Am I on the right track?

[smg]

I just wanted to make sure I'm on the right track.  Would appreciate any comments, either in support of what I'm doing, or constructive criticism and ways I can make it much better!  I have a few questions at the bottom too.

I'm 43, married, have 2 kids 13 and 11.  Live in the Bay Area, CA.  Been ER attending for about 3.5 years.  Make about 400K/yr.

On day 1 of being an attending, had about 300K student loans.  Could not refinance them for reasons that are not important to delineate at this time.

Today:, just refinanced the remaining 80K at 3.25%!!  My only other debt is a car.  I crashed my car 3 months ago suffering two lumbar vertebral fractures.  So I had to buy a new one.  So I owe 19K @ 0%.

No non-liquid assets!  Don't own a home.  We currently rent.  While that annoys me given my age, frankly I'm getting a good deal and want to ride this as long as possible.  Plus buying a home in the Bay Area is murderous.  We do outright own my wife's car.

So....I'm the kind of person that absolutely abhors debt I hate it with the fury of 1000 suns.  So recently I've been focusing my life on paying off my student debt.

Each year I

-max HSA

-max SEP-IRA

-try to pay down my debt significantly

 

Questions

- should I be starting a 529 for my kids while I have student debt?  I believe I recall no....have to take care of our retirement before our kids' education.  So when is the right time to start a 529?  After my student debt is gone?

- If we add up all of my wife's and my retirement accounts (multiple 401Ks, IRA, SEP-IRA, etc..) it's about 300K.  But currently I'm only contributing to the SEP-IRA.  My wife doesn't work.  Should I be contributing more to my retirement?

- Should I set up instead a 401K?  Should I just convert my SEP-IRA into a solo-401K?  I honestly get confused when I read things like tax-harvesting, tax-deferred, tax-managed, tax this and that.

- My wife really wants to start saving for a house, and I estimate we will need min 200K as down-payment.  Should I start now?  Or should I take extra money to pay down student debt (3.25%)?

- Now that my student debt is 3.25%, should I be trying to invest a little more?  Before it was 6.8%  If so, if I'm maxing my HSA and SEP-IRA how else can I invest?

 

I have life insurance ($1M) and my wife has life insurance ($500K).  I know I really need disability insurance.  It's so ************************ expensive.  I should have learned a lesson.  I broke my ************************ back in a car accident and was so lucky that it wasn't surgical.  Couldn't work for about 2.5 months.  I actually collected CA state disability insurance!

 

Right now I am maxing HSA and SEP-IRA...and with any additional funds paying down student debt.  And we have like 40K set aside for near-term emergencies.

 

Am I missing anything glaring?  If this is basically good, then I'm happy.  I may not be maximizing every opportunity,

[Lithium]

- Get disability insurance.  It's unthinkable not to have it when you're the only breadwinner for a family of 4 in a VHCOL.

- Max out your 401k and all other retirement vehicles.

- Move the SEP-IRA to a solo 401k so you can do a backdoor Roth IRA.

- Pay student loan debt off.

I wouldn't even think about buying a million dollar house until you do all of those things, especially if you abhor debt.  After 3.5 years as an attending, paying off 220K in loans and making it to a net worth of 220k is something to be proud of, but I would be very aggressive in building retirement savings at your age.  If you're spending $100,000 a year and aim to make it to 25x retirement savings, you still have a lot of work to do.  Obviously your savings rate and annual expenses are key in determining how quickly you get there.  As you probably realize, it will happen far more quickly if you go almost anywhere but the Bay Area.

[smg]

Is what you put below the order in which you recommend things, more or less?

Lithium wrote:

– Get disability insurance.  It’s unthinkable not to have it when you’re the only breadwinner for a family of 4 in a VHCOL.

Agreed...i need to do this.  I keep on stalling.  What is VHCOL?

– Max out your 401k and all other retirement vehicles.

So that's the question, what other retirement vehicles are there that I'm eligible?  Perhaps it's moving the SEP-IRA to a solo-401K then do backdoor Roth IRA like you put below...then I can save more than $55K/year.

– Move the SEP-IRA to a solo 401k so you can do a backdoor Roth IRA.

– Pay student loan debt off.

Pay off student loan after I've maximized all my retirement options?  Makes sense.

I wouldn’t even think about buying a million dollar house until you do all of those things, especially if you abhor debt.  After 3.5 years as an attending, paying off 220K in loans and making it to a net worth of 220k is something to be proud of, but I would be very aggressive in building retirement savings at your age.  If you’re spending $100,000 a year and aim to make it to 25x retirement savings, you still have a lot of work to do.  Obviously your savings rate and annual expenses are key in determining how quickly you get there.  As you probably realize, it will happen far more quickly if you go almost anywhere but the Bay Area.

Click to expand...

Should I even bother to save for a house now?  Note I'm not saying buying one, but saving one.  I for one wouldn't mind moving out of the Bay Area, but it's not as easy as that.  My wife's family is here, and ER docs in CA make a lot of money.  We pay a lot in taxes, but it's a top-10 state for making money too.

So I guess it's a *wait* to contribute to kids education.  Wait until I have no student debt and only do so after maximizing my retirement options.

Thanks!

[Lithium]

VHCOL = very high cost of living.

Retirement vehicles could be 401k, 457b, backdoor Roth IRA, HSA, and if you have any side work as an independent contractor, solo 401k contributions.

I didn't think about a 529, and since I don't have kids I'm far from an expert.  But I think maxing out 529's would make sense too before paying extra in student loans - obviously you can't get that space back once the year is over, and those are most likely costs you're going to pay one way or another.

In California at a high income, you definitely want to use every tax break available.

If buying a home in the Bay Area makes sense for you long-term, I wouldn't start saving for it until you have leftover income after doing everything else.

[DMFA]

VHCOL = very high cost of living. Bay Area, Manhattan p much.

You can make IRA contributions for you and your wife for 2017 and 2018. If you rollover your SEP-IRA into an individual 401(k) before 12/31/2018, you can do backdoor Roth of $5,500 per person per year. If you have $22,000 handy, you can do all that at the same time (need separate Traditional IRA and Roth IRA for you and your wife). Search the site for Backdoor Roth tutorials, including the "late" one. This is very easy.

Disability insurance is an absolute must. If you get hurt, your family's screwed. You also need way more life insurance at that income if you want your family to continue living the way they are in case you die. Prob 3-5 mil - have it cover a house, two colleges, and a few years' income for your wife. The "10x income" rule-of-thumb is kinda meh, decent ballpark figure but leaves out many considerations.

I'm lukewarm about paying over the minimum on 80k over a 5-year amortization schedule at 3.25%. That's aggressive enough. Finance charges are at most $6,487 over 5 years on that. Loans have a fixed maximum cost. If you're going to wax poetic about your debt aversion, fine, pay it...but you really aren't gaining that much by being more aggressive than you already are. I'd sink $22k into the backdoor Roths and replenish that over the next few months before getting any more aggressive on the loan. Ensure you're saving $1,000 a month to fund the backdoor Roths every January.

If you want to follow the 20% rule-of-thumb, that's $80k a year you'd need to save for retirement. $55k + 11k + 6.9k = $73k, so close. Make up the difference in a taxable brokerage account. Seems like you'd want to do this once your student loan is paid off. Not a bad idea.

As for buying a home...your very high cost of living area is going to take a while to get a 20% down payment. You might consider getting a non-conforming loan, aka "doctor loan" or "physician loan" allowing less down payment without PMI. It will probably need to be a jumbo loan, so your interest rate may not be great. Ensure you are well-established in your job and the area before buying, since if you have to sell, you will get eaten by closing costs.

I think you're probably fine, but could use a bit more critical analysis on your end, plus developing some familiarity with retirement accounts. You may want to roll every pretax retirement account (qualified plans and IRAs) into a single individual 401(k) effective 1/1/2018 to simplify; this also "opens the backdoor" for Roth conversions.

[mobilehomegurl]

Since your interest is low on your debt, you may want to put some money away for your kids' college fund especially since it's only a few years away. Regarding a home, it might be best to wait until the market cools down. Seems like it's more of a want than a need at this time. Good luck!

[hightower]

Agree with the insurance comments.  Since you're still no where near financial independence, you need to have a life insurance policy that would make your family financial independent in the event of a tragic death.  I would raise those payouts on your life policy to at least 4-5 mil.  Also agree with the disability policy need.  You should make that your top priority right now, today.  Don't mean to beat a dead horse, but that's so so important.  You've literally already dodged a bullet with that car accident.  Imagine if you would have been paralyzed from the waist down and couldn't work.  You guys would have to sell everything you own and probably end up on welfare.  Sorry if that sounds dramatic/cynical, but it happens.

As to the debt...First, good job getting rid of it!  I would just go ahead and finish paying it off.  You're so close to being done and with your salary it shouldn't take long to get rid of.  That goes for the car too.  Just get rid of it all and agree never to take out debt again for anything.  Then, you can start pouring funds into your tax advantaged space first (yes you should set up a 401k since it will lower your taxable income dramatically), and a backdoor roth, then a taxable account with everything left over.  Open a 529 if there will be significant tax advantages to doing so (I've never had one so I don't know much about them).

As far as the house purchase idea goes...your kids are nearly ready to move out and go to college (5 years from now for your oldest).  I hear things from my older colleagues all the time about how "as soon as my kids are gone..." and then they say they want to sell the house, downsize to an apartment, move somewhere new, etc.  Are you guys sure you really want to own a home at this point?  I mean, if you're lucky you'll get 5-10 years use out of it before your kids are all gone and it's just you and your wife.  Maybe just plan on buying a condo when they are in college?  You're going to have to probably cash flow a good portion of their college tuition at this point so buying a house and putting all that cash into a down payment anytime in the next few years doesn't make a lot of sense to me.  Something to consider if I were you

[u500_insulin]

My take on the original post is there is not enough money coming in vs expenses.

Close to 100k in debt

2 children that will be attending college sooner than later

quite far still from a one million dollar portfolio (what most docs would think a bare minimum for retirement)

a house in Bay Area starts at one million (small house)

this is coupled with the fact that the poster is in a high burn out field.

 

I think that the solution can be:

1) move out of Bay Area

or

2) pick up considerable shifts and possible for spouse to work

 

best of luck!

 

 

 

[ajm184]

I would be consider adding to you and your wife's Life Insurance policies, given you live in one of the more expensive parts of the country. Your insurance is only 2.5x current income. I have heard 8 - 10x income as 'rule of thumb'. Get level term premium for an amount of time estimated time to FI (Financial Independence). Your wife will also need additional life insurance imo, because if she passes, her time/effort contribution to the children will need to either a. done by you (lowering your income) or b. pay get someone to help out.

Try this as a primer on purchasing life insurance: https://www.whitecoatinvestor.com/how-to-buy-life-insurance/

[StarTrekDoc]

Priorities:

Income protection: 

-Term Life Insurance for both.  You: 400k x 8 -  $3.2-4M;   Her:  $1M probably enough to keep you working and childcare coverages  -- 10-15 years probably enough for you at this time depending on your launching of the kids.

-Disability Insurance for you is a MUST.  You saw what little EDD gives you.

Retirement:

-Fully fund tax sheltered options to 20% earnings as rule of thumb

Debt/Lifestyle:

-Debatable on which takes priority.  Student debt repayment gradually vs saving for downpayment to get into a home -- personal choice on this -- lots of debates of virtues of either -- Personal choice which to attack or split decision

529 Education:

-With your above goals, you may not have much left for this to make a timely impact since they are 11 and 13 already.  Avoid the temptation of private schooling in your case.  Great Bay Area schools abound and you can rent at preferred district much less than the cost of ownership.   Same for college UC schools are quite competitive.

[spotty_dog]

smg wrote:

I for one wouldn’t mind moving out of the Bay Area, but it’s not as easy as that.  My wife’s family is here, and ER docs in CA make a lot of money.  We pay a lot in taxes, but it’s a top-10 state for making money too.

Click to expand...

I hate to tell you this, but we're an EM family in a no income tax state in a moderate to low COL area, and we make what you do if not more. (We're semi-rural, which might be a non-starter if your family enjoys the bustle of the BA.)

But we're at that income only after some pay raises. When he was 3.5 years out of training, he was averaging $287k total independent contractor income, which translates to less than $200k AGI. Yet we had increased our NW by 450k since the end of residency. And that includes having made a five-figure expenditure each year toward lifestyle stuff: we bought a new-to-us minivan, and did house repairs. Oh, and my husband bought number of very expensive bicycles.  :P

I'm not saying our choices were the right ones for everyone, but you do need to recognize you're making choices. When you buy that car you can't afford without financing, or those electronics that the school requires for homework, or that high-speed internet because life without streaming is hardly life at all...those are choices, and they're ones that are taking you farther from financial independence.

One choice my husband made during those first 3.5 years was to moonlight. He picked up an extra 4-5 shifts a month, some of which required hours of commuting. He did this because he knew A) he would never have more energy for working his butt off than he did right out of residency, and B) it's better to have the money early on and get it started compounding. Oh, and C) it was kinda interesting to work in different hospital systems with different patient bases.

Anyway, as far as prioritizing where you go from here, you're getting good advice. Good luck!!

[MPMD]

You are way under-insured.

I would be curious why you took out more debt (car loan) if you say you abhor it? Not trying to be nasty or nit-picky I just think you need to explore more fully what your actual attitude towards debt is. Presumably insurance paid out on your car? Not to get too Dave Ramsey on you but if you have a car loan after a wreck it means you upgraded, not replaced.

Agree with others who have said you need to max out your tax protected space.

I wouldn't worry about renting in a VHCOLA, I probably would rent too. There have been recent threads on Bay Area real estate that gave a lot of us regulars chest pain.

[wideopenspaces]

You've gotten some good advice, I'm glad you posted. After insurance, I'd focus on putting away 20 percent towards retirement while riding out the rest of the debt over a couple of years. If you plan to pay for college I'd put in whatever amount gets you a deduction in the 529 accouns and then plan to cash flow the rest. Because of that, I personally wouldn't plan to buy a home. I think it would be really tough to be making a mortgage payment, paying for college and putting away enough for retirement. I'd reconsider a condo or something once the kids were in college or you were done paying for college.

However, it all depends on your priorities. I don't think you have enough to buy a house, fund retirement and pay for both kids college tuition all at once. So you have to decide what is most important. Also if your wife was able to go back to work at some point that might change things up.

Good luck figuring things out! You're asking good questions and I think you're going to end up just fine.

[soundsystem]

I would agree with the posts above: would get more life insurance and would definitely get disability. Your biggest asset is your health at this point. Assuming you stay healthy you'll have a decent annual income going forward.

Regarding your salary and what you mentioned, I would agree with you in trying to keep your job. Your salary is very good and I'd say is above the average for EM. Not sure if it's location specific, but in many other parts of the country it would be hard to get to that number (unless of course you'd be taking a lot of extra shifts, moonlighting, etc...). On the other hand, if you move to low cost area, obviously your money would go a longer way, but at the same time you need to be happy where you are.

Regarding home, given that housing prices are so high in the Bay area, i'd stay away from buying there. I'd reassess once the kids are gone college. Maybe downsize significantly then. Look also at an article today arguing it makes more sense to rent than to buy in today's market: https://www.marketwatch.com/story/why-it-makes-more-sense-to-rent-than-buy-2018-01-11

About the car, 19k loan is very reasonable! Not sure why others found this too much.

Good luck!

 

 

 

[Kamban]

smg wrote:

– should I be starting a 529 for my kids while I have student debt? I believe I recall no….have to take care of our retirement before our kids’ education. So when is the right time to start a 529? After my student debt is gone?

Click to expand...

At this point savings for your retirement is more of a priority. The California public school education is fantastic and if your children can get scholarships their education can be covered with a combination of loans and monetary help from you.

smg wrote:

My wife really wants to start saving for a house, and I estimate we will need min 200K as down-payment. Should I start now? Or should I take extra money to pay down student debt (3.25%)?

Click to expand...

I think renting for the next 5-6 years makes more sense. After that you will be empty-nesters and can buy a house at an affordable area. Maybe even move to another state with good income, lower or no taxes and turbo charge that retirement savings. Buying a house will tie you down and you will get bogged down working harder and longer towards your retirement.