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  • Give this intern a financial check-up

    I’ve been reading these forums (and the book) for several years, but a few recent threads asking for a “financial check-up” have made some of the fundamentals a lot more “sticky” in my head. In that context, could I ask for some feedback on my situation?

    I am starting intern year in IM, am a little older (32 – did an MD/PhD), and my wife is a PhD engineer. She makes very good money in industry, so our pre-tax income this year will be around $190k.

    We own a house in a “hot” housing market worth ~$425k. We value the safety of outright home ownership, so have aggressively put money towards this house – at this point, we owe ~$100k on it, which we’d like to pay off, soon.

    No debt, other than the ~$100k remaining on the house note.

    We own decent cars that we take care of, and should last us at least another 5 years.

    We have ~$80k saved in various 401k’s, which we realize is low for our ages, but that doesn’t concern us too much, given our lack of debt and high equity in our house. We’ve obviously always contributed whatever is necessary to get any matching contributions, and will continue to do that.

    No kids (or plans for any), and no pets (although we’d like to get a dog once we’re more settled).

    I’m leaning towards doing a fellowship, but the thought of being 40 before getting a “real job” is scary. I’m also burning out a little on training and have considered being a hospitalist or doing outpatient IM in a more rural area. I know some people don’t like the hospitalist schedule, but I think it would work well with my lifestyle ambitions.

    Wife would like to semi-retire after I get a “real job” – ie, teach a few courses each semester at a university, tend the garden, cook good food, etc.

    Our long-term ambition is to build a new house that fits our lifestyle better (ie – we don’t need a bunch of bedrooms and living space like our existing house has, but we would like a small pool and a gym). We anticipate needing about $1M for this, which given the equity in our existing house, seems doable.

    We both have disability insurance paid by our employers, but aren’t very concerned about our insurance coverages, since we have no real debt and both have high earning potential. We have generous umbrella liability coverage.

    Our immediate plans are to pay off the house note (this year), then begin aggressively contributing to retirement accounts. I’m unsure what else we should be doing, especially given that our income is high, presently, and will more than double once I finish training – to an extent, I feel like we should be enjoying life a little more, now, given the favorable income potential in our future. Thoughts?

     

  • #2
    Your wife makes enough money that you can do whatever you want, including nothing, and still be okay, as long as she keeps working. So if a fellowship is really important to you, go do it. You're ahead of most docs at 40 already! But you sound pretty ambivalent about it to me.

    You're going to need a lot more income than you have now to afford a $1M house. Even with $325K down, you're going to want $350K in combined income to buy that house. Sounds like that probably means both of you working.

    Most docs are way too debt tolerant. You're one of the few that might be leaning a little too far the other way. On that income, I'd be maxing out all retirement accounts (including Backdoor Roth IRAs) before even considering throwing more money at that mortgage.
    Helping those who wear the white coat get a fair shake on Wall Street since 2011

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    • #3
      I think you're in overall good shape and the lack of debt is awesome, but at this point you need to start focusing on building wealth.  100k mortgage is not bad debt to have and you're very secure already.  Another year of waiting to build retirement accounts is another year of lost opportunity to put your money to work for you.  The later you wait to save, the less your savings will be worth and the less it will grow with compounding. Only 80k in a 401k in someone making as much as you, that's a problem.  You're really behind.

      If I were you I would STOP obsessing with paying off the house now and start pouring everything you can into retirement accounts, tax advantaged first, then taxable accounts.  Have you been maxing out 401k's each year?  If not, you're paying more in taxes than you need to.  Also, remember that high income people get a big government handout each year called the mortgage interest deduction.  You might as well take advantage of it.  That combined with your 401k contributions will let you keep more of your own money, which can go into investments and start working for you.  Earn money while you sleep

      Also, have you actually calculated out what your disability insurance will be if one of you became disabled?  Usually employer plans are not very good and won't be enough to cover your high income.  Wouldn't it be horrible if not only one of you become disabled, but because of inadequate insurance you also have to majorly scale back your lifestyle?  It worries me that you're "not very concerned about our insurance coverages" because that shows you don't fully understand what could happen in the unlikely event that one of you become disabled or passes away prematurely.  You should both have a good disability and life insurance policy for at least the next 10 years while you are building wealth.  You have nothing to sustain you right now if you lost your ability to work or if one of you passed away.  Sure you could sell your house for 400k, but that's not going to sustain you for long and that means you'd have to move into a cheap, small apartment.  That would kind of suck right?  Until your portfolio is 25 times your annual expenses, you need insurance.

      Also, don't assume you're always going to have a high income.  You mentioned you're burning out in training already.  Guess what?  It's way harder working as an attending then it is as a resident.  The hours are a little better, but the responsibility and number of patients will sky rocket.  You might burn out pretty quick there too.  I'm a hospitalist and I've been burnt out before and I see people get to that point all the time.  Therefore, you want to save aggressively before that happens.  If you start saving now and save very aggressively for the next 10 years, you guys will have the opportunity to retire early or work only part time and not have to worry about burn out any longer.

       

      Keep your mortgage, save everything you can, enjoy life, and you two are well on your way to a secure, happy life together.  Good luck!

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      • #4
        Appreciate the feedback.

        I should note that the house loan is a personal loan from family, so we've agreed to pay it back in the short-term, not stretch it out. I would like to set aside the merits of that, though - owning a house outright (or with only unsecured loans from family) was highly emotionally important to us, so that's what we did. We'll pay it back in the next year, for sure, and legitimately have zero debt.

         

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        • #5




          Appreciate the feedback.

          I should note that the house loan is a personal loan from family, so we’ve agreed to pay it back in the short-term, not stretch it out. I would like to set aside the merits of that, though – owning a house outright (or with only unsecured loans from family) was highly emotionally important to us, so that’s what we did. We’ll pay it back in the next year, for sure, and legitimately have zero debt.

           
          Click to expand...


          That's an important detail you left out  Yes, then you have no choice but to pay it off.

          I would still encourage you to reassess your insurance situation though.  Especially if you are planning on doing training for the next 8 years.  If you're wife were to become disabled during that time, you'd lose her income and if your insurance isn't enough you'd be forced to drastically change your life on top of dealing with the stress of a disability and full time resident life.  That might be too much to handle.  At least do yourself the favor to make sure that in that horrible situation you'd be completely financially secure.

          If you're unsure about your current insurance situation, post your policy numbers here and let people critique them.

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          • #6
            Most important near term decision I see is picking the right fellowship (or choosing the hospitalist route). Find something you love doing. And being a resident/fellow is a "real job" with "real earnings" even if we don't always refer to it as such. Lots of people would love a $50-60k/year job. The hourly rate isn't great but it's still a job.

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            • #7
              Thanks, hightower - I will carefully reassess the insurance situation. My first-pass reading of my employer-provided policy is that it's actually quite good, but I will go carefully evaluate it. I should note that our lifestyles are fairly modest, so living off a resident's income would not be a significant imposition to us (although if, say, one of us required long-term care, that could obviously be a problem, so your point is well-taken, and I will prioritize a careful review of our insurance).

               

              Our "dream house" plans are many years out, WCI - definitely not until I have an attending job, so by that time, we'd hope to have >half the value as a downpayment, and take a loan <2x salary.

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              • #8
                You are in good shape. I would get a mortgage on the remainder of the house loan, pay your family member back immediately, take advantage of the mortgage tax deduction, and put money in retirement. Max out Roth IRAs and retirement accounts as much as possible. That is your logical financial next step.

                Look into your disability policies. 99% of them are not good for physicians. Also make sure your other insurance needs are taken care of. The thing about a 1-million dollar house is not just buying it, but keeping up with it, I know first-hand....

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                • #9
                  Maybe I'm misunderstanding, but how would I benefit from the mortgage tax deduction? Interest would be ~$4.5k/yr (initially), while standard deduction is $12.6k/yr, and we have no other itemizable deductions (well, a few thousand in property taxes, etc, but certainly not an additional $8k of deductions)

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                  • #10
                    OP, you're on the right track with a low mortgage amount and low deductions that itemization isn't much -- you're a dream tax return to HR block.  

                    My advice is to sit down with the DW and plan out your careers.   She's taken on the heavy lifting with your PhD and voiced a desire to semi-retire into teaching and that'll damper out the income vs your fellowship desires of 4+ more years of indentured servitude -- what's the game plan for your careers?

                    That's what's going to drive your dream home build and retirement date/time/funding since no kids and low current spend and only 100k debt.

                    My suggestion given your parameters--  max out 401k and Roth IRA backdoor funds and if can extend the payback loan to 2-3 years to allow that funding instead of 1 year.

                    The key here is your fellowship/her semi-retirement plans

                    Comment


                    • #11


                      Maybe I’m misunderstanding, but how would I benefit from the mortgage tax deduction? Interest would be ~$4.5k/yr (initially), while standard deduction is $12.6k/yr, and we have no other itemizable deductions (well, a few thousand in property taxes, etc, but certainly not an additional $8k of deductions)
                      Click to expand...


                      I'm not clear on this either.  Is your loan right now interest free?  If so I am do not understand how converting it to a loan WITH interest for a tax deduction on the interest makes sense.  The only purpose of that would be to free up cash to invest right away, but unless you're going to take a loan you planned to pay off in a year and make it a 15-year loan with a lot of accrued interest, I don't understand.

                      It  would be great if you could at least max your 401k(s) and stretch out the home loan a few extra months.  Once that home loan is knocked out you can basically do whatever you want.
                      An alt-brown look at medicine, money, faith, & family
                      www.RogueDadMD.com

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                      • #12
                        !. Why did you borrow from a family for the house?

                        2. What are you credit scores? Do you have any credit history? Do you have credit cards? You need a solid credit history to buy 1M houses...

                        3. Why did you decide on a 1M house? Why that #? 2 people don't need much. You need a 100k house. Sounds like you think you'll stay in the same place for training this "hot" market - I assume the HCOL has turned the house from 100 - 1M? (we live in a market that is also "hot"!) I mention this here, only because its important to note the difference in the value of the land, and the house. Sounds like you're buying for the HCOL?! area?

                        4. Do you have any physician scientist / research / teaching leanings? How do you expect your PhD to augment your career or hobbies going forward?

                        5. I think you need an IPS. Why the urge to have a house paid off in full? (sort of rhetorical... make sure your desires are honestly reflected in the IPS.). Also a budget is maybe a good idea.

                        6. What are the terms on the house? interest free? anything written? Regarding itemizing... Sounds like you'd only have a couple grand a year of interest (aka, less than the standard deduction). Can you get an cash out mortgage, and buy your next place? Can you rent your current place? I think one thought here is to get a standard 15 year mortgage on the house, improve cash flow to fund retirement, etc. Just a thought, but it's worth thinking about, because it leads to the next point.

                        7. Whats your plan? Sounds like you have a plan~ish. She wants to retire, you are burned out already, you have some non standard loan and terms on a house... Whats the 2, 5, 10, 20, 40 year plan? Whats the dream career, location area, near/far from family/friends/etc. I'd suggest you make a plan, so you can better set goals. I don't see a lot of goal setting here. "Someday buy a 1M house". Okay... ARe you going to live aboad, or will you teach, or will you retire in 8, or 38 years? Would you like to travel? How much do you think you'll need to have saved for retirement?

                        (I asked a lot of questions - I don't pretend to know the full situation from a couple of short posts, but hope they are taking in the spirit of thinking about what you'd like, because you have some great opportunity!)

                        Comment


                        • #13
                          Adventure,

                          1) Logistically, it's much easier to buy/sell without a bank (or appraisers and inspectors) involved. Convenience. The match sent us scrambling to buy in a tight market, so this arrangement saved time and reduced risk. It probably wouldn't be ideal in other situations.

                          2) 800+. Yes, we have cash-back cards that we use to pay for everything, then pay the cards off in full each month.

                          3) You think a couple with combined $200k income should have a $100k house? And that we should keep that house once my salary jumps to $300k+?

                          4) If the perfect opportunity arose, perhaps, but no strong feelings to do this. In retrospect, I shouldn't have done the PhD, but didn't know it, at the time.

                          5) Ok. We like the idea of the safety that comes with no mortgage debt.

                          6) Probably no interest, "pay it back whenever". It sounds like there is a lot of push to delay this repayment to fully-fund 401ks. I think that's doable.

                          7) Point taken. So far, our attempts to plan have been tripped up pretty hard by the randomness of the match and sundry other logistics of training for this career, so we're trying not to get too enamored with any particular plans

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                          • #14
                            I'm one of the bigger proponents of don't be afraid to spend and enjoy life here.
                            I do have some concerns with your proposed plan. I don't think I would advocate for putting such a large proportion of your resources in a million dollar house, especially if you are going to do a fellowship.
                            Time/compound interest has always been our biggest tool. You have chosen to pay loan back rather than accumulate money in retirement funds. If early retirement is a goal, a million dollar house would really put that at risk, especially if wife retires.

                            If early retirement isn't a goal then go ahead. It's still a limiting factor that will affect all other spending but just make sure you like your job before you buy that house.
                            I would personally make sure wife is okay with trade offs if she decides to early retire and you go ahead with expensive house. Especially because life is very unpredictable. Good that you don't have other debt.

                            We value flexibility so we waited a long time for dream house. I still hate all the bills even though mathematically they don't make a difference.

                            Congrats on starting your internship. Don't pick a fellowship where you make less money than hospitalist. You would be approaching ages where you could really limit retirement options, even being a five per center.


                            Good luck. Ymmv

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                            • #15




                               

                              2. What are you credit scores? Do you have any credit history? Do you have credit cards? You need a solid credit history to buy 1M houses…

                               
                              Click to expand...


                              No you don't. You can do manual underwriting or even pay cash. You only need a credit history to borrow money using automatic underwriting, not to buy stuff. Big difference. Might be easier to go through automatic underwriting than manual underwriting of course.
                              Helping those who wear the white coat get a fair shake on Wall Street since 2011

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