your expenses.

    5. Have a Last Will and Testament drafted along with a Healthcare Representative Power of Appointment, a Durable Power of Attorney and a Living Will.

    Comment


    • #3
      To address your question about IRAs, you are limited to $5,500/yr per person, so you won't be able to contribute to a TIRA in the same year you contribute to the Roth. You'll have to wait until 2017 to begin the back-door strategy.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #4
        1. Disability insurance will be purchased in the next month or so. For life insurance, I have a 500k 10yr policy with about 4 yrs left, as well as a 1mil 10yr policy with 6-7 yrs left. My wife has a 500k 10yr policy with 6-7yrs left.

        2. I don't have an umbrella policy, but I plan on it.

        3. I am in Nebraska. But I don't know about the 529 plans.

        4. Emergency plan is also in monthly budget. We will probably keep some of the extra loan payments for a few month until that is fully funded.

        5. I know my wife and I need to work on that.

         

        Comment


        • #5
          Def agree with the disability insurance, life insurance, and you should def look into 529 plans for the kids

           

          is your 457b non govt or govt? If non-govt, there are some considerations before contributing - solid health system that won't go belly up? good funds, low expense ratios? other fees?

          Comment


          • #6
            Non-govt 457b. The health system is pretty large. I don't know about the funds or expense ratios or fees yet. Won't most of those things be offset with the fact that it is tax deferred?

            Comment


            • #7
              1. Make sure to purchase a policy with a true "Own-Occupation" definition of total disability and take advantage of any discounts associated with your hospital prior to graduating. You should also find out if your future employer will be providing you with any group Long-Term Disability (LTD) coverage. The agent/broker you will be or are working with can then calculate the amount of individual coverage available. Depending upon your specialty, you will be able to purchase $6,500-$7,500 month under the "New In Practice" Limits - even if you would normally qualify for a lower benefit amount.

              2. Your coverage amount seems adequate for now but very low based upon your future income and number of children that you have. I would also assume your children are young as your wife does not work. You should look to purchase additional coverage with longer durations and possibly "ladder" your coverage to reduce your overall premium outlay. You should also increase the amount of coverage that you have on your wife. In the event something happens to her, you will need more money in order to continue to work at the pace you will be starting out or allow you to work less and spend more time with the kids.

               

               

              Comment


              • #8
                At $1.5M, your life insurance coverage seems inadequate. It would appear that:
                $350K would be consumed by the mortgage
                $300K would be consumed by a college fund for your 3 kids, assuming a public 4-yr degree for each child (presently running $25K/yr on average)

                This leaves your widow with $850,000 to support herself and three kids, assuming she does not go back to work. She’ll also need some money for her retirement.
                Using the 4% rule of thumb from Bill Bengen’s work and the Trinity Study, we can assume she might be able to create a sustainable income of about $2,800 per month (that’s $850K x 4% / 12). This may be less than you earned during residency.

                You could pick up $2 or $3 million in 15-year term to supplement this and, assuming you’re young and in decent health, the premium would be quite affordable. Larry Keller, who first replied to your post, can help you get this in place.

                Physician Family Financial Advisors inc.

                Comment


                • #9
                  Here is last WCI post on 457(b) Plans written by Joshua Knudson, MD.

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

                  Comment


                  • #10




                    Non-govt 457b. The health system is pretty large. I don’t know about the funds or expense ratios or fees yet. Won’t most of those things be offset with the fact that it is tax deferred?
                    Click to expand...


                    Def read that white coat article referenced above. And know what your options if you leave you job - you may need to take ALL of it as a lump sum (not ideal...). You cannot roll it over like you can for a 403b unless your new job has a non-govt 457b that allows rollovers. Every 457b plan is very different, get the details first before contributing. Mine for example, if I leave,  lets me take distributions over any amount of years as I want, so I won't get a huge tax hit if/when I leave the job.

                     

                    The part that many have difficulty swallowing is that the fact that the money is subject to the hospital creditors if it goes bankrupt - so there is a chance (tiny chance, depending on how solvent your hospital is)  you can lose all contributions. My hospital system is the largest in the state so I find it unlikely, but I've still decided to not max out that plan for now since I am several years until retirement.

                    Comment


                    • #11
                      Sounds like you have a good plan.  Agree with getting disability and possibly increased life insurance since you are the sole earner.  PM if you want to know who I used for the disability for my wife and I, otherwise I'm sure the above agent would be quite capable.  Definitely examine the details of fund availability in the retirement accounts.  You could have terrible options which would argue against the 457b.  The 401k is a no-brainer.

                      Comment


                      • #12
                        I did a one off check up with a financial advisor when the youngest was in utero. He pointed out his 15 year term policy would run out when she was 10, and that even if I were an at home Mom, Dad would need a lot more than nothing if I died to replace my services (or quit work). So make sure you both have term policies, proper size, that are affordable until you'll have amassed enough money to self cover. (Our youngest is off at school, and we paid the cheap term policies a few years after we no longer needed them as $400 lottery tickets ((only half mil policy for us Army FPs- what IS your specialty?!?)), then dropped it when rate tripled at end of the policies' terms.)

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                        • #13
                          Specialty-Anesthesia.

                          On the 457, I think I might go against putting money into it just because I might end up changing jobs and don't want to get hit with the tax bill.

                          Comment


                          • #14




                            Specialty-Anesthesia.

                            On the 457, I think I might go against putting money into it just because I might end up changing jobs and don’t want to get hit with the tax bill.
                            Click to expand...


                            Just a thought - if you are comfortable with the financial strength of your employer, read the SPD re: the 457 before making that decision. You may have the option to remove it over a period of years (likely will) and the tax bill is only a repayment of what you are getting as a tax reduction today. If someone offered you a few thousand $ a year today that you may or may not have to pay back in the future, or that you could choose to pay back on the terms you choose, wouldn't you take it? Especially if you could invest that money for growth and you would come out ahead, financially, after taxes? A bird in the hand and so forth. In other words, you'll be better off even if you do leave your job - but what if you don't? Do you want to look back 10 or 20 years from now and have regrets that you didn't save more, tax-deferred, for retirement when you had the opportunity?
                            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                            Comment


                            • #15
                              Very similar to my situation when I started just over two years ago...minus the family part so I didn't have life insurance to figure out.  As stated above can't stress enough getting all that figured out but as far as you accounts go.

                              Do you have any retirement accounts from residency laying around? If you had a 401k or 403b from that I would roll that over into a ROTH.  Its a tax hit but this is the last year you wont' have full attending salary.

                              If you do come out low enough on the salary to do the straight ROTH this year no you can't backdoor as well as stated above.  If you have any ability to get a ROTH right now do it.  Remember you can contribute to a 2015 ROTH until taxes are due.  If you're like me you will find yourself always wanting more ROTH space.

                              The decision to taxable invest versus paying down the loans is a very individual decision.  Paying them down is contributing to your overall net worth just as taxable investing is.  If you have a plan to pay them off in five years then I think taxable investing is fine.  I have done the same thing splitting extra cash flow between taxable investing and paying my loans down planning to have them gone in five years.  More conservative investors would say don't do any taxable investing until those loans are gone and if you went that route you'll be just fine as well.

                              A 457 is fine but you MUST understand the distribution options your plan gives you and have a plan in place for that money if you leave/get fired.

                              My order would be:

                              1. 401k to the max

                              2. ROTHs

                              3. Something to a 529 at least to get whatever tax break the state probably gives you

                              4. Stealth IRA (HSA)

                              5. 457b

                              6. Extra to student loan to be gone in five years

                              7. Taxable investing

                              8. Enjoy how much better life as an attending is

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