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.
The investment spectrum moves from active management to passive and everything in between. In its most active sense, the active camp is that of a day trader, scouring the markets constantly for tidbits of information that are going to get them a leg up and acting instantaneously to take advantage of it. These folks have quite the task. In the age of information, they are competing against the collective wisdom of every trader. They are, quite simply, going to need a massive amount of luck over a long period of time to make it a successful venture. In short – probably improbable.
Index funds sit comfortably on the other end of the spectrum. All they need to do is make sure they contain the same stocks that exist in the index they are mirroring. The 500 stocks in the S&P are the classic example. Index funds reconstitute themselves once a year to factor in the stocks that have left and those that have entered the index. This reconstitution impact is a big issue for index funds. Stocks entering the index typically appreciate, and stocks leaving do just the opposite. Regardless, the index fund has to buy the former high and sell the lower low. This annual reconstitution impact accumulates year after year. In the long term, it’s significant.
In the face of active management and pure index investing, Dimensional Fund Advisors (DFA) offers a better solution. Built in the halls of academia at the University of Chicago, the theory was put into play in 1981 when DFA opened its doors. While DFA is closer to the passive end of the spectrum, there are some key differences between the two:
- DFA tilts to small and value companies. Globally since 1920, small and value companies have outperformed large cap and growth companies.
- In 2013 DFA added a direct profitability factor as well. In short, companies with high direct profitability outperform those with less.
If you can’t beat the markets, join them. In the case of DFA, do so in a way that leverages the evidence of market returns.
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:
- Utilize the resources of regulatory agencies to ensure they have a clean record. Look up Registered Investment Advisors (RIAs) and brokers.
- 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.
Any good football coach will tell you that you want players at their best position. A 350-pound football player is built to anchor the offensive line, not play wide receiver. A kicker is there to kick extra points and field goals, not quarterback. In this way, a team is intentionally built to leverage its collective parts in the most productive fashion.
In much the same way, it’s important for physicians to locate investment assets to their most tax productive vehicle. Here are some examples:
- Use tax-free municipal bonds in taxable investment accounts.
- Real Estate Investment Trusts (REITs) and Treasury Inflation Protected Securities (TIPS) are tax inefficient and belong in tax-sheltered accounts such as 401(k)s, IRAs, and Roth IRAs.
- Use tax-managed funds in non-tax-deferred accounts.
Effective asset positioning lowers your tax burden and translates directly into higher investment returns. Otherwise, you’re leaving money on the table.
You’re going to score fewer points if your kicker is throwing passes to your wide receiver. In this case, effective asset location will put more points on the board and allow you to reach your retirement goals sooner.
Wouldn’t a risk-free 15% annual return be nice? You could sleep safe and sound while your investments grow at an amazing clip, and nothing, not the stock market, the real estate market, some political mess, etc., could take it away from you. Physicians in particular get incredibly creative in seeking such returns.
Here are just a few examples of where physicians look for what I refer to as the Holy Grail of investments – an extremely high-risk free rate of return:
- Funding a clinic pension with an orchard. Yes, the kind with trees, fruit and a harvest. A company did this only to discover that a few years later the orchard had lost significant value and needed to be sold at a fire sale price to provide liquidity for an exiting partner.
- Individual stocks. Remember, Apple and Microsoft are the rare exceptions, not the rule. About 99% of individual stocks don’t even come close to doing what those companies have done.
- Sector plays. Physicians are smart and can conjure perfectly rational arguments for investing in biotech, gold, etc. But, no one is smarter than the collective wisdom of the market. It’s a force not worth fighting, especially in the information age. In that sense, all you’re doing is taking concentrated risk in a sector. You may get lucky, but probably not.
- Falling prey to downright scams. There are countless cases of scam artists working their way into a physician group and selling them on a guaranteed 15%+ return. If it sound too good to be true, it is – period.
The search for the Grail will continue due to one very fundamental rule of finance. Risk and return are related – a higher expected return comes with more risk, and less risky investments come with a lower expected return. In economic terms, there is no free lunch.
But, do we even need the Grail? If U.S. large cap stock returned 10.1% and U.S. small cap stocks returned 12.3% annually over the past 86 years, maybe we don’t. Accepting what the market gives us and using the evidence to craft a globally diversified portfolio is a fine solution. While nothing is guaranteed, I for one much prefer the idea of investing with evidence. Searching for something that doesn’t exist at the expense of your retirement goals, and everyone who is depending on you to make the right decisions, is a risky venture. Proceed with caution.
The Personal Exemption Phaseout (PEP) is back. Physicians and other high-income earners need to consider its impact. Below you’ll find the general guidelines, an example of how it works and finally, creative ways in which you can help manage or negate its impact.
PEP phases out the personal exemption by 2% for each $2,500 that a person’s adjusted gross income (AGI) exceeds the threshold.
PEP for 2015
|Filing Status||Phaseout Begins||Phaseout Ends|
|Married Filing Jointly||$309,900||$432,400|
|Head of Household||$284,050||$406,550|
Example: married filing jointly with two children
Personal exemption = $16,000. AGI= $360,000. AGI in excess of phaseout is $50,100/$2,500= 20.4, round up to 21. Multiply by 2% = 42% reduction on the initial exemption of $16,000. Reduction amount = $6,720. Personal exemption = $9,280.
If you are at the upper threshold of a $2,500 increment, take caution. A $100 increase in income could wipe out 2% of your personal exemptions.
Here’s how can you manage the impact.
Get your portfolio in shape
Realized gains in your investment accounts are included in your AGI and will impact the PEP. If your portfolio is in need of restructuring (in turn realization of gains) due to poor management and misallocation, there’s no time like the present to get it in shape. The benefits of a well-structured portfolio are more valuable than the personal exemption. And, if your income is going to stay the same, the net impact of the PEP will be the same whether you realize all the gains in year one, or, for example, over a two to three year period. That said, if your income is going to be significantly less next year, consider holding off.
Distribute your income elsewhere
IRA distributions are considered income. If your income is getting close to the phaseout, distribute elsewhere – a taxable brokerage account, for instance.
Consider your dividends
If your income is constant and your investment accounts distribute a significant amount of distributions, consider the following options:
- Locate the dividend paying assets in your tax sheltered accounts,
- Retool the investment strategy in your non-tax deferred accounts to minimize dividend-paying investments. PEP aside, asset location can be an extremely valuable tool for high-income earners.
Make the most of your deductions
Take advantage of your 401(k), 401(k) over 50 catch up, IRA, and Health Savings Account (HSA). Also consider your student loan interest, which is important for younger physicians who are still carrying the debt.
Manage your distributions
If you are in a partnership, manage distributions more effectively in high-income years.
These 5 simple steps to investing wisely will get you on track to enjoying your hard work and living fully.
Live like a resident and save big
The earlier you can amass money and let the power of compounding interest work for you, the better. If you start to max out ($18,000/year) your company sponsored retirement plan at age 30 at 8% interest, you will have accumulated $260,758 by age 40. Assuming no other contributions, 8% interest and retirement at age 65 this $260,758 would grow to over $827,168. Alternatively, if you wait until age 40 to begin saving, holding the other factors constant, the result would be just over $488,738 at age 65. Those ten years made a huge difference – you made twice as much and you didn’t have to save a dime more. Your future self will thank you.
Pay off and manage your debt
For new physicians, student debt is a burden that continues to grow. At 7-8% interest, getting it under control is paramount. As a general rule of thumb, the higher interest rate debt takes priority. If you have a 9% loan and a 5% loan, focus on the former. That said, mentally, paying off smaller amounts can be rewarding. Assume you have a loan with a balance of $10,000 and one with a balance of $200,000. Even if the former has a lower interest rate, there is a mental benefit to paying it off – namely, making the $200,000 gorilla seem manageable.
Tip: Manage real estate debt with caution. I recently interviewed a physician for my upcoming book whose enthusiasm for the real estate market was palpable. This same physician bought at the peak of the market in 2006 and got burned. He was also on the brink of retirement.
Here are three red flags to watch out for.
- Leverage works two ways. It feels great when the real estate market is humming along, and when things pull back, just the opposite
- In retirement, you want liquidity. Selling real estate takes time. Selling a mutual fund takes a day.
- Concentrating the majority of your wealth in one asset is risky. Diversification can not only reduce portfolio risk. If done correctly, it can increase your expected return.
Figure out how big of a nest egg you will need
Spending $150,000 per year in retirement and using a 4% annual distribution puts the figure at $3,750,000. Income sources such as Social Security and pensions will impact this figure. Also take into consideration expenses that will be expiring in retirement, such as your mortgage.
Draft and investment policy statement
Your investment policy statement (IPS) should, at minimum, contain the following:
- Asset allocation
- Risk tolerance
- Liquidity requirements
- Portfolio strategy
The IPS is the core of your long-term investment plan. All investment ideas should be filtered through your IPS. If the idea is not congruent with the plan, scrap it.
Life, disability, umbrella and malpractice insurance are a must for physicians. Millions of dollars can vanish in the blink of an eye, and your retirement prospects right along with it, if you are inadequately insured.
Life insurance is particularly important for younger physicians who, in the event of their passing, would need to pay off a mortgage and replace years of lost income for their family. The good news is that a 20-year term life policy will not break the bank.
Disability is important for physicians for all stages of life. Making sure your income stream is protected in the event of a long-term disability is crucial. Your earning power is a huge asset. Typically, physicians are covered in part through work and should consider a supplemental policy. Umbrella policies cover excess liability beyond your home and auto coverage. A two million dollar policy typically costs less than $1,000 per year. This is cost effective coverage that’s status quo for nearly all financial plans. Malpractice insurance is an obvious must for physicians and is self-explanatory.
Stefan Turkula is in his five-year residency for orthopedic surgery. At 32, his ability to Live Fully and Invest Wisely despite 80-hour work weeks and a daunting debt burden is impressive. My hope is that you can pull a few nuggets of inspiration from his interview. I know I did.
What drove you to medicine in general, and specifically to orthopedics?
Medicine was something that was always on my radar as a career. My grandfather was a family physician in a rural town in North Dakota, and I have an Aunt who is a plastic surgeon. So, I sort of had them to look up to for a while. That being said, I never thought of medicine as a career until I started thinking of ways to apply myself in things I was passionate about; using science, technology, and physical skill to care for and treat people in their time of greatest need. Medicine affords me that privilege and I’m thankful every day that I get to do my job (some days more than others, however).
Orthopedic surgery, as it would turn out, was essentially my destiny. For me it is the perfect symphony of medicine, science, and technology being used to make people more functional and feel better than before they met me. Which is sort of a mantra of mine, I want to leave every patient feeling at least a little better than they did when they first met me.
Typically, if someone is seeing me in the emergency room they’re having one of the worst days of their life. Being able to take someone from that point, to being able to enjoy life in a meaningful way for him or her is a pretty cool feeling.
Additionally, having been an orthopedic patient many times myself, I find myself easily identifying with many people musculoskeletal problems and appreciating their desire to get back to functioning at a high level again. I love being able to help them achieve their goals.
Now, it’s no secret that becoming a doctor isn’t cheap. How are you dealing with the debt burden of medical school?
Ah, the debt burden. It’s substantial. I funded 100% of my medical school and graduate program with student loans, and I graduated with about $400,000 of debt (which includes my $20k from undergrad). Now, what is my plan to pay it off? Public Service Loan Forgiveness (PSLF). The amount of debt I have and my salary as a resident ($52,000 this year) are so mismatched that repaying anything substantial while I’m still in training is essentially impossible.
Luckily there are some very reasonable programs. The Income-Based Repayment (IBR) and Pay as You Earn (PYE) options are the only reasonable choices for me, but in the long run I’m relying on the PSLF program. PSLF is a godsend for those in medicine with a lot of debt. With the criteria being that you must work for a non-profit (99% of teaching hospitals are non-profits) and make the minimum IBR or PYE payments for 10 years, it’s a no-brainer to start that as soon as possible.
When I’m finished with residency and fellowship, 6 years, I will have 4 years of payments left if I continue to work at a non-profit hospital until the remainder of my loans will be forgiven. Now with the crushing interest rates given to student loans (I think my average over all loans is like 7%), my total amount forgiven, which accounts for future interest and minimum payments for 20 years, will be close to $900,000. That’s just an insane number that’s hard to comprehend now, much less when I was student taking out those loans. So, I’m pretty much reliant on the PSLF program.
What is the best piece of financial advice you ever received?
“Save money for what you hate, spend money on what you love.” I have no idea where I heard/read that, I guess I could just take credit for making it up, but it’s been a good mindset for my money management. I take it to mean that make sure you’ve covered everything that is a burden (rent, car payment, utilities, etc) so they’re no longer burdens and just out of your mind. Whatever you have left over, do with as you please.
I don’t go crazy, and tend save a small amount each month, but there are things that are important for me, like travel, and I’m more than happy to spend a lot of my income on that rather than squirrel it all away. Let’s be honest, I’m a 32 year-old single guy and I work 80+ hours a week. I don’t have much time to spend money, and I don’t make a large enough salary to realistically save much for my retirement or future at the moment.
So, my current philosophy is that I’m going to invest in my happiness rather than an investment portfolio. That will change quite a bit once I finish training and start making a real orthopaedic surgeon salary in a few years, but in the meantime I’m happy just being happy.
At Merriman, we focus on helping our clients live fully. It sounds like you do this part well!
I skied competitively in freestyle skiing from the age of 10 on, and eventually won the Junior Olympics when I was 17. Skiing gave me an incredible amount of freedom and appreciation for travel and seeing new places. I got to see and do a great number of things that I wouldn’t have been able to without skiing. Just because I was a good skier I was able to be exposed to the outdoors and love being there. As a teenager you barely realize these things, but all those experiences are what have shaped me to be an adventure seeking, outdoors loving person.
Like I said before, at the moment, I invest in my happiness. My schedule is such that when I take vacation, it has to be for an entire week at a time. We get 4 weeks a year in my program and that usually means 1 week every 3-4 months. No random 3-day weekends or anything like that. So, I’ve committed myself to making the most each vacation. Each week is an opportunity for a new adventure, and so far it’s worked out for me.
I have the privilege of having lived all over the country and can find a place to crash in almost any city if need be. That being said, I did take a solo trip to Canada last winter that was astounding affordable. I flew into Calgary on a cheap ticket, rented the cheapest car I could find, and spent a week sleeping in youth hostels with crazy 20 year old Australian and German students on holiday while skiing and exploring the Canadian Rockies, making some pretty interesting friends along the way. The strength of the US dollar vs the Canadian made the trip so much cheaper than I had expected. So by sacrificing any semblance of luxury, I was able to have a pretty amazing adventure on the cheap.
I’m always on the lookout for what might be a good, inexpensive trip. Such as camping in Zion national park for 4 days, which was another vacation I took last year. I took a super cheap flight to Las Vegas, got a car for $20/day and went backcountry camping in Zion, which is pretty much free, and you get see some of the most beautiful scenery on earth. Those sorts of trips are what I’m always on the lookout for. Fairly simple to plan, and the major expense is the plane ticket.
Clearly, Stefan is doing things right. His ability to live a full and meaningful life in the face of limited time and economic resources is inspiring. If you are resident or young physician reading this, my hope is that it inspires you to work within your means financially, enjoy life and make wise decisions about your debt management.
Stefan Turkula is not a current or former client of Merriman, nor is he an employee of the firm. Stefan authorized Merriman to share his personal story in the interview and subsequent blog post for illustrative purposes only. Merriman did not pay Stefan to participate in the interview.
Our litigious society puts the need for asset protection strategies at the forefront, especially for physicians and other high income earners. Whether it’s creditors, litigants or future ex-spouses, you owe it to yourself, your heirs and any other benefactors of your estate to protect the assets you have worked so hard to accumulate.
Insurance is the simplest form of asset protection. Home and auto insurance are the bare bones, absolute basic insurance, which everyone should have. Not too far removed and equally important are the following:
- Umbrella insurance, also known as excess liability insurance. Its purpose is to shelter you from excess liability that stretches beyond your basic insurance limits. Coverage typically starts at $1 million and can go north of $10 million, depending on your needs. It’s cheap – typically a few hundred dollars for the first $1 million in coverage and incrementally more cost effective as you add more.
- Malpractice insurance.
Important note: Make sure there are no gaps in your coverage. One way to avoid this is by working with one carrier, which should also afford you a multi-line discount. Also, be diligent about staying on top of your insurance. Annual reviews are prudent.
From there, look to slightly more complicated techniques to further buoy your asset protection plan.
- Prenuptial agreements. If you’re getting married for a second time, or simply getting married late in life, prenuptial agreements can protect your assets in the event of a future divorce.
- Maximize contributions to your retirement accounts. Company sponsored retirement accounts such as 401(k)s are protected from creditors under federal law. IRAs and Roth IRAs are protected – in certain cases to a lesser extent – under state law.
- Limited Liability Companies (LLCs). By putting your home in an LLC, you are protecting your personal assets and limiting the exposure of what’s in the LLC To isolate exposure, a separate LLC is advisable for each property.
- Where available (this varies from state to state), certain forms of ownership, such as tenancy by the entirety, can help protect assets from creditors and litigants.
- Asset protection trusts. Used for your heirs, charity and even to effectively manage an inheritance.
- Gifts. Removing assets from your estate before the end of your plan.
This list covers a significant amount of the asset planning that most physicians should consider. Start with the simple items, such as insurance, and build from there. An effective asset protection plan will help you sleep better and ensure that everyone who is depending on you is taken care of.