Driving Returns Through Strategic Asset Location

Physicians with at least one retirement account (for example, an IRA, Roth IRA or 401k) and one taxable account will benefit from higher returns with comprehensive asset location. In asset location, all accounts supporting the same financial objectives (for example, providing income in retirement) are viewed collectively as a single portfolio. Asset classes (for example, U.S. stocks or government bonds) are preferentially placed in either retirement or taxable accounts.

In taxable accounts, high-yielding assets have a higher tax burden than in retirement accounts. These assets are prioritized for placement in retirement accounts. In contrast, tax-free municipal bonds bear no tax burden, so they are preferentially placed in a taxable account. The result is the risk-adjusted expected return from the sum of all accounts increases. This is particularly important for physicians who, by virtue of being in high tax brackets, pay a lot of taxes.

Consider what happens if you place a high-yielding investment in a non-tax sheltered account. You must pay 39.6% (top tax rate) on non-qualified distributions from that investment, as opposed to sheltering that high-yielding asset in a tax-deferred account. Clearly, your net returns are dependent upon more than just appreciation. Smart asset location matters, especially for high income earning physicians.

Think of it like a hospital – a complex entity separated into different wings and departments to maximize efficiency. Each department houses doctors and staff who are best equipped for their roles. Emergency room doctors are going to be dealing with people needing the most immediate and intense level of care. An ER doctor wouldn’t treat a patient with a sprained finger while someone who was just in a traumatic car accident sits in the waiting room. In much the same way, your aggregate investment portfolio can be separated into different accounts and investment vehicles. Inside each of those vehicles are investments and holdings that are suited for the particular account type.

A more efficient hospital will lead to greater outcomes and profitability. The same is true for your portfolio. Strategic asset location maximizes efficiency and leads to better outcomes and portfolio growth.

Living Fully: Juan Aragon

Dr. Juan AragonLast fall I had the pleasure of interviewing Dr. Juan Aragon, Executive Director of Primary Care, Specialties and Physicians’ Services at Evergreen Health.

His story begins in Costa Rica where he grew up and completed his medical training. His journey into medicine was sparked on a casual car ride with his father who asked Juan the question: “what are you going to do for a living?” When Juan told him that he wanted to be a missionary, his father pressed back, asking how he would pay the bills. Right then and there, Juan decided he would go into medicine.

After starting a medical training program in Costa Rica, Juan took 9 months off for bible school at Capernwray Hall in England. His goal was to mature, away from his family, and spend some time in self-reflection to ensure that medical school was truly the right path for him.

Juan finished medical school at age 24 and took a job in the remote location of Drakes Bay on the Oso Peninsula in Costa Rica. Juan was the second doctor Drakes Bay ever had and, needless to say, he gained a ton of clinical experience there.

Missionary work continued to call to him, so he left Drakes Bay to work for a bible school, and did pro-bono work for the affiliated hospital. This is where he learned the administrative side of medicine. And, how much he liked it. He wore a lot of hats: Chief of Human Resources, Chief Risk Officer, etc., and by the time he moved on, the school had built up an unprecedented $300,000 cash reserve.

In 2008 he received his Master of Medical Management, Health Systems Management from Tulane University. He moved to Seattle in 2009 to start his career at Evergreen Health.

After learning about his background, I asked Dr. Aragon a series of questions, as follows:

Lowell: How do you give back?

Juan: My religion – Christianity – should have a visible impact. It is not just a philosophy. Early on I gave back with my talents and skills via board participation. I focused on organizations that had youth programs, like the YMCA, with the goal of helping kids navigate the messy teen years. I have continued to work with the YMCA in tandem with Evergreen.

I am currently involved with the University of Washington Masters in Health Administration program. I see these kids as the ones who will be here when I am not. Investing in their future is paramount. My participation in panels and business cases also helps me learn and succeed in my current role at Evergreen Health.

Lowell: How do you “Live Fully”?

Juan: At the end of the day when you look back at a day’s worth, a year’s worth or even 10 years’ worth of time, you need to ask: did I invest enough time in my family that I am preparing them to be better individuals to face the challenges of this world than I am? Am I fully investing in the people I love the most? Was I conscious enough to be grateful to the people who contributed to my life, in recognition that I am where I am because of them? Answering “yes” to these question brings fullness. A friend once told me – “be grateful with your treasures, be grateful with your talents and be grateful with your touch.”

Lowell: What is the best piece of financial advice you ever received?

Juan: Live like it’s your last day but plan like you are going to live a hundred years. Don’t get into credit card debt. Save enough money to have fun.  Always have the attitude that if you are willing to give, opportunities will present themselves constantly. Look at things as opportunities. The same thing is true with investing: Don’t leave it all in one place. Leave it where you can take advantage of opportunities.

Lowell: Do you miss practicing medicine?

Juan: Yes. But, I made the choice in 2008 to pursue an administrative career. I find alternative ways to be with people, and I see the long term impact that my work will have on patients. I know that at some point, I or my loved ones will need these services and I want to make sure they are the best services possible.

Lowell: What is the biggest challenge and opportunity for health care?

Juan: Challenge – Affordability. Our health care is so expensive that it is not sustainable. For the past 6 years, we have tried 200 experiments and none have delivered results. Opportunity – Same thing. If you think about how our nation was formed, it has always figured out how to force its way through complex problems. The US is the way it is because it figures out innovative solutions to transform the market. We will break through. Consider the innovations of Amazon, Google and Apple for instance.

Lowell: What advice do you have for physicians?

Juan: As you are figuring out what you want to do with your life, take the time to figure out what you are passionate about. Make sure you have the skills and financial support to do it. Figure out your priorities and have a plan to make sure those priorities are met. As long as you have a plan, you know where you are going. You can figure it out. Ask for help. Design the map to fit your lifestyle. Develop a plan to make enough money and enjoy it. Have a plan and understand choices and tradeoffs. Understand where true north is. Figure out how to overcome obstacles and stay on track.

Society presses kids to have it all figured out; this pressure is incredible. You do not have to have it all figured out. Have a plan. Talk to smart people. Work hard. Have a good attitude. Don’t think that when you go to college you need to have your retirement date figured out. It’s okay to not know all the answers. Never be afraid to ask for help.

Juan is an impressive person, and I thoroughly enjoyed speaking with him. His global perspective, work ethic, and humble attitude bring a unique perspective to the medical field. I hope you glean some insight from his thoughts, and that they lead you to a fuller place.

Student Loan Protection Riders and Retirement Protection Riders

Disability insurance helps protect you by providing income in the event of a disability. This insurance is particularly important because people are much more likely to become disabled than they are to die, which would be covered by life insurance. In fact, according to the Disability Insurance Resource Center, a 32-year-old is 6.5 times more likely to suffer a serious disability lasting 90 days or longer than to die.

In a previous post, we looked at a program designed to help young professionals, and even some students, protect their future earning ability in the event of a disability. There are two other disability benefits that individuals should consider, depending on their specific needs.

Student Loan Protection Rider

Student loan debt now totals $1.2 trillion, and the total student loan debt in the country is now greater than the total credit card debt. Not surprisingly, student loans are now the largest financial concern for many people. One reason for concern is that it’s almost impossible to get rid of student loans in the event of a financial hardship. For recent graduates with significant student loans, these can become an even greater burden in the event of disability.

The student loan protection rider can be added onto a disability insurance policy. With this rider, if the insured becomes disabled, the insurer will pay $500 to $2,000 per month for the student loan payments. Payments are made directly to the loan provider so that the beneficiary will not be over-insured. The rider has the flexibility to be dropped when student loans are paid off and it’s no longer needed.

The student loan protection rider is generally an inexpensive addition to a supplemental disability insurance policy. As medical students and other professionals increasingly graduate with over $100,000 in student loans, this rider can be a significant benefit for young professionals.

Retirement Protection Rider

With the loss of income that results from a serious disability, an individual also loses the ability to save for retirement. The retirement protection rider can be added onto a supplemental disability insurance policy like the student loan protection rider.

With this plan, after a client has been disabled for 180 days, the monthly benefit will be given to a fund where it’s invested as the client or advisor allocates. The benefit received from the insurer is non-taxable income because it’s a disability benefit purchased with after-tax dollars, but any income later earned by the investments would be subject to income tax.

Parting Thoughts

The riders described above are more appropriate for some people than for others. Merriman does not sell insurance, but it’s important that we work with our clients to develop comprehensive financial plans. We are proud to work with our clients and their family members to identify what may be appropriate based on their specific needs and circumstances.

New Professionals Program – Future Income Protection Plan

Disability insurance is a well-known and valuable tool for protecting future income. In most cases, an individual can get insurance that pays up to 60% of her current income if she becomes disabled. This can be especially valuable for high-income professionals like physicians, who would have a difficult time finding work at a comparable salary in the event of a disability.

As valuable as this resource is, traditional disability insurance has a significant gap for a specific type of professional: those who have recently completed or nearly completed their training, but do not yet receive the salary they expect to eventually earn.

New Professionals Program

For new professionals, the ability to earn your future income, or human capital, may be your largest (or only) asset. Also, medical residencies generally involve long hours and low pay – especially relative to what you can earn later. Traditional disability insurance that pays 60% of current income doesn’t accurately reflect the medical resident’s future earning power.

Disability insurance under the new professionals program provides the ability to get a salary based on future income, rather than current income. In fact, current income isn’t considered when determining benefits – it’s based on a formula.

Let’s consider Nicole, a hypothetical fourth-year ER resident. She’s making $60,000 per year and has a group disability policy provided through the hospital that would cover up to 60% of that salary. She purchased a disability insurance policy using the new professionals program, which gives her an additional $6,500 monthly benefit if she becomes disabled. It also continues to provide a partial, residual benefit if she’s able to return to work at lower pay. This policy would cost her $4,698 per year with the level premium option. However, she also has a graded premium option, which costs less at first, but increases slightly each year. This would initially cost her $2,172.

Nicole completes her residency the next year and receives a contract with a $360,000 salary. She already has a disability insurance policy in place with a future increase option (FIO) that can increase the benefit without having to undergo additional medical underwriting. Also, she can choose to continue paying premiums on the graded option, or she can switch to the certainty of a level premium.

Protecting Your Most Valuable Asset

Most insurance providers now offer disability insurance through the new professionals program. It’s available to various medical professionals, as well as CPAs, attorneys, engineers, architects and others. Medical professionals are generally able to enroll in the program as early as their third or fourth year of medical school. The available benefit starts around $2,500 per month and gradually increases throughout the residency to a maximum of $5,000 to $7,500 per month, depending on the specialty. read more…

Medtech Angel Investments for Physicians

Medical technology (medtech) angel investments can be a great opportunity for physicians to engage as mentors with startup companies within their field of expertise. A cardiac surgeon, for instance, can offer expertise to an entrepreneur building a new stint. Typically the physician will make some level of investment and be heavily involved in the company, hopefully seeing it and their investment prosper.

Another route is to invest in multiple companies and be much less involved. Obviously, it would be difficult to offer day-to-day or even month-to-month mentorship for more than one or two companies as a busy physician. In this case, you need to be economical and look for resources to help you with your investment selection. Most major cities have angel investment groups that, for a nominal fee, will help you vet companies and offer other resources as you make your investment decision.

Your best option for plugging in to medtech angel investing in Seattle is WINGS.

Whichever route you take (mentor or passive investor), be aware of the risk and return. While not much has been written on the subject, the white paper “Returns to Angel Investors in Groups” by Robert Wiltbank and Warren Boeker does a nice job of setting the expectations.

Here are seven things you need to know when considering medtech angel investments:

  • Risk. 30% of your investments will fail. 30% will return your money. 10% will go big. 20% will return something. To succeed, you must understand this and have the wherewithal (assets) and stomach (guts) to ride out the losses.
  • Return. 27% IRR. Most of this coming from the 10% that are home runs. See Returns to Angel Investors in Groups.
  • Time horizon. Companies that fail (lemons), fail faster than those that succeed (plums). Proper investment requires patience and the ability to reinvest over periods of time.
  • Invest 5-10% of your portfolio assets. Your risk is concentrated and your return is dependent upon “home runs.” Subjecting more than 5-10% of your assets is just too risky.
  • Diversification. Single company risk is big with these investments. Prudent investment requires investing in at least 15 to 20 companies.
  • Involvement. If mentoring within your field of expertise is the desired path, how much time do you have to devote to it?
  • Do your due diligence, or depend on a group such as WINGS to help you do it. Success rates and due diligence are highly correlated.

If you’re serious about becoming a medtech angel investor, learn the local landscape. Spend some time with local groups, such as WINGS. Figure out how much you want to invest and what role you want to take on. Most importantly, know your downside risk, be mechanical in your decision-making and limit your investment to 5-10% of your total portfolio.

Living Fully: Dr. Albert (Skip) Edmonds, Retired Anesthesiologist

skipedmondsFrom the heights of K2 to the war struck Syrian-Jordan border, Albert (Skip) Edmonds’ journey is one of intrigue and insight. I had the pleasure of sitting down with him to hear his story.

As the son of a pediatrician, medicine presented itself as a likely career path for Skip at an early age, although his route was somewhat circuitous. Upon graduating from Williams College, he pursued oceanographic research in the Antarctic. He spent 200 days at sea, south of Australia in a 200-foot vessel, stomaching choppy waters. During this time, he was also able to pursue his love for mountaineering in the mountains of New Zealand.

After a year in the Antarctic, Skip was faced with a decision: Continue with oceanography and get a PhD, or pursue an MD. The variety of opportunities in medicine ultimately won out and Skip headed to Virginia for medical school.

Early in his career as a practicing physician, Skip put his mountaineering skills to the ultimate test as part of the first American expedition to K2 in 1978. Led by Jim Whitaker of REI, the group was 14 people strong. It was a long trip, beginning in mid-June and lasting well into October. Skip remembers the toughest elements being the weather and the confinement, not to mention dehydration and limited oxygen. Just when the group’s food supply was on the brink of depletion, there was a break in the weather and two groups of two made it to the summit in two successive days, marking the first American ascent of K2 and the third overall ascent.

After many years practicing medicine in Seattle, Skip was ready to retire. It was then that an opportunity to join Doctors Without Borders (DWB) presented itself. Skip was at his cabin in 2010 when the Haiti earthquake struck, and he immediately realized his skill set would be useful. He sent in his application to DWB and went through a rigorous selection process. DWB is very careful in selecting its members, and for good reason. Electricity is intermittent and the living conditions are tough. Experiencing third world medicine is a shock for most American physicians, and DWB wants to make sure each physician can not only handle it, but will want to come back for a second mission. Surgical missions are typically in trauma zones and last about a month, with physicians working around the clock. Non-surgical missions last 3-6 months and have a less intense daily schedule.

Skip says it’s the individual patients you remember the most. There is one 7-year-old Nigerian boy he remembers well. The boy was hit by a car and, after a dozen surgeries, lost both of his legs to infection. Despite his trial, the boy always had a smile for Skip and his colleagues and appreciated their work.

In 2012 he was stationed on the Syrian-Jordan border during the Syrian civil war. They could see the bombs going off a few kilometers away and patients were pouring in. It was an emotionally challenging experience. Skip and his team attempted to save one woman for over a month, and Skip recalled how brave she was to endure. Unfortunately, the infection eventually took her life.

His advice for physicians who are thinking about joining DWB is to do your homework. Make sure you understand it will be harder than you think. Something will come around the corner, either medically or culturally, that will shock you. In the end, Skip always learns an incredible amount on his missions. And, he takes home more than he is able to give back.

If you are interested in more information, you can visit the DWB website. Skip would also be happy to talk with you one-on-one; e-mail me and I will make the introduction.

Skip’s advice for life in general is to find something that occupies your head and that you love to do. It will take you away from the stresses of medicine, allowing you to unplug, decompress and approach your work with a clear head. For Skip, this is rock climbing because it takes total focus and concentration and doesn’t allow him to worry about the daily stresses of life.

The best piece of financial advice Skip ever received was to not try and do it himself. When the tech bubble popped in 1999 that became clear. Skip was in his late 40s at the time and lost half of his retirement nest egg. Later, he entrusted money to a friend and got burned. All in all, he had little interest for investing and therefore was not going to stay on top of it. Hiring a financial advisor allowed him to focus more on the things he really enjoys, like rock climbing.

What is my 401(k) worth?

istock_000011454389xsmallThe era of pension plans is by and large over. Enter defined contribution plans – 401(k)s, 403(b)s etc. Despite different alphanumeric combos (IRS code), all of these plans have, for the most part, the same recipe: Contribute up to a certain amount, get your employer match, invest. The ultimate goal of each is to accrue enough money through contributions and appreciation to comfortably carry you through retirement.

As pension plans fade into the past, how you manage and contribute to these plans becomes increasingly important. And, the responsibility in doing so is yours.

So, how much income can you count on from your 401(k) 30+ years down the road? Let’s start with three assumptions:

  • You contribute the maximum IRS allowable amount – $18,000 plus a $6,000 catch up if you are over 50 years old
  • You invest over a 30 year period
  • Your investment grows at 7% per year

The output would be $2 million. Using the standard 4% distribution rule, this translates into $80,000 of income in retirement per year.

So, your 401(k) is worth $80,000 per year. But how much will you actually need in retirement? If you are a physician currently making more than $100,000 per year, $80,000 is not going to cut it and you should look for other savings opportunities.

How We Allocate 401(k) Retirement Plans

Knowing what we know about stock markets, how can we achieve the highest possible return with the lowest amount of risk? This is the primary question driving the allocations that follow. It’s a simple question that’s packed with layers of complexity.

Here’s a brief review of how we broke down the complexity to make it simple for you to execute.

  • Calculated risk
    • Stocks are riskier than bonds. History tells us you receive a higher return for taking this risk.iStock_000012549664XSmall
    • Certain stocks outperform other stocks – small cap and value stocks, for example.
  • Controlled risk
    • Do not put all your eggs in one basket.
    • Use high quality bonds to offset stock market risk.
    • Be patient. The best way to capture stock market returns is to stay invested and keep investing with your periodic 401(k) contributions.

Of course, the biggest factor in all of this is YOU. While we know how to develop retirement plan portfolios, we do not know your specific goals, objectives and values. Specifically, I can’t tell you whether you should be in the 100% stock allocation, the 60% stock 40% bond, or some iteration thereof. Can I assume that a 32-year-old who recently became a physician should take more risk in light of a longer investment horizon? Sure. But that changes for a physician in his forties, and for one who wants to retire early.

If you have specific questions about which mix to choose, shoot me an email at lowell@merriman.com.

Likewise, if your 401(k) is not listed on our site, send me your available investment options and I’d be happy to provide my thoughts.

Stretch for Time

iStock_32819864_XSmallPhysicians are stretched for time. Sleep and work alone can account for over 80% of the average physician’s day. Making the most of and stretching the remaining time is hugely important. A time budget can help. It will allow you to audit your current budget, get intentional about how you spend your time and find small chunks here and there – chunks that will add up quickly to stretch your day.

Start to create your time budget by outlining your day. Bucket each portion into categories: work, sleep, leisure, family time, etc. Next, identify holes in your time budget.

Typical holes come in the form of TV, social media, your daily commute, search engine rabbit holes and checking email. Naturally, these are the very same places you can find those extra chunks of time to make your day more meaningful.

  • The best solution for TV is to create a strict budget. If you have a favorite show, limit your viewing time to just that one show.
  • In the age of information, social media and email can be tough to manage. My advice is to allot time to each at the beginning and end of your day. It’s important to stay socially relevant, and checking in twice a day is more than enough to do so. Another helpful tip is to turn off push notifications. Doing so will ease the temptation of checking in.
  • Avoid search engine rabbit holes. In other words, getting lured in by something on the Internet and realizing 10 minutes later you have no idea where you started. We’re all guilty of doing this. My only advice is to stick to the task at hand. If you catch yourself drifting, snap out of it and close your browser.
  • Commuting is one of my favorite opportunities for picking up time. When I am walking to the bus, I listen to an educational podcast. This 15-minute chunk of time allows my first of two email checks for the day. I recently spoke with someone who read War and Peace over the course of a month on his daily walk to work. Talk about productivity!
  • Subcategory of email – Unsubscribe. If you signed up for a newsletter or service you no longer use, unsubscribe. It will shorten your daily email checks and close potential rabbit holes.

These time saving tactics serve two functions – purpose and productivity. By becoming more productive with your time, you can create a more purposeful day. Once you have identified your baseline budget and patched the holes, you can start to live a fuller life.

A Game of Numbers

iStock_54258976_XSmallDebt management is the increasingly larger elephant on the financial priorities list for a new physician. The average educational debt alone was $169,901 for the class of 2013 (Source: Association of American Medical Colleges). While it would be nice to focus exclusively on paying this down, you likely have competing demands – retirement savings and buying a home, for instance. Here’s a quick list of average figures and why you should manage all your financial demands:

  • Student debt – Assuming a total of $225,000 in Federal Direct Loans at 6% interest, the monthly payment for a 10-year payoff is $2,497. The sooner you’re done paying this, the better. If rates were much higher, say 10-12%, you would want to be even more aggressive with your repayment schedule. If rates were much lower, like 3-4%, it would be just the opposite. A silver lining is that you can deduct the interest paid on your tax return.
  • Mortgage – Assuming a $400,000 30-year fixed mortgage at 4.5%, the monthly payment is approximately $2,700. In this case, you’re borrowing against a real asset that’s going to have some level of appreciation – historically near the rate of inflation, which is 3%. An added benefit is that you can deduct the interest paid on your taxes, an important consideration for higher tax brackets.
  • Pre-tax 401(k) – This is a $17,500 per year maximum contribution, or $1,458 per month. By starting to save early you leverage the growth of capital markets. For example, if you contribute $1,458 a month over the next 30 years at 8% annual interest, you’ll accumulate $2,172,944. If you wait five years, that figure drops to $1,386,596.
  • Saving for your child’s education – This figure can vary widely. For example, do you want to fully fund? Private or public school? In state or out of state? For now, start by simply getting the ball rolling. Even if it’s $100 per month to start, get in the habit of saving now. In the not so distant future, you can reevaluate. If you start at birth, you have 18 years to set aside money in a tax-favorable investment. Just like with your 401(k), it’s an incredible opportunity to leverage the stock market. I think you’d agree it’s preferable to writing checks out of your bank account when your kids turn 18 and head off to college.

With an average first-year compensation of $224,693 (MGMA Physician Placement Starting Salary Survey, 2013), managing all four of these expenses should be financially feasible. If not, it might be a good time to review your budget. If you can continue to live like a resident for the first few years, saving money and reducing your debt, you’ll be able to retire earlier and with more financial security.

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