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.
Stocks are riskier than bonds. History tells us you receive a higher return for taking this risk.
Certain stocks outperform other stocks – small cap and value stocks, for example.
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 email@example.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.
Physicians 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.
Debt 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.
For this edition of Living Fully, I had the pleasure of interviewing Tony Armada, CEO of Western WA at Providence Health & Services and CEO of Swedish Health Services. Tony has been part of our local health care community since 2013 when he relocated from Chicago to work at Providence and Swedish Health Services. Before Chicago, he spent 16 years in Los Angeles and Detroit prior to that. He likes to joke that he brings professional sports championships with him. In Detroit it was the Pistons. In LA it was the Lakers. In Chicago it was the Blackhawks. When he came to Seattle in 2013, the Seahawks won the Super Bowl.
It’s clear, however, that Tony brought much more than sports to our city. He is actively involved in the Seattle Metropolitan Chamber of Commerce, the Washington State Hospital Association and the World Trade Center Seattle. Amidst this busy professional life, he puts friends and family first and takes time to enjoy life. I sat down with Tony to understand how he manages to Invest Wisely and Live Fully.
Tony grew up in a health care family. His father was a physician and his mother was a pharmacist. From a young age, Tony knew he would follow a similar path. After earning his undergraduate degree in human medicine and technology at Michigan State University, he practiced medical technology for four years in a 400-bed hospital.
Because education is important to Tony, he went back to school for a Master of Health Administration (MHA) and Master of Business Administration (MBA) as a backup in case the MHA didn’t work out. In the end, Tony found them complimentary, and they taught him about both sides of the health care equation.
Fast forward to today, Tony manages nine hospitals and 16,000 caregivers in the greater Seattle area and western Washington. Maintaining the right work/life balance is important to Tony. On the work side, he loves what he does and his family supports those endeavors. But, family and leisure are a top priority, and Tony makes a point to use his vacation days and spend time with family.
Now that his daughters are attending out-of-state colleges, that adds a layer of complexity. His oldest daughter is following in his health care footsteps, working as an EMT in Chicago. Ultimately, she would like to go back to school to become a Physician’s Assistant. Tony’s youngest daughter is following the business path and is studying business management. She is also a Division 1 scholarship athlete, playing volleyball.
As you can imagine, not much keeps Tony up at night. As he puts it, “I am too tired!” Instead, he asks himself the question: Did I make a difference in somebody’s life today? If the answer is yes, he feels good going to bed. Whether it’s giving his daughters the opportunity to enjoy life, or making sure patients are well-cared for, the answer is almost always yes.
In the near future, Tony would like to set aside money for a foundation that will use funds in perpetuity to fund and create opportunities for young adults via coaching, mentoring and internships. Tony will also give back with his time. That question he asks himself before bed? Soon, the answer will always be yes.
Whether you are a resident, new physician or thirty years into it like Tony, my hope is that his story will give you some guidance and inspiration on how to manage a busy life and live fully. Did you make a difference in somebody’s life today?
Joe grew up in a financially relaxed household. Money came easily to his parents and when they needed something, it was there. He wasn’t spoiled, just well taken care of. Lucy was just the opposite. Money was scarce. Choices had to be made.
When Joe and Lucy got married, their two very different financial tracks had to merge. Much like Joe and Lucy, all of us have stories about what money was like growing up. As we enter into and manage relationships, merging those financial stories is a crucial element to the relationships’ long-term success. The following points provide guidance on how to do so.
Set expectations around your goals
Funding your children’s schooling is a classic example. For the Joe-like individuals, the answer seems obvious – their parents paid for their schooling, so they feel obligated to do the same. The Lucy answer is starkly different. Whether it’s paying for schooling themselves, or getting some kind of scholarship, they need to have some skin in the game. Whatever the outcome, being proactive with a plan is what matters.
Couples at or near retirement can face equally difficult crossroads. One person may be under the impression they’re going to downsize the home to buy a small condo and spend their time traveling. The other person is completely attached to the home they’ve lived in for 40 years and has no intention of selling it. They want to stay closer to their family and the community relationships they have built. Wow! Sounds like fireworks. Again, plan ahead. Don’t wait until your last day of work to have this discussion. Have it now.
If your goals align, great. If not, tweak them to arrive at a compromise. Goals, plans and circumstances change, so continue to have the conversation. I suggest an annual check in. That way things can evolve naturally and you’re not stuck dealing with a dramatic change 20 years down the road.
Who manages the finances?
It’s completely natural for one person in the relationship to gravitate to the finances. In our example, it’s typically the Lucy types – those that had to make choices about how to spend their money. Over time, that person comes to know their finances like the back of their hand. So what happens if that person is suddenly no longer around? Financial relationships can often live on a teeter totter. One person carries the weight, and the other is left suspended in air. Once the weight is gone, the other person may land pretty hard. Neither person in the relationship wants this, so it’s best to take steps to ensure both people have a baseline understanding of the household finances.
Tip: If you’re working with professionals (CFP®, CPA, etc.), make sure the non-financial person attends all meetings. This allows all parties to increase their plan acumen steadily over time and establish relationships with the professionals.
Be honest with yourself and with your partner about your financial habits. Until recently, I’d never encountered a “secret bank account.” In this case, someone siphoned money into a bank account their spouse was completely unaware of. The intention was to create a pool of money that could continually fund their spending habits. A secret like this is a ticking time bomb. It’s probably one of the primary factors behind the statistic that finance-related issues are the number one cause of divorce. Divorce is much more catastrophic than a secret bank account. Again, it’s best to have full disclosure.
Review your various account statements – bank, investment, credit cards, loans, etc. I know it’s easy to toss them into the shredder with the envelope still sealed, but most of us need to be aware of what we spend, so it’s good to get in the habit of reviewing the statements. Twenty minutes a month is all it should take. The intent is for you to get a rough baseline of where your money is going. Knowledge is power. Understanding the big picture of your spending and savings habits is crucial to your long-term success.
Like Joe and Lucy, we all come from different financial backgrounds. The above discussion topics will help those looking to merge paths as well as those who are on an independent path. Start with setting the expectations and defining goals together. From there, ensure that all parties have a baseline understanding of the financial picture. Move to full disclosure – for most of us, this should be nothing more than getting all of the information on the table. Before you know it, you’ll have a mutually agreed upon plan. Day by day and week by week, you’ll live this plan so you can accomplish all that is important to you.
Physicians can spend over a decade working on their credentials. While their financial planner need not go to medical school, they should go through some sort of accreditation process. Whether you’re hiring an advisor or back checking your current one, the following four areas are a good place to start:
Experience – What kind and how much? The planner should have at least five years of actual planning experience working with individual clients.
Don’t get lost in the vast sea of credentials and designations. Focus on the three that matter – CFP®, CFA and CPA.
Certified Financial Planner (CFP®) – Requires 18 to 24 months of coursework followed by a rigorous 10-hour exam. Three years working as a financial planner. Bachelor’s degree or higher. Thirty hours of Continuing Education (CE) every two years.
Certified Financial Analyst (CFA) – More technically oriented than the CFP®, but equally valuable. Rigorous studies, testing and CE requirements.
Certified Public Accountant (CPA) – Having tax planning help on hand is hugely beneficial. Rigorous studies, testing and CE requirements.
Transparent fee structure. My advice? Align the economic incentives.
Fee only – Fee is based on the amount of money managed (i.e., 1% of a $1 million portfolio). Economic incentives aligned in the sense that if the account grows, everyone is happy – 1% of $1.5 million is greater than 1% of $1 million and, most importantly, you have more money.
Commission based – Fees are associated with specific products and transactions. Client/advisor incentives misaligned. The more your advisor trades the account, the more they will make. They’re also incented to sell expensive “fee-centric” products.
Fee based – Fee only plus Commissions. Not ideal.
Do your due diligence. You, your significant other, your heirs and any charitable benefactors of your estate will all thank you.