Investing for retirement

[Guest UVAPAC]

I know there has been several threads in the past on investing, and what others out there are doing with their money.  I figured with the stock market surging (every US index at all time historical highs) it was a good opportunity to discuss.  I am always amazed talking with family, friends, and patients at how many people still do not allocate funds for retirement, or contribute the bare minimum to obtain some kind of company match.

 

Anyhow here are my thoughts, in which are by no means expert thoughts.  (A couple general thoughts about saving for retirement followed by questions about how others are investing for their futures)

 

1)  I always think it is important to contribute the maximum you are comfortable with towards 401K/403B retirement plans.  Most employers offer some kind of match (our hospital will patch half of up to 4%), and all contributions are tax deductible.  Therefore you should be contributing at bare minimum enough to receive the company match.  Statistically speaking those who invest in 401K/403B plans early/often retire very comfortably.  I recommend low cost index funds (a lot of the actively managed funds charge huge premiums, and no evidence to suggest they outperform the market).  Currently I have 75% in US stocks and 25% international.  I hold no bonds at all (I am 31 years old, and a huge advocate of Warren Buffet.  He basically said he doesn't understand young people holding bonds, when you have 30-40 years ahead of you until retirement.  Over time stocks have always outperformed bonds, and therefore I am allocated for higher risk/higher reward)

2)  I hold a Roth IRA, which I am almost positive this will be my first year I am not able to contribute due to mine/wife's combined income.  Limits are $133,000 for an individual on $196,000 combined household income.  You can contribute $5,500, and $6,500 if over 50.  The advantage to the Roth IRA is it is "pre-taxed dollars" and therefore you don't pay any taxes on your earnings as long as you hold them past the age of 65.  (I know that there is such thing as a "back door Roth IRA" that a lot of the doctors I work with do, however I haven't looked into this at this point)

3)  I have my individual investment account, which I use for a lot of the extra money I have set aside.  I have it all invested in major use companies (Pfizer, PayPal, Bank of America, Facebook, Nvidia, JP Morgan, a few other individuals, and a couple of exchange traded funds (ETFs).  Again a pretty aggressive approach/portfolio.

4)  Outside of stocks I hold a couple of US Government Bonds (that pay essentially nothing) and have some money parked in a CD which pays 1.50%. 

 

 

So anyhow, I have never been an investor in a "down market" and obviously things can't keep skyrocketing forever (though it would be nice).  Has anyone adjusted their allocations to more conservative investments anticipating a downturn?  Bonds, Cash, Gold, Etc?  I know it is impossible to time the market, but it has gone up so far, so fast, it almost feels inevitable.  I feel like if I change over a chunk of these investments, I will miss out on the continued rise.  My father would always say "buy low and sell high" which I have done my best to accomplish... but now it feels like playing with fire.

 

Anyone invest in anything else?  Real-Estate? Side Businesses?  

Hopefully not to much rambling, and all makes sense.  I am just curious if everyone does a "set it and forget it" mentality and if the market crashes it crashes... or if you try to out-think and outperform the market.

 

Thanks

[mgriffiths]

Decent information, but I would recommend looking into the back door Roth - it can save you tens of thousands of dollars now and therefore significantly more later.

As for preparing for an "inevitable" downturn, I would say make sure you are diversified (sounds like you are), and then keep going strong and continue to invest when the market goes south.  Those who stayed the course before, during, and after the 2008 crash more than made their money back in about 18 months.  During the 2008 crash my wife and I didn't have much invested as I was a humble teacher at that time, but we lost approximately 65% of our retirement which of course led to some stress.  But, we continued to plod along contributing during the downturn.  Even ignoring the money we added, we had a net profit of 32% between 2007-2010.  So, again I say diversify and then just plod along.  Those who try to time the market almost always lose.  Of course, as you get closer to retirement you want to move to safer products as you potentially won't have the time to recover, but otherwise "set it and forget it!"

[mgriffiths]

Oh, and shout out to low cost index funds!

[Boatswain2PA]

My general rules:

1) Emergency savings:  I have about 3-4 months expenses in cash, then six month of expenses in rolling CDs (one CD coming mature every 3 months). 

 
2) Get the match from employer into 401K/403B.  This is free money.

3) After that, the best investment is an HSA.  Tax free money goes in, and tax free growth comes out.  You don't have to reimburse yourself in the same year that you spent your healthcare money.  We are paying cash for our healthcare expenses and saving the receipts.  At some point in the future (ie: in retirement, or whenever we want) we can write ourselves a big tax-free check from our HSA.

4) Then a ROTH, or backdoor ROTH if necessary. Remember, if you are not eligible for a 401K/403B (ie: you're self-employed) then the income limits for a ROTH don't come into play.  Post-tax money (ouch!) goes in, but then the growth is free.  EVERYONE under the age of 55 should be fully funding their ROTH.  

5) After THAT you should max out the 401K/403B, SEP IRA, or other retirement account.  Once you're out of debt (except for your home) then at LEAST 15% of your income should go toward retirement (HSA/Roth/401K/403B/IRA).  

Regarding what to invest in:  If you're still 15 years from retirement then I suggest 100% in mutual funds with a mix of growth, aggressive growth, and international.  If you're within 15 years of retirement, and the market has been smoking like it has been for the past year....then you might want to consider moving some assets into less risky environments (like bonds).  It would suck to have the market fall 40% right as you're about to retire.  

About a month ago I stopped putting more money into the market.  I haven't sold anything yet, but now I'm just putting my IRA contributions into the cash account.  I think the market is going to go up some more, but there is going to be a big correction coming sometime.  I hope to have a significant amount of cash set aside to jump in when that happens.  Once I hit a certain amount in cash, then I'll start putting my contributions back into the market.  

Diversity isn't just about the stock market.  Diversity also means diversifying your income streams.  I read somewhere that the typical millionaire in America has multiple income streams.  I have my income, rental income, military retirement income, and my wife's income.  

Another thing that all of us should consider is asset protection in case of catastrophic medical liability.  It varies from state to state, but you should know what you COULD lose if you are sued beyond your malpractice limits, and see if there are reasonable things you could do to protect yourself from those losses.  For example, while most states protect your retirement accounts, some states don't include IRAs as retirement accounts (only ROTH and 401K/403Bs).  Also your primary home is usually protected (a good reason to have a paid off home), but some states limit this by home value or property acreage.  

Which leads into my favorite way of retirement planning AND asset protection:  Real estate!  There is NOTHING like owning paid-off rental properties that are held by a LLC.  If they are paid off then you're not a desperate landlord, always stressed about making the next mortgage payment, or worried about the loss if you kick out a bad tenant.  

 

[Ollivander]

I plan on putting literally everything that I'm not living on in cryptocurrency for the first couple of years.

[Guest UVAPAC]

On 10/23/2017 at 4:45 AM, Ollivander said:

I plan on putting literally everything that I'm not living on in cryptocurrency for the first couple of years.

I am not sure if this is sarcasm or not, however I think that cryptocurrency is a terribly bad investment, especially at this point.

There is A LOT of crime on the internet performed with cryptocurrency.  Money laundering, tax evasion, drug dealing, gambling, etc.  

If the government decides to come out and regulate cryptocurrency (in my opinion it is a matter of when... not if...) you will lose 90% of your money overnight in the blink of an eye. 

If you had gotten in 5 years ago when a bitcoin was worth $40 that would have been nice, but with it sitting at $4,000+ it is way to volatile.  

[JMPAC]

3) After that, the best investment is an HSA.  Tax free money goes in, and tax free growth comes out.  You don't have to reimburse yourself in the same year that you spent your healthcare money.  We are paying cash for our healthcare expenses and saving the receipts.  At some point in the future (ie: in retirement, or whenever we want) we can write ourselves a big tax-free check from our HSA.



 

I’m curious if you can explain this some more. I thought a health savings account was just something you could buy specific, approved, health care related items and expenses from. I kind of recall it as something you would see offered in addition to a high deductible somewhat crappy health plan. Sorry if this is a stupid question, I’m just realizing I must have no idea what an HSA really is or how it’s used.

[Boatswain2PA]

Not a stupid question at all.

If you have a qualified high-deductible health plan then you can start an HSA.  With the changes to the insurance market after Obamacare, I would venture to say that MOST healthcare plans are high-deductible and therefore qualify.  Check with your insurance agent or accountant to see if yours does.

With an HSA you put in pre-tax money ($6750/year max) and any growth is also tax free.  A HSA can be used to pay for most medical expenditures (it can NOT be used to pay for your health insurance premiums, OTC meds, etc), including deductibles, co-pays, cost-shares, prescriptions, DME, etc.

Two ways to pay expenses.  You could pay directly out of the HSA (debit card/check from HSA to the provider), OR....you can reimburse yourself for the receipts of such covered costs.  And here's another great part about the HSA - you don't have to reimburse yourself in the same year that the expenditure was made.

What we are doing is putting $6750/year in an investment HSA and leaving it there letting it grow.  Meanwhile we are saving all of our medical receipts in a file.  In 20 years from now we may want  to write ourselves a big check from the HSA and the money will be tax free.

Even better, at retirement age (I think age 59 1/2) you can take money out of the HSA without any penalty (although you have to pay income tax on it, like a 401K/IRA).

[GetMeOuttaThisMess]

$6750 is family plan.  $3400 for individual.  If over 55 (moi) then its an extra $1K.  Limits increase next year to $3450/$6900 respectively.  IF a family plan and both parties are over 55, only the plan owner can get the extra $1K contribution.

[JMPAC]

Thanks! I had no idea you could leave money in one for so long.

[TWR]

I am retired now but can only tell you to invest as much and as early as you can.  You WILL reap the rewards when you are my age.  I practiced medicine for 31 years so I am no expert but I did take full advantage of any 401 that was offered.  Also NEVER spent more money than I made.  I also sat down with a broker/financial manger that I was comfortable with a felt he had my interest at heart.  Sure capitalism is wonderful and I knew the brokers were doing there job to generate income but not at my expense.  I have had the same guy in NY for 20+ years and his hard work and research have paid off for me.  Stock markets are cyclical and they go up and down.  Just ride the rollercoaster.  Don't panic and in this case don't pull out!!! 2008 is a good example of the bumpy ride and recovery.  IMHO

PS 10 years ago Amazon was $79 a share.  Check todays price!!!!!!  AMZN

[JMann]

I'm just not familiar with the specifics of using an HSA as a financial tool. My new job has one and I'm planning on taking advantage though. 

 

If you fully fund a family HSA for 15-20 years and rarely dip into it, what would be your plan for utilizing those monies later? Medical expenses later in life I assume? If you have $250,000+ in an HSA at 65, what happens to any unused portions when you die? Is it transferrable in your estate like an IRA and the like?

 

 

[JMPAC]

What are your opinions regarding paying down student loans vs saving for retirement and investing? I keep finding opposing advice. One source will say the loans are number one priority and then another source says to prioritize retirement and then another may say that using money to invest is a higher priority. I tried murdering those loans for the past two years and paid well above minimum and seems like I barely made a dent. It starts to make more sense to me to put money into an investment account with an 8-9% return instead of trying to chip away at the loans that are 1-7% (the biggest ones are the 6-7%, of course). Can I grow my money better so that in the end I’m able to pay more on the loans? Or should I really concentrate on the debt first? After some research, I do plan to refinance the grad school loans this weekend. The interest rates are killing me with fed loans.
I’m guessing there’s not a black and white answer, but I’m interested in other’s experiences and opinions.

[Guest UVAPAC]

JMPAC

Statistically over the last 60 years stock market returns 7% a year.  I would pay off any loans that are 6-7%, and then start shelling away for retirement.

One move I have seen several colleagues make... find a job that offers student loan repayment.  I just had a friend who did 3 years with community health center and they paid off 100% of his remaining loans, on top of a decent salary.

[GetMeOuttaThisMess]

Check IRA Pub 969 for HSA specifics. Payouts CAN be used for certain insurance premiums. You designate a survivor for receipt of funds upon your death. The HSA becomes theirs to use.


Sent from my iPad using Tapatalk

[south]

1 hour ago, JMPAC said:

 After some research, I do plan to refinance the grad school loans this weekend. The interest rates are killing me with fed loans..

This is almost never worth it.  The only single advantage is that the interest rates may be lower.  Even if you don't pay a fee, you are giving up every other advantage of federal loans.  Flexibility in payment plans, loan forgiveness, easy access to things like making extra payments. There are a lot of horror stories out there about bait and switch - once they have the loan, they can literally do whatever they want - change your payment or your terms, sell your loans to another company, and the classic "losing" or "forgetting" your extra payment or otherwise denying you access to that ability.  

This last thing - the most disastrous thing for a single loan is for the borrower to make extra payments and start paying it down early, and banks and other private companies have a very strong vested interest in preventing you doing this - it wrecks their planning models and their ability to borrow and leverage money.  You are literally taking money directly out of their pocket when you do this.  In fact, one of the minor factors that contributed to the housing crash in 2008 is that the banks underestimated the effect of people making above the minimum payment.  

People complain about student loans and I get it.  But unless you are planning on making exactly the minimum payment, for the specified term, with no changes, it's not worth refinancing.  If you think there's a chance you may need to make a change, they are going to fight you tooth and nail. 

One more thing - There's no "I can't afford this payment" button on private loans where you can drop your payment down if your income changes or get some sort of help.  They could give a crap if you get the cancer or whatever. 

Not a fan.  Student Loan Hero and such are best taken with a large grain of salt.  Some good advice, but they are selling you private loans and a few clicks will show their real agenda.  

Personally, I'm making the payments that I can afford, and getting the rest forgiven.  So far, I've worked for non-profits and the government, so that should happen in 10 years.  If not, then it will be in 20.  I'm saving up for the tax bill.  I should save thousands of dollars this way - far more than if I got a private loan.  And I have already had to change my payment a couple of times in my short career.  Stuff happens. 

 

[south]

2 hours ago, JMPAC said:

What are your opinions regarding paying down student loans vs saving for retirement and investing?

An excellent question and you've summed it up nicely.  Basically, I'm really into this stuff, and I still can't figure it out.  I've done both ends, where I've punched down debt at the expense of other things, and I've also let debt sit while I stacked dinero up elsewhere.

I really do get both arguments, debt is slavery, no, no, max out investments and retirement, etc.  I will say that as long as you have emergency funds, you are probably okay doing that with which you are most comfortable. 

Right now, at this moment, I am pulling from emergency funds because something happened, and if I had not learned a lesson a couple of years ago, I may have still been putting crazy amounts towards debt (student loans and a small amount of consumer debt that I could not avoid; my car is paid off, etc).  But I had a premonition, and reduced debt payment and stockpiled a little cash for a little while.  Had I not done that, I would be cleaning pools or something on the side right now for gas money - no joke.  Stuff happens.  

Rates of investments are not guaranteed, but debt payment "returns" are - you know the impact of each payment.  A lot of people point to this.  

However, the money you put into debt is all the way gone.  If you get the cancer or something else happens, you can't use that money anymore.  It's nice to watch the amounts increase and think to yourself, if something catastrophic happened, I could take the penalty and tax hit and take care of the problem.  

So I dunno.  If you've been doing one thing for a while, try the other thing.  If you've got emergency funds, and you aren't driving a Bentley and making it rain at the strippy clubs, I'm cool with either thing. 

[beattie228]

2 hours ago, JMPAC said:

What are your opinions regarding paying down student loans vs saving for retirement and investing?

Honestly, the right answer to this question can be found by asking yourself "How much debt am I comfortable having while still being able to sleep at night?" General rule of thumb is pay off any and all loans with an interest rate of 5-6% or higher while at the same time meeting the minimum employer contribution percentage (don't leave free money on the table!). Once you've paid off the loans/consumer debt with interest higher than 5-6% and you have a comfortable emergency fund, max out retirement account(s) and then consider opening a taxable investment account (I use Vanguard).

[Boatswain2PA]

2 hours ago, beattie228 said:

Honestly, the right answer to this question can be found by asking yourself "How much debt am I comfortable having while still being able to sleep at night?" General rule of thumb is pay off any and all loans with an interest rate of 5-6% or higher while at the same time meeting the minimum employer contribution percentage (don't leave free money on the table!). Once you've paid off the loans/consumer debt with interest higher than 5-6% and you have a comfortable emergency fund, max out retirement account(s) and then consider opening a taxable investment account (I use Vanguard).

Your math is right, but you are not accounting for risk.

Yes the market gets 7% a year on average.  But how about disability? Lawsuit??  Spouse/kids get sick and you have to cut way back at work??  Easy to do if you are out of debt.  Harder to do if you gotta work 25 hrs a week just to pay the bills.

Absolutely agree with South about the emergency savings.  That is a true lifesaver that prevents you from going further into debt..

 

[beattie228]

22 minutes ago, Boatswain2PA said:

Your math is right, but you are not accounting for risk.

Yes the market gets 7% a year on average.  But how about disability? Lawsuit??  Spouse/kids get sick and you have to cut way back at work??  Easy to do if you are out of debt.  Harder to do if you gotta work 25 hrs a week just to pay the bills.

Absolutely agree with South about the emergency savings.  That is a true lifesaver that prevents you from going further into debt..

 

Risk is accounted for with the comfortable emergency fund I recommended above. Agree completely that you never know what curve-ball life may throw at you. Having liquid cash on hand is the solution to that problem. If things got bad enough to where you couldn't work, there are student loan options available (albeit interest racks up quickly). To each their own, though.

[Boatswain2PA]

No, your emergency savings is mitigating your risk (which is always good), but my point was the MATH you used doesn't account for the risk. Yes, if you borrow money at 1% and invest it at 7% you make 6%.  That's math, and you can't change it.  But it doesn't account for the 2-3 years where you don't make 7%, you make -20%.  Or if you have a major life change.  Your math is correct, but math can't correct for the risk factor. 

 

You're also right, to each their own.  

From my personal experience, leveraging debt to make money is stressful, and you often don't make nearly as much as you think.  I've owned rental properties with mortgages....and never seemed to make any money.  I've bought a new car at 0.9% interest rate, thinking I would be better off investing the difference...but didn't really invest the difference.

Few years ago my wife and I closely evaluated how we were doing things.  I remember building the spreadsheet (that I still use) and listing out all of our debts and assets.  We owned multiple houses, cars, boats, etc....yet we were worth about $100K total.  If I remember right we were paying almost $30K a year in interest!  The only people getting rich was the banks (and the insurance companies).   We drastically changed how we did things, stopped leveraging debt and just started building wealth.  Funny thing is, once we did this, our actual wealth started moving upward quickly.  That spreadsheet now says we are worth >$500K just a few years later.  Projections are to hit $1M in 3-4 years (not counting market gains).

We close Friday on a 75 acres of beautiful land that we are taking out a small mortgage on.  We plan on having it paid off in 2 years (hopefully less), then building our dream house.  If we mortgaged the land for 30 years we would pay $107K in interest.  Instead I expect we will pay a whopping $450 in interest over 2 years.  In my experience, that's how you build wealth instead of giving it to the bank.

You're right, to each their own.

[Lexapro]

Pay off the debt first unless your student loans have very low interest rates (<4%). The market is due for a correction and from the reading I've done, it's pretty risky to expect a 7% return on your retirement portfolio (this is just my take on what I've read). I would rather invest in myself now and remove the stress of debt instead of gambling on return rates (once again, I'm pretty cautious). The only exception is putting in money to max out any 401k match your employer has - obviously do this, it's free money. An emergency fund is a given as well.

I graduated with 90k in debt. I am due to pay it off completely next month, after 25 months of payments. I did it by avoiding lifestyle inflation as much as possible (I did do a few nice things for myself) and keeping a per diem side gig. I cannot explain how good it feels to be done with my loans. I am 30. I can spend the next few decades maxing out retirement accounts, buying a house, even letting loose and dropping some of my hard earned cash on traveling the world (heck maybe buying an Audi) without any of that nasty debt hanging over my head. For me this is a huge comfort. Perhaps you'd rather invest now and trust in the market while stretching out your loan rayments... but honestly I feel like that approach would give me an ulcer.

Of course, I'm in special circumstances in the sense that I'm somewhat on the younger side, don't have kids or a mortgage, etc. I think if you graduate in my circumstances (20s/30s, single, no dependents) just buckle down and pay off that debt! You will still have plenty of time to reap your rewards.

[kpsmith32]

Clinical year student here and I have nothing to add other than to just say thanks to everyone for this information. Investments/retirement funds/etc have never been something I’ve been educated on, so it’ll be nice to look back at this a little under a year from now when I start working. Thanks again. 

[JMPAC]

First of all, thanks so much for all of the responses. I really appreciate this community of smart people who are willing to discuss things and give great advice.

I have some follow up questions. What do you think of SoFi? I’ve gotten advice from docs I work with and from White Coat Investor (yes, I emailed that guy, lol) that I basically should have switched my 6-7% loans over to get a 2-3% loan right away. It makes sense to bring that rate down and I have other motivation, as well. Someone mentioned that the private loans are shady and jerk you around, but that has already been my experience with Navient. After dumping $4k a month on my loans and then realizing that wasn’t sustainable after we had to start paying for childcare and we had to go through an unpaid maternity leave, we got on REPAYE. I set up auto payments and didn’t worry about it for months because they just kept coming out on time. Then, they send me a notification that my loans are overdue and I was very confused because I checked and the payments came out every month, no problem. Well, apparently they bought one of my loans from a different servicer and it got rid of my payment plan. They didn’t tell me any of this until I was 4 months past due. They fixed that and it’s not on my credit, no fees, but I had to start from scratch with REPAYE. The deal is you pay on time for ten years and then it’s forgiven and so now I wasted a whole year of on time payments. Basically, I don’t trust Navient and would love to not have to deal with them anymore. This wasn’t their first offense, but I won’t go into an even longer story.

The other issue is, my SO has very significant loans, as well, thanks to another healthcare graduate program. So, paying off our combined massive loans just seems impossible compared to trying to save for retirement, emergencies, etc.

I guess the only good thing is that it’s our only debt, but we also don’t own property. I actually stopped worrying so much about that because I recently listened to a podcast of someone explaining how home ownership isn’t a good investment unless it’s paid off property that gives you rent money from a tenant every month. Of course, there are different opinions about that, too.

I’ve thought about working more hours, but that increases both our childcare costs and time away from our child. Is it reasonable to assume that when we have school age kids and even high school kids, we can make up for it by working more and not having to pay for child care? I don’t want to miss out on these early years, they change daily at this age.

Maybe I’ll win the lottery one of these days...yeah, that’s a good financial plan....Sadly, that actually seems as realistic as ever being able to pay off these loans. :(

[south]

Well again the horror stories of private loans are generally far worse.  You came out of Naveient's stupidity relatively unscathed, and you could try to work with the US government (their boss) to get your year of time back.  Slow, painful, but probably effective.  No one has a vested interest in screwing you over so eventually they would probably just say okay.

Private loans are the opposite.  They absolutely love it when something gets screwed up and can threaten you with various things when they do - regardless of who was at fault.  It's money in their pocket, absolute gold.  

Said my piece. Final thought - the moving out of federal loans into private can't be undone.  You'll never see the benefits of federal loans (easy pre-payment, repayment plans) again.

Maybe there's a middle ground here for you.  Take the smaller of your two loans and try going private with it.  See how it goes.  If they treat you okay, then go from there.  I'm pretty sure you've thought of that. 

Take your time, everyone, and learn this stuff and what you may be comfortable with.  It's all the price of a couple of books and a lot of web surfing for free.  At least you are thinking about it, and that places you ahead of most people who don't think ahead and plan their financial future.  "I'll just work until I'm dead" is beyond mere galactic stupidity to...something else I don't even have a name for.