Advice on my situation

[SiR99]

Hi everyone,

I am a second year resident (out of 4-5 years total) that is very interested in business/investing and I am trying to plan out my financial future and wanted advice from other financially experienced doctors/professionals about my situation.

 

A little about me to help give you an idea of where I'm at right now:

Debt: None

Savings: ~$80,000

Retirement: 

- $1900 in Fidelity rollover IRA (has just been sitting there, I need to do something with it, like transfer it to my residency retirement plan or cash out)

- My residency requires us to contribute 10% of our income to a retirement plan and matches with 14% of my income. The logistics have worked out in a way where I will get to keep 60% of my residency/employer contribution plus my own gains/losses when I finish. At that point I can either cash out and pay the tax or transfer the money to another retirement account.

- Ideally, I was thinking of investing in real estate/apartment complexes throughout my career and once I retire, just living off the income. Or maybe just working part time, not sure.

 

Before I started med school, I had the Fidelity Rollover IRA mentioned above with about $1900 in it. It's just been sitting there, not really growing and I need to do something with it, like transfer it to my residency retirement plan or cash out)

 

During my intern year I thought about opening a Roth IRA, but my main goal is to save money for either a down payment on a nice house (I want to live in a high cost of living area) or enough money to open up a private practice when I finished my training (if I specialize). 

 

My thought process was that if I contributed $5500/year into a Roth IRA, that would be about $22,000 ($5500 x 4) less money that I would have for a down payment on a house or a private practice, since the purpose of that account/money would be for retirement.

 

I had a few questions:

1. What should I do with the $1900 in Fidelity rollover IRA? (Cash out, transfer to current retirement plan, put in Roth IRA, etc?)

2. Given the information above, should I still invest in a Roth IRA? (Given I'm contributing 10% of income to a retirement plan already, which I might just cash out in the end).

3. I would like any critique about my thought process or anything that seems like a red flag/mistake in the way I have been going about this so far.

 

I appreciate any insight anyone can give.

 

Thanks

[jfoxcpacfp]

SiR99 wrote:

1. What should I do with the $1900 in Fidelity rollover IRA? (Cash out, transfer to current retirement plan, put in Roth IRA, etc?) 2. Given the information above, should I still invest in a Roth IRA? (Given I’m contributing 10% of income to a retirement plan already, which I might just cash out in the end).

Click to expand...

1. Convert to a Roth IRA


2. Yes. If you can't afford the downpayment on a nice house in a HCOL area when you're ready to buy and you are determined to go ahead with it, you can take your original contributions out of your Roth with no tax or penalty.

You didn't ask, but imho, I think your priorities may be out of whack.

[hightower]

Wow, first of all you are very fortunate to have no debt at this point in your career.  However you managed to pull that off is great for you.  You've got a much better start then most.

If I were you, I would not jump right into investing with a risky real estate purchase.  You need to do the basics first.  Start contributing the max amounts to tax deferred accounts each year and develop a long term investment plan involving stocks and bonds.  There are better ways to get exposure to real estate investments without actually purchasing property.  Real estate is risky and even though it can be potentially rewarding, I would not contribute my entire nest egg to just that (and no successful investor would).  Later on down the road when you're already building wealth in tax advantaged accounts and you still have money left over to invest elsewhere, you can then look into buying property if that's still something you want to do.

Low cost index funds should be the bulk of your investments in my opinion.

Check out the many articles on this website that outline asset allocation and portfolio options and take the advice to heart.  Read the whitecoatinvestor book and really learn what he outlines in there.  Have you read the getting started information on bogleheads.org yet?  If not, now is the time for sure.  Consider picking up a couple of the recommended books from this site too.  There's an especially good article in the blog section about investment mistakes that people have made over the years.  Read them and see how easy it can be to lose a lot of money if you don't know what you're doing.

Again, you have a very fortunate situation and you want to make sure you do wise things with your money from this point forward. In summary, my advice would be to spend the next couple of years of your residency reading and learning about investing and personal finance.  Continue to contribute as much as you can afford into your tax advantaged accounts including the 401k and Roth IRA.  Spend a lot of time reading things on this site and others.  Once you start working, you'll be miles ahead of most 1st year attending.

[TheAbacus]

Congratulations on having the foresight to plan this early! I wish I could have met you as a resident!

 

Some thoughts to consider (in no particular order):

1. Roth IRAs are powerful retirement planning tools - they help greatly in tax diversification in retirement.

https://www.whitecoatinvestor.com/the-proper-ratio-for-retirement-tax-diversification/

2. Maximizing Roth (post-tax) contributions (even before your tax deferred 403b) during the lowest earning years of your life is a decision you will thank yourself for, the minute you get your first salary as an attending physician.

3. Renting for a few years, (or for several years) particularly in a HCOL area, may be a more financially favorable decision.

4. Buy a house ONLY after you're convinced that you have no reason to move from there for the next decade (longer durations make financial sense in HCOL areas) - anything less than that, and you'd be better off renting.

5. Retiring from medicine and becoming a full time landlord, is not really retiring!

[DMFA]

What are you doing with so much cash sitting around? How did all that get there? Why hasn't it been earning you money?

Every dollar you don't contribute to your employer retirement account, if it would be matched, is leaving even more money on the table. You should contribute 20-25% of gross income to retirement.

Buying a house fresh out of residency is fraught with risks, not least among which is leaving your first job within a couple years. Massive closing costs would erode any equity you might have built up in that short time. Don't let realtors and HGTV sell you on the idea; it's a complex decision.

Convert any traditional IRAs to Roth now, while you're in a low bracket. That minimizes the taxes due. Take some of that cash sitting around and max a Roth IRA this year. This early on, your primary assets should be low-cost stock index funds, like total stock market and S&P 500 funds.

You're at a very good starting point with no debt and cash on hand. However, there are a lot of vitally important concepts that you don't seem to know. Read the resources mentioned above and consider sitting down with a financial planner.

[Gas_Doc]

hightower wrote:

If I were you, I would not jump right into investing with a risky real estate purchase.  You need to do the basics first.  Start contributing the max amounts to tax deferred accounts each year and develop a long term investment plan involving stocks and bonds.  There are better ways to get exposure to real estate investments without actually purchasing property.  Real estate is risky and even though it can be potentially rewarding, I would not contribute my entire nest egg to just that (and no successful investor would).  Later on down the road when you’re already building wealth in tax advantaged accounts and you still have money left over to invest elsewhere, you can then look into buying property if that’s still something you want to do.

 

Click to expand...

I came here to say exactly this. I'm not as far along as many of the MD's here, but I've fresh out of training and like you, have the real estate itch. My plan is to not invest any money in real estate in a given year until I've maxed out all of my retirement accounts (401k, backdoor Roth IRA, profit-sharing plan). And even then, my money invested in real estate properties will never exceed more than 10% of my total portfolio.

 

I agree with everyone else, pump as much money into a Roth IRA as you can and invest it in a broadly-diversified equity portfolio (at Fidelity, FSTVX and FSIVX should be the backbone of your portfolio). Being this early in training, the longer you allow that money to grow, the greater the tax advantage you've achieved in retirement. Good luck!

[conniebird]

Why is everyone in such a hurry to buy a house?

[VagabondMD]

conniebird wrote:

Why is everyone in such a hurry to buy a house?

Click to expand...

I agree! I can't wait to get out of mine.

[notadoc]

conniebird wrote:

Why is everyone in such a hurry to buy a house?

Click to expand...

Brainwashing from real estate industry, social pressure (what you're blank years old and you haven't bought a house?!) and HGTV.

[hightower]

notadoc wrote:

conniebird wrote:

Why is everyone in such a hurry to buy a house?

Click to expand…

Brainwashing from real estate industry, social pressure (what you’re blank years old and you haven’t bought a house?!) and HGTV.

Click to expand...

Absolutely.  Speaking of HGTV, I was watching it at work last night during some downtime (we don't pay for cable at home so I never watch it unless my wife is watching it on Netflix), but their shows are RIDICULOUS!
There was an older couple with no kids on there ready to spend over 500k on a house in Louisville KY, but they weren't sure if they were okay with the house because it was 10 years old and had a few light scratches in the floors and they thought it would need 50k in upgrades right away. The house looked brand new still.

Maybe they are super rich and planning on paying cash, I don't know, but it seems crazy to me to spend over half a million dollars on a very large house when you're 55 years old and its only 2 people living in there.  To each their own I guess.

Made me realize that I'm a lot more frugal than I thought.  If my wife and I end up not having kids, I'm going to downsize us to something tiny, super energy efficient, and cheap enough to pay off really quickly and use the money I would have spent on housing to instead travel a lot more.

[Craigy]

conniebird wrote:

Why is everyone in such a hurry to buy a house?

Click to expand...

Renting is expensive.

[Zaphod]

hightower wrote:

notadoc wrote:

conniebird wrote:

Why is everyone in such a hurry to buy a house?

Click to expand…

Brainwashing from real estate industry, social pressure (what you’re blank years old and you haven’t bought a house?!) and HGTV.

Click to expand…

Absolutely.  Speaking of HGTV, I was watching it at work last night during some downtime (we don’t pay for cable at home so I never watch it unless my wife is watching it on Netflix), but their shows are RIDICULOUS!
There was an older couple with no kids on there ready to spend over 500k on a house in Louisville KY, but they weren’t sure if they were okay with the house because it was 10 years old and had a few light scratches in the floors and they thought it would need 50k in upgrades right away. The house looked brand new still.

Maybe they are super rich and planning on paying cash, I don’t know, but it seems crazy to me to spend over half a million dollars on a very large house when you’re 55 years old and its only 2 people living in there.  To each their own I guess.

Made me realize that I’m a lot more frugal than I thought.  If my wife and I end up not having kids, I’m going to downsize us to something tiny, super energy efficient, and cheap enough to pay off really quickly and use the money I would have spent on housing to instead travel a lot more.

Click to expand...

We hired an older CRNA at our practice and they immediately bought a house, single person and since I'd also just put down an offer (sltly smaller but 50% cheaper) and wrapped up my looking I had seen the place before. It was huge, and gorgeous of course, but too big for our small family and way more than needed. I could not believe it, one person in a just over 3k sq ft house, less than 3 months on the job. You may not like it or we may not like you, now the practice basically owns them, no leverage.

Maybe they have the cash and dont care, but also made me realize im not too crazy.

[YSH]

Yes, HGTV doesn't help.  Some of the home buyers sound downright whiny and unrealistic, to be honest.  But, you know, the right path is seldom glamorous or interesting.

Social pressure is no joke.  For the average 30-35 year old person who have been living life based on criteria and milestones created by someone else (XX on MCAT, >3.5 gpa on transcript, do this, do that), it is not easy to steer away from following the crowd, especially when buying bigger and newer gives one a nice ego boost.  Have you not notice that by 3rd or 4th year in med school, all the couples suddenly get engaged or married?  Medical training is a total pressure cooker environment, both academically, socially and developmentally.

Also, most older generations (especially immigrants) have the mindset that becoming a landlord is THE way to build wealth and they will beat that idea into their well educated/ high income earning offspring. If you look at life from their POV, there are truth to that.  Most immigrant parents work blue collar jobs and don't have access to a lot of retirement planning vehicles or tax saving options.  And for whatever savings they do have they are still very much pressured by "financial advisers" from their local banks to buy this or that stock, essentially taking money out of their hands.  To these hard working older immigrants, home-ownership is a tangible wealth builder, something that IS in "THEIR" control and can serve as their retirement account.  So for the average resident who has managed to crawl his way out of the blue collar family up bringing, trying to come up with another financial game plan isn't easy.

This is just another variation of how being privilege gives one such an upper hand.  Privilege can be better education, better endowment, better (career, parental) guidance or better connection.

Didn't WCI himself credit his mom for jump starting his financial savviness?

[SiR99]

jfoxcpacfp wrote:

1. Convert to a Roth IRA


2. Yes. If you can’t afford the downpayment on a nice house in a HCOL area when you’re ready to buy and you are determined to go ahead with it, you can take your original contributions out of your Roth with no tax or penalty.

You didn’t ask, but imho, I think your priorities may be out of whack.

Click to expand...

Thanks for the reply,

Can you give me any insight on why you think my priorities may be out of whack? I am open to changing my priorities.

 

Do you guys think I should stay with Fidelity for the Roth IRA or go with Vanguard or another company? Also, is there a specific type of Roth IRA I should be looking for?

 

[SiR99]

hightower wrote:

Wow, first of all you are very fortunate to have no debt at this point in your career.  However you managed to pull that off is great for you.  You’ve got a much better start then most.

If I were you, I would not jump right into investing with a risky real estate purchase.  You need to do the basics first.  Start contributing the max amounts to tax deferred accounts each year and develop a long term investment plan involving stocks and bonds.  There are better ways to get exposure to real estate investments without actually purchasing property.  Real estate is risky and even though it can be potentially rewarding, I would not contribute my entire nest egg to just that (and no successful investor would).  Later on down the road when you’re already building wealth in tax advantaged accounts and you still have money left over to invest elsewhere, you can then look into buying property if that’s still something you want to do.

Low cost index funds should be the bulk of your investments in my opinion.

Check out the many articles on this website that outline asset allocation and portfolio options and take the advice to heart.  Read the whitecoatinvestor book and really learn what he outlines in there.  Have you read the getting started information on bogleheads.org yet?  If not, now is the time for sure.  Consider picking up a couple of the recommended books from this site too.  There’s an especially good article in the blog section about investment mistakes that people have made over the years.  Read them and see how easy it can be to lose a lot of money if you don’t know what you’re doing.

Again, you have a very fortunate situation and you want to make sure you do wise things with your money from this point forward. In summary, my advice would be to spend the next couple of years of your residency reading and learning about investing and personal finance.  Continue to contribute as much as you can afford into your tax advantaged accounts including the 401k and Roth IRA.  Spend a lot of time reading things on this site and others.  Once you start working, you’ll be miles ahead of most 1st year attending.

Click to expand...

Thank you for the great info! I will definitely start looking into those resources you pointed out.