Well compensated, not so knowledgeable Dr.=Beginner

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toothpuller
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Well compensated, not so knowledgeable Dr.=Beginner

Post by toothpuller »

Hello Bogleheads this is my first post,

My wife and I are very successful medical specialists. I am 35 and she is 34. We will likely file a combined household gross income of approximately 800K for 2012.

We own a home which we purchased for 700K, it is not a lavish home despite the cost. Real estate in our area is very expensive (northeast suburbs) and our annual tax liability is 17K, we owe about 520K on the home at 4.8% because we had to take a jumbo loan.

Now for the investments thus far. Our cash on hand is approximately 835K. It's just sitting in a money market account not really doing much. We have a 401K plan that we have maximized our contributions to, totaling about 200K in held assets diversified amongst a variety of index and other funds. Our combined Roth and traditional IRA holdings approximates about another 235K again well diversified in 90% stock and 10% bond. I changed my bond positions by 10% this year to favor stock holdings. We have two daughters (2.75 yrs old and one 1.2 yrs old) and have made thus far 10K in 529 college plan contributions to each of their accounts. We each have term life policies of 3 million plus 1 million accidental death via our association. We both are insured up to 15K per month tax free with own occupation disability income protection. We also have a 1 million umbrella policy on our auto's.

Now the questions. I am uncomfortable leaving such a large amount in cash in a bank. We are exceeding the FDIC insured limits on these accounts. We are looking to move the money into other positions to achieve growth that at least competes with inflation. There are many directions we can go in. I am searching to find some tax deferred retirement vehicle outside of a 401K to invest in. There seems to be none present. I would consider opening up a scottrade or e-trade account and moving some money into etf's or dividend paying stock but am leary about having to pay tax on the capital gains if I sell the position which would be taxed lower than my fed tax rate of 39%, it also opens up the advantage of using tax loss harvesting.

A commercial building has come up for sale in our town. It is brand new and beautiful, has six tenants and open space for me to move my practice into. The return on investment after expenses is 200K per year with 3% per annum rent increases for the tenants. The building is 2.5 million and as stated is in brand new condition. I wouldn't mind putting down the down payment and financing it knowing that the income from the building would pay off the bill in about 12 years. I would need a management company to help me run the property as I am too overwhelmed running my practice which would cut into the profits but that is the cost of business. I currently rent the space I am in and have outgrown it quickly.

Another option is to pay off our mortgage. This would still leave us still with plenty of emergency funds and I'm certain we could replenish the accounts pretty quickly after another year of working.

We are modest people just looking for some answers and advice. Unfortunately personal finance is not taught to us. Any help, directions, or opinions no matter how harsh would be greatly appreciated.
Last edited by toothpuller on Sat Feb 23, 2013 12:40 pm, edited 2 times in total.
livesoft
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by livesoft »

I recommend you edit your post to get rid of all the extraneous stuff. It's all fluff to us (most folks here are physicians or graduates of MIT). Then follow the "Getting Started" guidelines.

But I will say, you are fully capable of reading some books to get yourself knowledgeable and teach yourself personal finance.

Welcome to the forum.
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letsgobobby
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by letsgobobby »

No commercial buildings, ever. Why? You're a microspecialist oral surgeon so logically the next step is... Commercial real estate?
livesoft
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by livesoft »

Physicians in my area are into commercial buildings. They build and open up a Doc-in-a-Box, but the real estate agents didn't tell them that everybody was opening up a Doc-in-a-Box, so now there are more Doc-in-a-Boxes than there are Starbucks and MacDonalds (combined!) in our area.
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William4u
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by William4u »

A 3 fund portfolio is all you need...

http://www.bogleheads.org/wiki/Three-fund_portfolio

Vanguard total domestic and total international funds are perfect for you, and tax efficient.
Topic Author
toothpuller
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by toothpuller »

OK, edited down. Sorry for the fluff. Should I invest the excess funds into a separate non-deductible IRA? Can I do that with Vanguard?
Grt2bOutdoors
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by Grt2bOutdoors »

letsgobobby wrote:No commercial buildings, ever. Why? You're a microspecialist oral surgeon so logically the next step is... Commercial real estate?
A dentist friend of mine owns a building - it houses his successful practice, and two other commercial paying customers. It's all paid off, now he just uses the other tenants to pay the taxes and insurance on the property. I think that is where the toothpuller is going with this idea and given his yearly income could likely pay off that building in a few short years.

I think you need a bigger umbrella policy - $1MM is low given your occupation and other assets. I take home less than you and my umbrella is the same size.

Consider doing this - take some of your cash and pay down the mortgage to a level that will qualify you for a conventional low-interest rate mortage - you will likely be able to get the rate down to 3.25-3.5% for a 30 year. You will save a boat load of interest, even if you go for a 15 year.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
toothpuller
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by toothpuller »

Grt2bOutdoors wrote:
letsgobobby wrote:No commercial buildings, ever. Why? You're a microspecialist oral surgeon so logically the next step is... Commercial real estate?
A dentist friend of mine owns a building - it houses his successful practice, and two other commercial paying customers. It's all paid off, now he just uses the other tenants to pay the taxes and insurance on the property. I think that is where the toothpuller is going with this idea and given his yearly income could likely pay off that building in a few short years.

I think you need a bigger umbrella policy - $1MM is low given your occupation and other assets. I take home less than you and my umbrella is the same size.

Consider doing this - take some of your cash and pay down the mortgage to a level that will qualify you for a conventional low-interest rate mortage - you will likely be able to get the rate down to 3.25-3.5% for a 30 year. You will save a boat load of interest, even if you go for a 15 year.
That makes the most sense to me too. I keep asking my wife to do this on her days off but she has dropped the ball. I'll work on that on Monday. As for now, yep, a couple of emergencies came in and it's off to work on my day off.
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by LadyGeek »

(When you return...) Welcome! Do you think you can rework your post into something along these lines? Asking Portfolio Questions That format is designed to give us the information we need, along with making you think about the "big picture." Customize it to whatever works for you.

Have you taken a look at EmergDoc's The White Coat Investor blog?
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zebrafish
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by zebrafish »

A beginner should not invest in a million dollar investment property
This is insane
I'm an MD and our biggest weakness is thinking we know a lot about everything because we know a lot about something
Don't confuse the two
Why complicate life? Build a large stock based net worth first, learn about real estate over years before entering this game. You may find it isn't so attractive an investment, especially if you have no experience
What you are considering is extremely risky
travellight
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by travellight »

I would also get more umbrella; at least 3 million. It is fairly cheap.

I would stray from the other recs and say that the building sounds interesting. You need a place for your practice anyway so why pay rent? I would become extremely knowledgeable first on commercial real estate and the local market and make sure it is a fantastic deal and that it is in great physical condition.

I am a physician as well and own 6 investment properties so I don't see the two as mutually exclusive. It helps though if you have the mindset for it.

You have the luxury of a great income to take on some mild risk. I consider myself fairly conservative and only bought real estate with the ability to weather the storm if I had 100% vacancy.
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letsgobobby
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by letsgobobby »

ok for the record I feel the need to say I am an MD as well, or I'll be left out in this thread along with livesoft and LadyGeek, who have their own noteworthy credentials.

Maybe owning your OWN building is one thing.
livesoft
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by livesoft »

For the record, I am neither an MD nor a graduate of MIT. I never even took courses at MIT nor even in Massachusetts.

For the OP, there are lots of accounts that one can use for investing. You mentioned a few, but there are also joint accounts (aka joint taxable account) that can be opened at many places such as an online discount broker like WellsTrade, TDAmeritrade, Fidelity, Schwab, Vanguard et al. (Scottrade and E-trade would not be on my list though). A taxable account can be used for very tax-efficient investing which can be learned easily enough. Another possibility are low-fee variable annuities from Vanguard or elsewhere (be VERY CAREFUL with these) which provide tax-deferred investing albeit at a moderate cost and big tax hit later.

It seems that paying off a mortgage and having an expensive house is a way for physicians to shelter assets from lawsuits as many states have homestead protections.

Also there are many scams and poor choices out there. With your income level, you don't have to do anything spectacular as long as you avoid the scams and poor choices.
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Dadarkar
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by Dadarkar »

Also there are many scams and poor choices out there. With your income level, you don't have to do anything spectacular as long as you avoid the scams and poor choices.
+1, Best advice.
letsgobobby
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by letsgobobby »

In all seriousness, I suggest you start with the basics:

Saving $300,000 per year, with a base of $1,000,000 (these are made up numbers), what is wrong with:

1/3 municipal bonds + TBM (the former in taxable, the latter in tax-deferred)
1/3 TISM
1/3 TSM

?

Simple, low-cost, tax-efficient, and does not take any of your limited time.

You definitely need more umbrella and max liability on all vehicles and home.

Considering the costs of taxable investing and your immense cash flow, I'd agree with paying off your mortgage. I don't normally recommend that, but in this case liquidity is zero concern and you are paying over market rates because you have a jumbo. You could pay it down, refi to a conforming, yada yada, but to what end?

Yes you can each fund non-deductible IRAs. If you have no traditional IRAs, you can immediately convert those to Roth IRAs. If you hurry you can do that for 2012, as well.

If you think you'll have kids someday, I strongly suggest you explore funding 529s right now. You can each open one with yourself as beneficiary, and plop $140,000 into each. When your kids are born, change the beneficiaries to your children. MA also offers an attractive prepaid tuition plan, but MIT and Harvard are excluded. All gains are tax-free if used for qualified expenses. And you can change beneficiary to your nieces, nephews, and eventual grandchildren (there are some catches, but they are small).

I don't think variable annuities are necessarily the right route, but if ever there was a good candidate it is you: young (so can benefit from many years of tax deferral), need tax advantaged space, very high marginal tax rates on investment (23.8% plus high state taxes I presume). Vanguard offers among the cheapest if not the cheapest.
Last edited by letsgobobby on Sat Feb 23, 2013 3:13 pm, edited 2 times in total.
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zebrafish
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by zebrafish »

letsgobobby wrote:Maybe owning your OWN building is one thing.
I think this could make a lot of sense, but I would get my financial house in order, learn more about real estate, and speak with colleagues about how they went through this process and get their advice before going down this road.

Owning your building is still potentially risky-- what if you want to expand your practice? What if you change hospital affiliations and all of a sudden have to commute an hour to get to your inpatients? If you are renting a place or working for an existing practice, you have much more flexibility. It just seems like at age 34, the poster may not have a lot of years under his/her belt to understand where his practice is going or where he wants his practice to go.

I've seen the economy hammer people in the health profession without the flexibility to move. A friend's orthodontic practice is suffering greatly because their office is right in the middle of a hard-hit area economically, and they have been forced to sell their house and take up a part-time locums practice to keep all the bills paid. Their commercial real-estate has also fallen in value and selling isn't a great option-- and who's going to buy a medical office in an area where business stinks? There can be a lot of upside, but the downside can really suck, too.
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BolderBoy
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by BolderBoy »

toothpuller wrote:We also have a 1 million umbrella policy on our auto's.

I am searching to find some tax deferred retirement vehicle outside of a 401K to invest in. There seems to be none present.
I've never been to Massachusetts and my MD would stand for "Manic Depressive".

You need MUCH more liability umbrella protection as you have VAST earning abilities which could make you a large target - get a $5 million policy as soon as possible. Usually, lawyers just want what insurances you have, but you and your wife could be milked forever as annuities.

Another tax-deferred retirement vehicle you can consider is a defined benefit plan (we are so used to talking about defined contribution (typical 401k) plans, we forget about these others.) They allow for HUGE sums to be squirreled away tax free. BUT, they are complex and you'll need to see a retirement specialist to set one up - usually requires the services of an actuary.
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White Coat Investor
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by White Coat Investor »

Welcome to the forum! You've found a great place.

You are in an enviable place financially, even among physicians. Your combined income is 4 times that of the average physician. Many people retire on the amount you have sitting in a bank account at age 35. You've already won the game. Now you just have to avoid screwing up. I write/edit a blog mentioned above that helps docs who have already won the game avoid screwing up.

Start with the basics- adequate malpractice, personal liability, and disability insurance.

Get yourself an emergency fund of perhaps 6 months of living expenses and put it into FDIC insured savings accounts. (If you can't get it all into one account, put it into two or more.)

Maximize any available tax-protected investing accounts such as an HSA, backdoor Roth IRAs, 401Ks/profit-sharing plans, and defined benefit plans. Between the two of you, you may be able to shelter $200K or more per year that way. Lowering taxes has a HUGE yield on your income.

Develop a reasonable investing plan. A reasonably conservative fixed asset allocation of low-cost index funds reabalanced once a year will work fine.

Avoid scams and investments you don't know much about. It's okay to invest in real estate, but do it with only a small percentage of your portfolio and remember that in some ways it is like a second job, which you two certainly don't need.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
ResNullius
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by ResNullius »

I would pay off the mortgage right away, then put a huge chunk of your available money into Vanguard tax-exempt. I would stay on the shorter side to reduce risk. I also would put some money in SP500 and Total Market. These index funds are much less risky than buying a commerical building. Personally, I've known many docs of various types who have regretted the day they purchased their building. You look to be in fine shape overall, just you need to get a decent asset allocation, then get your funds invested. More than about $100K in cash at your age just doesn't make sense. As for umbrella insurance, you should have at least $3M.
dharrythomas
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by dharrythomas »

I'm not a doctor either and have never been in Boston.

I'd pay off the house. Set aside whatever you think for an emergency fund, and invest the taxable money in either TSM and TISM or the Total World Stock Index.

I'd wait a year or two on a building to see how health care reform shakes out. It may have a big impact on how you want to structure your practice.

Good Luck

Harry
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toothpuller
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by toothpuller »

Thank you for the great comments thus far, at last I have found a home! I'll reply when I get home tonight.
rainyday1
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by rainyday1 »

Well, I'm not a doctor, but we do have similar income situations. We do not have qualify for any tax-sheltered investments aside from 401k and HSA. You may have more options available to you since it sounds like you are self-employed. We chose not to invest in non-deductible IRA's. Given our expense level, I figure we will be in a much lower tax bracket when we retire. If I'm wrong and we generate so much income that we can't stay out of the top tax bracket, well, then we have so much money it doesn't matter (in my mind). We'll pay the tax and still have plenty.

So we have chosen to have a paid-off home and a large taxable portfolio. We have considered real estate, but frankly, it sounds like a hassle. Your mortgage is reasonable given your income level, but I think it makes great sense either to pay it off since you have the cash. If you didn't feel comfortable doing that, I think the suggestion to bring it down to the conforming level is a great one.

Then I would go with a 3-5 fund portfolio of index funds. Looks like you are less risk-averse than we are, so maybe

50% Total Stock Market
30% Total International
20% Total Bond

We have recently added Emerging Markets into the mix too, reducing our Total US stock market exposure. The account will grow pretty exponentially for you, especially if you pay off the house. You're in a wonderful spot! Don't add stress by getting involved in crazy investment ideas. If you really love and understand commercial real estate, go for it. But you have two very small children and two stressful jobs, make the investing easy on yourself so you can enjoy life. You have enough income that you don't have to take huge risk to fund a great retirement. Just my two cents... Congrats on the success!
Bad_golfer
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by Bad_golfer »

Heck I'm not a doc nor did I graduate from college but I did retire early and qualify as a vanguard flagship account. Considering your income and the amount u have saved u might want to consult, at least initially, with a CFP (certified financial planner). Seems like a lot to risk for a Learn as you go trainee. I imagine most folks on this board didn't start investing with large sums and learned with smaller amounts at risk. Check out the vanguard voyager and flagship services offered to investors with amounts over 500k.
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toothpuller
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by toothpuller »

Wow, a lot of great replies thus far and a lot to digest. Well I am a doctor and I did not go to MIT. I went to a state school and the only fancy pants education I received afterwards was at NYU for specialty training. My partner went full ride to Cornell, then half tuition to Harvard, and then on to Columbia. She is the gifted one, I'm the ordinary nobody. She's the brains and I'm the charm. How she ever decided to marry me is still a mystery. While we do earn a sizable income do understand that it is split among two doctors. Par for the course for our specialty is about 350K, so we are doing better than par which isn't bad for two early thirty somethings. Yes, when combined it is excessive but comparable say to an opthalmic surgeon, neurosurgeon, or any other highly specialized surgeon.

The health care reform has little to nothing to do with dentistry at all other than a mandated tax which hasn't been implemented yet. It's unlikely the President is going to go near dentistry as it is too much of a commodity and far too expensive for the Fed to consider reformin

The white coat investors forum is great. I would have never found it otherwise. Thank you.

Commercial real estate is something I know little about. I am leary about getting into a 2.5 million dollar building as a beginner especially when I have a family to care for and two booming practices. However, I pay my landlord about 36K annually in rent and I'm pretty squeezed in the space. I need more space and am willing to pay more but at some point it gets a little ridiculous, hence the thought process to look towards owning a building that is also generating income. I can build a better and more efficiently designed office with better flow and have the added benefit of paying myself the rent. Do I know much about this? It's only a thought but I knew nothing about dental practice yet bought two of them. That seems to be working out pretty well.

We have in the past maxed out 401K contributions for the owners, each sinking in the max amount of 50K for two years, hence the 200K balance. Now however, some employees are eligible for the plan, it is too expensive to salary match them and it brings us down to only 17.5 each in contributions.
Topic Author
toothpuller
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by toothpuller »

For the LadyGeek

Emergency funds: 835K in cash, liquid in various accounts.
Debt: Mortgage on home 520K at 4.8% all other debts paid, no car loans, educational debt paid off, practice startup costs paid off.
Tax Filing Status: Married filing jointly, PC filing as a sub-chapter S-corp.
Tax Rate: 39% Federal, 10% State [political comments removed by admin LadyGeek]
State of Residence: NY (ugh)
Age: 34 soon to be 35 feel like 45.
Desired Asset allocation: 90%stocks / 10% bonds
Desired International allocation: 10% of stocks
Topic Author
toothpuller
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by toothpuller »

letsgobobby wrote:In all seriousness, I suggest you start with the basics:

Saving $300,000 per year, with a base of $1,000,000 (these are made up numbers), what is wrong with:

1/3 municipal bonds + TBM (the former in taxable, the latter in tax-deferred)
1/3 TISM
1/3 TSM

?
The performance of muni's and the bond market in general is poor.

Simple, low-cost, tax-efficient, and does not take any of your limited time.

You definitely need more umbrella and max liability on all vehicles and home.
Agreed, will correct this ASAP.
Considering the costs of taxable investing and your immense cash flow, I'd agree with paying off your mortgage. I don't normally recommend that, but in this case liquidity is zero concern and you are paying over market rates because you have a jumbo. You could pay it down, refi to a conforming, yada yada, but to what end?
Something my wife and I discussed. Why pay refi. costs when we can swallow the whole loan and move on. I am blessed. My problem is not accruing funds, it is dodging tax liabilities and inflation. I seek not to beat the market, just inflation. I'll worry about the earning potential.

Yes you can each fund non-deductible IRAs. If you have no traditional IRAs, you can immediately convert those to Roth IRAs. If you hurry you can do that for 2012, as well.

I'm on the fence on Roth conversions. 2012 was my best year ever, which also means I will pay the most tax ever. 2013 may not be so kind. We shall see. Why convert on the high side of the tax bracket, why not wait until a bad year to convert funds over?


If you think you'll have kids someday, I strongly suggest you explore funding 529s right now. You can each open one with yourself as beneficiary, and plop $140,000 into each. When your kids are born, change the beneficiaries to your children. MA also offers an attractive prepaid tuition plan, but MIT and Harvard are excluded. All gains are tax-free if used for qualified expenses. And you can change beneficiary to your nieces, nephews, and eventual grandchildren (there are some catches, but they are small).
I have two kids already. The max contribution is 5K per child per year as per NYS. If I could plunk down 140K per kid right now I would do it.

I don't think variable annuities are necessarily the right route, but if ever there was a good candidate it is you: young (so can benefit from many years of tax deferral), need tax advantaged space, very high marginal tax rates on investment (23.8% plus high state taxes I presume). Vanguard offers among the cheapest if not the cheapest.
No annuities, not now, not ever!
Topic Author
toothpuller
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by toothpuller »

Bad_golfer wrote:Heck I'm not a doc nor did I graduate from college but I did retire early and qualify as a vanguard flagship account. Considering your income and the amount u have saved u might want to consult, at least initially, with a CFP (certified financial planner). Seems like a lot to risk for a Learn as you go trainee. I imagine most folks on this board didn't start investing with large sums and learned with smaller amounts at risk. Check out the vanguard voyager and flagship services offered to investors with amounts over 500k.
We were working with a financial planner. I had to end the relationship when the discussions started moving towards whole life policies and how I must have whole life. I prefer to keep investments and insurance separate. I traded a lot of my expensive disability and life insurance policies that he sold me to much lower cost coverage. I am slowly converting the high cost mutual funds that I bought from financial planners over the years to lower cost products from Vanguard. I was young, naive and didn't know any better. I am not as young, still naive and still don't know much more other than I was getting ripped off as the "planners" nibbled away at the edges of my hard earned money. Let's say I go with a fee only based planner. I'm basically paying someone a hefty sum for their picks? No thanks.
Topic Author
toothpuller
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by toothpuller »

zebrafish wrote:
letsgobobby wrote:Maybe owning your OWN building is one thing.
I think this could make a lot of sense, but I would get my financial house in order, learn more about real estate, and speak with colleagues about how they went through this process and get their advice before going down this road.

The real estate was one idea. I can afford to buy my own space, why not. Why make my landlord rich? Why pile money renovating my office and his space at my expense?

Owning your building is still potentially risky-- what if you want to expand your practice? What if you change hospital affiliations and all of a sudden have to commute an hour to get to your inpatients? If you are renting a place or working for an existing practice, you have much more flexibility. It just seems like at age 34, the poster may not have a lot of years under his/her belt to understand where his practice is going or where he wants his practice to go.

This won't happen, I am permanently in the town till the end. When we bought out the previous owner, gross collections were 20-30K, now we collect between 120-140K per month. I bought the practice in 2009. The second practice was bought in June, annual collection was 150K, we are on track to hit 225K this June. I had no formal education in business practice. When I came to town, they made fun of me because I look young and my age, then they saw my work, now they call me first.

I've seen the economy hammer people in the health profession without the flexibility to move. A friend's orthodontic practice is suffering greatly because their office is right in the middle of a hard-hit area economically, and they have been forced to sell their house and take up a part-time locums practice to keep all the bills paid. Their commercial real-estate has also fallen in value and selling isn't a great option-- and who's going to buy a medical office in an area where business stinks? There can be a lot of upside, but the downside can really suck, too.
Yes, this is a very real risk to me. I have five other specialists in a 5 mile radius that I compete with. I have seriously damaged their practices. Someone younger and more handsome than I is bound to come along and do the same, it is only time.
letsgobobby
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by letsgobobby »

toothpuller,

1. Bonds - have not performed badly. Performance has been very good. If you are predicting the future then that is not consistent with Boglehead principles.

I have noticed a plethora of recent threads where successful young thirtysomethings propose ultra-aggressive asset allocations of 80-100% stocks with their 7 figure portfolios. Maybe this is just a coincidence, but I do not recall hearing much of that in 2008 or 2009.

90% stocks for a 35 year old with zero need to take risk is almost over the line from "wild and crazy" to "stupid and greedy." There are other *very* bright people on this board who have very aggressive stock allocations; however, I know that most of them have already been through 1 or more 50% bear markets with smaller portfolios; they have proven their mettle. It would be terrible to find out you don't have the stomach for losses you think you do, at just the wrong time.

2. Roth IRAs - you should definitely *not* convert TIRAs to Roth IRAs in your current bracket. However, you can still make non-deductible IRA contributions, regardless. If you immediately convert those to Roths you have to prorate your TIRAs, so if you have a lot of untaxed money in those the whole thing becomes non-viable. Personally I wouldn't do non-deductible IRA contributions if I weren't planning to make the conversion, because the tax advantages aren't that great.

3. I think you misunderstand the 'max' on 529s. There is a maximum state tax deduction in NYS for 529 contributions. However, 529s have very large contribution limits. The Utah plan allows contributions up to a total of $397,000 per beneficiary. The Nevada plan allows contributions up to a total of $390,000 per beneficiary. You can have an unlimited number of plans for an unlimited number of beneficiaries. So you can see there really is no limit to how much money you can put in a 529. However, when you deposit funds into a 529 for your daughter (for example), that counts as a completed gift, and as such if it exceeds the annual gift exclusion of $14,000, it will count against your lifetime exemption. However, 529s have a special allowance in which you may front load 5 years of contributions without gift/lifetime exclusion tax consequences. That means $70k from you to child 1, $70k from you to child 2, $70 from your wife to child 1, and $70k from your wife to child 2. You can do that tomorrow, with no tax consequence. That's $280k growing tax-free forever (if used for qualified expenses), and also out of your estate. You should look into it.
Last edited by letsgobobby on Sun Feb 24, 2013 12:04 am, edited 1 time in total.
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BolderBoy
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by BolderBoy »

toothpuller wrote: We have in the past maxed out 401K contributions for the owners, each sinking in the max amount of 50K for two years, hence the 200K balance. Now however, some employees are eligible for the plan, it is too expensive to salary match them and it brings us down to only 17.5 each in contributions.
Have you looked into a "Safe Harbor" 401k Plan for your practice? Would still allow the highest paid folks to put in the max and a lesser amount for the rest of the folks.

Good for you in ditching the financial planner / salesman who was servicing you before. Look up the farmer's use of the term "servicing".
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toothpuller
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by toothpuller »

letsgobobby wrote:toothpuller,

1. Bonds - have not performed badly. Performance has been very good. If you are predicting the future then that is not consistent with Boglehead principles.
Good point, I have much to learn. As stated above, I know a lot about bone biology yet little regarding investing.
I have noticed a plethora of recent threads where successful young thirtysomethings propose ultra-aggressive asset allocations of 80-100% stocks with their 7 figure portfolios. Maybe this is just a coincidence, but I do not recall hearing much of that in 2008 or 2009.

We piled nearly all of our retirement portfolio into stocks in 2010, the P/E of stocks was wildly in our favor, glad I did.

90% stocks for a 35 year old with zero need to take risk is almost over the line from "wild and crazy" to "stupid and greedy." There are other *very* bright people on this board who have very aggressive stock allocations; however, I know that most of them have already been through 1 or more 50% bear markets with smaller portfolios; they have proven their mettle. It would be terrible to find out you don't have the stomach for losses you think you do, at just the wrong time.

Good point yet again. I just sold an American Funds Bond fund, it is sitting in cash right now, I was going to place it into stocks but maybe I'll go Vanguard total bond fund. That would put me at 75/25, stock/bond. I personally feel that I am ten or more years behind the ball. I need to make up lost time. I spent much of my youth and energy in school.

2. Roth IRAs - you should definitely *not* convert TIRAs to Roth IRAs in your current bracket. However, you can still make non-deductible IRA contributions, regardless. If you immediately convert those to Roths you have to prorate your TIRAs, so if you have a lot of untaxed money in those the whole thing becomes non-viable. Personally I wouldn't do non-deductible IRA contributions if I weren't planning to make the conversion, because the tax advantages aren't that great.
I agree, not to mention isn't it better to have money grow tax deferred? If I place 100 bacteria into a petri dish and grow at ideal temp/nutritional value, I should hit a peak colony before growing 60 bacteria under the same conditions.

3. I think you misunderstand the 'max' on 529s. There is a maximum state tax deduction in NYS for 529 contributions. However, 529s have very large contribution limits. The Utah plan allows contributions up to a total of $397,000 per beneficiary. The Nevada plan allows contributions up to a total of $390,000 per beneficiary. You can have an unlimited number of plans for an unlimited number of beneficiaries. So you can see there really is no limit to how much money you can put in a 529. However, when you deposit funds into a 529 for your daughter (for example), that counts as a completed gift, and as such if it exceeds the annual gift exclusion of $14,000, it will count against your lifetime exemption. However, 529s have a special exemption in which you may frontload 5 years of contributions without gift/lifetime exclusion tax consequences. That means $70k from you to child 1, $70k from you to child 2, $70 from your wife to child 1, and $70k from your wife to child 2. You can do that tomorrow, with no tax consequence. That's $280k growing tax-free forever (if used for qualified expenses), and also out of your estate. You should look into it.
I need to wrap my head around this a bit more. I live in NYS but can contribute to a Utah 529? Can you point me to a plain english source where I can research this a bit more.
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toothpuller
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by toothpuller »

BolderBoy wrote:
toothpuller wrote: We have in the past maxed out 401K contributions for the owners, each sinking in the max amount of 50K for two years, hence the 200K balance. Now however, some employees are eligible for the plan, it is too expensive to salary match them and it brings us down to only 17.5 each in contributions.
Have you looked into a "Safe Harbor" 401k Plan for your practice? Would still allow the highest paid folks to put in the max and a lesser amount for the rest of the folks.

Good for you in ditching the financial planner / salesman who was servicing you before. Look up the farmer's use of the term "servicing".
Yes we have a safe harbor plan in place. Since we were a new practice the new employees didn't qualify. This year they do. I personally think it is in our advantage to include them in the profit share. It would cost me about 15-20K in profit share to maximize my contribution and my wife's contributions but that is chump change in the grand scheme. I also would consider taking that 15-20K and converting some of our traditional IRA to Roth. That may be a better alternative. Such a greedy boss I am. I have to run the numbers.
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by letsgobobby »

You can contribute to any 529 anywhere; also, any number of 529s. We have six for 2 kids.

http://www.bogleheads.org/wiki/529_Plans

NYS tax law governs where/how you get the tax deduction. You might have to make a $5000 contribution to each of your kids' NYS 529 plans to max the deduction; after that, go where the plan is cheapest and best. For us that has been Utah and Nevada. We live in Washington, so no tax benefit (also, no income tax :D )

75/25 is a lot more reasonable than 90/10. :sharebeer

When you say you are 'behind' because of training, I get it. But you also say you live very modestly; come from modest people; and just want financial security. You have $1,000,000 to start with and earning power 20 times the average American household. Even if your investments earned a real rate of return of 0% for the rest of your lives, you will have enough. You have no need to take risk. Taking a little is ok. Taking a ton is greedy; not wrong, and expectedly your return will be higher. But re-read what EmergDoc wrote above - pretty much the only thing that can hurt you now is getting scammed or doing something stupid. Taking a lot of risk you don't need to take qualifies as the latter.

I have a lot less earning power than you, and I'm a little older, and my allocation is 60/40. I could probably tolerate more risk but I have no need to. With 60/40 I am extremely confident I will meet my long-term goals - I also like to think we live moderately and come from modest people and plan to stay that way. Once we pay off the absurdly large house and save a million dollars for college, that is. :oops:
LFKB
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by LFKB »

You will need to do your own research but I think this is the decision you will come to in the end. I went through a similar process recently for the first time. I'm 26 with a similar but slightly lower income and about half the asset base but I rent for the time being, after my research this is what I would do if I were you.

Pay off the mortgage. 4.8% is not cheap and you will feel better if you don't owe money on the house and it will free up monthly income to invest.

After paying off the mortgage, you will have a total of about $730k in taxable and tax deferred accounts. This is what you need to determine your asset allocation from.

Set aside 6 months living expenses in a high yield savings account with ING or someone else. I'm guessing 6 months is probably about $80k for someone like you.

This leaves you with $650k to invest in the markets, $435k which is in tax deferred accounts and $215k in taxable.

If I were you my asset allocation would be 60% stock, 30% bond, 10% real estate. You don't need to take more risk than that.

Put all 30% bond (~$195k) in total bond market or A similar low cost diversified bond fund in your 401k or/and IRA. Put 10% bond ($65k) in Vanguard REIT fund or another similar fund in your 401k/IRA. Invest the remaining 60% ($390k) in total stock market ($240k) and total international bond market ($150k) across both your taxable and tax deferred accounts.

Set up a monthly automatic recurring investment into your funds with the monthly income freed up from your mortgage.
ks289
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by ks289 »

toothpuller wrote:
BolderBoy wrote:
toothpuller wrote: We have in the past maxed out 401K contributions for the owners, each sinking in the max amount of 50K for two years, hence the 200K balance. Now however, some employees are eligible for the plan, it is too expensive to salary match them and it brings us down to only 17.5 each in contributions.
Have you looked into a "Safe Harbor" 401k Plan for your practice? Would still allow the highest paid folks to put in the max and a lesser amount for the rest of the folks.

Good for you in ditching the financial planner / salesman who was servicing you before. Look up the farmer's use of the term "servicing".
Yes we have a safe harbor plan in place. Since we were a new practice the new employees didn't qualify. This year they do. I personally think it is in our advantage to include them in the profit share. It would cost me about 15-20K in profit share to maximize my contribution and my wife's contributions but that is chump change in the grand scheme. I also would consider taking that 15-20K and converting some of our traditional IRA to Roth. That may be a better alternative. Such a greedy boss I am. I have to run the numbers.
It doesn't sound like you are being greedy at all, since the safe harbor match and profit share can be substantial expense for employers (totaling roughly 10% of salary in our plan), and therefore your tax deferral benefit needs to be weighed against this cost. If your employees are content with a compensation package with such a generous match/profit share (and in particular if you have an excellent 401k) with a lower base salary/hourly wage and if you remain a relatively small practice, then it may be win-win. I have personally found it helpful for attracting and keeping good and competent employees.

Great advice from the expert posters above by the way, and good luck!
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by Call_Me_Op »

livesoft wrote: It's all fluff to us (most folks here are physicians or graduates of MIT).
I doubt that this is true - and note that many successful and smart people [many of them Bogleheads, I'm sure] are members of neither category.
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by YDNAL »

toothpuller wrote:We own a home which we purchased for 700K, it is not a lavish home despite the cost. Real estate in our area is very expensive (northeast suburbs) and our annual tax liability is 17K, we owe about 520K on the home at 4.8% because we had to take a jumbo loan.

Now for the investments thus far. Our cash on hand is approximately 835K. It's just sitting in a money market account not really doing much.
Welcome, toothpuller!

Three things:
  • 1. Always pay yourself FIRST, not a bank(s), thus get rid of interest expense (mortgage). The monthly payments (interest + principal) can go back into saving.... you are only a mid-30 couple with high salary and large window to build financial wealth. Taxable savings (non-advantaged like 401K, IRA, etc) must be tax efficient - especially for a couple earning $800K+ annually.
    http://www.bogleheads.org/wiki/Principl ... _Placement

    2. Saving/Investing is simple - although some people like to make it complex. Find the proper/correct balance - for your personal circumstances - between Risky/Less risky investments. A 90/10 split you contemplate needs a second look based on the stuff you have posted in this thread.
    http://www.bogleheads.org/wiki/Investme ... _Statement

    3. Own the entire kit and caboodle of Domestic and International Equities (risky) in fully-diversified Index funds; then place all focus on your JOINT and larger Asset - human capital - for (a) consumption and lifestyle, and (b) building wealth.
Good luck!
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by travellight »

a few additional points:

-I would pay down the mortgage and refinance to Penfed's 1.99% loan that is amortized and paid off in 5 years.

-the concern about putting more than you may need in 529 plans is that you do have to spend it all on education. I don't know what the penalty is if you don't.

-it seems to me a tIRA is better than taxable investing, so I would definitely contribute each year to your max, then consider doing the back door ROTH so you don't pay taxes on the conversion.
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by BerkeleyChris »

I would pay off the mortgage entirely and save/invest as much as you can over the next few years. If you decide to make investments outside the boglehead portfolio--and it is not clear to me that you should take on hassles that divert your time away from your practice and your family--at least be sure to do it without taking on new debt. You have a great foundation for a very prosperous future, and you could have the cash saved up in a few years to make higher risk/higher potential reward investments without leveraging up.
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by nimo956 »

I can't believe no one has suggested looking into I bonds and EE bonds. You can buy 10k per year per SSN, so 80k per year for you, your wife and children.
50% VTI / 50% VXUS
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by Default User BR »

I would not pay off the mortgage entirely. Paying down to conforming and locking in a low-rate fixed mortgage could make a lot of sense.


Brian
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by Grt2bOutdoors »

nimo956 wrote:I can't believe no one has suggested looking into I bonds and EE bonds. You can buy 10k per year per SSN, so 80k per year for you, your wife and children.
His tax bracket is the highest 39% plus NYS/NYC tax add another 10% - what benefit do you see when every $1 earned will result in a 39%+ (add in the new health tax + Medicare tax of 0.009%) or about 43 cents being confiscated in tax?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
nimo956
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by nimo956 »

Grt2bOutdoors wrote:
nimo956 wrote:I can't believe no one has suggested looking into I bonds and EE bonds. You can buy 10k per year per SSN, so 80k per year for you, your wife and children.
His tax bracket is the highest 39% plus NYS/NYC tax add another 10% - what benefit do you see when every $1 earned will result in a 39%+ (add in the new health tax + Medicare tax of 0.009%) or about 43 cents being confiscated in tax?
1. I-Bonds and EE-Bonds aren't subject to state and local taxes
2. He might be retired in 20 or 30 years and in a lower tax bracket
3. It's better than keeping cash in a bank account
4. I-Bonds and EE-Bonds are tax-free if used for qualified education expenses
4. The OP specifically asked to learn about "some tax deferred retirement vehicle outside of a 401K to invest in"
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by LadyGeek »

Good point. To complete the picture, the wiki has background info: I Savings Bonds and EE Savings Bonds

Additionally, others have suggested to get a good financial plan in order. Start here: Getting Started Financial planning comes before investment planning.
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by Grt2bOutdoors »

nimo956 wrote:
Grt2bOutdoors wrote:
nimo956 wrote:I can't believe no one has suggested looking into I bonds and EE bonds. You can buy 10k per year per SSN, so 80k per year for you, your wife and children.
His tax bracket is the highest 39% plus NYS/NYC tax add another 10% - what benefit do you see when every $1 earned will result in a 39%+ (add in the new health tax + Medicare tax of 0.009%) or about 43 cents being confiscated in tax?
1. I-Bonds and EE-Bonds aren't subject to state and local taxes
2. He might be retired in 20 or 30 years and in a lower tax bracket
3. It's better than keeping cash in a bank account
4. I-Bonds and EE-Bonds are tax-free if used for qualified education expenses
4. The OP specifically asked to learn about "some tax deferred retirement vehicle outside of a 401K to invest in"
Perhaps not subject to state and local taxes, but they will be subject to the new investment tax + Medicare surcharge.

The OP makes far in excess of the MAGI allowed to take advantage of "tax-free" for use in qualified education expenses. The current maximum MAGI per Married Filing Jointly is $136,650 - the OP makes that amount in the first 3 months of a calendar year and the OP does not seem to suggest they will be retiring in 18 years. Here's the link for those needing more details http://www.irs.gov/publications/p970/ch ... 1000178602.
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by LadyGeek »

There are 2 separate topics here:

- First, check the publication dates for Tax Benefits for Education (Pub 970): The online version is for the 2011 tax year, the PDF version is for 2012.

- Then, there's the Net Investment Income Tax which went into effect on Jan 1, 2013. We also have a page in the wiki: ACA net investment income tax
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by letsgobobby »

Grt2bOutdoors wrote:
nimo956 wrote:
Grt2bOutdoors wrote:
nimo956 wrote:I can't believe no one has suggested looking into I bonds and EE bonds. You can buy 10k per year per SSN, so 80k per year for you, your wife and children.
His tax bracket is the highest 39% plus NYS/NYC tax add another 10% - what benefit do you see when every $1 earned will result in a 39%+ (add in the new health tax + Medicare tax of 0.009%) or about 43 cents being confiscated in tax?
1. I-Bonds and EE-Bonds aren't subject to state and local taxes
2. He might be retired in 20 or 30 years and in a lower tax bracket
3. It's better than keeping cash in a bank account
4. I-Bonds and EE-Bonds are tax-free if used for qualified education expenses
4. The OP specifically asked to learn about "some tax deferred retirement vehicle outside of a 401K to invest in"
Perhaps not subject to state and local taxes, but they will be subject to the new investment tax + Medicare surcharge.

The OP makes far in excess of the MAGI allowed to take advantage of "tax-free" for use in qualified education expenses. The current maximum MAGI per Married Filing Jointly is $136,650 - the OP makes that amount in the first 3 months of a calendar year and the OP does not seem to suggest they will be retiring in 18 years. Here's the link for those needing more details http://www.irs.gov/publications/p970/ch ... 1000178602.
I agree with you that EE bonds are not attractive, as they must be redeemed at 20 years precisely to optimize returns. I bonds have the advantage of being deferred for up to 30 years, and there is some chance they'll be retired by then.
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by herks »

My wife and I are a few years younger than you and yours. I'm an MD in NY same as you didn't go to school in Boston, wife also a physician. Wife is the brains in my family as well.

First off.. wow!

I'd contribute at least 10k to your NY 529 plan, $10k NYS income tax deduction max but given your income, could consider contributing $140k each per child on their 529s (70k from you and 70k from your wife).

I'd also do backdoor Roth IRA (see whitecoatinvestor) throw in another $11k each

Max out your 401ks or 403s, HSAs, Backdoor Roth IRAs, 529 to at least get the max NYS income tax deduction.

After that, I'd build your taxable account with a tax efficient portfolio with Vanguard (ie/ VTIAX, VTSAX)

Increase the umbrella policy.

My guess is you are going to do well with your business and you may consider using the disposable income you have left (after maxing out tax advantage accounts) to your business.

Good luck.
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by TroutMD »

I am a new Physician and my wife is a professional as well. We just recently 'jumped'; my last outline of our situation and final plans can be found here: http://www.bogleheads.org/forum/viewtop ... 1&t=110725


I read a lot; and much like you we have a substantial cash reserve that I know is a 'bad idea'. Several other people have said it, but I will say a few things as well.

-Maximize every retirement avenue avaliable to you: 401K, Sep, IRAs, etc.
-Strongly consider the 529 college plans; espically if there is a 'tax advantage' to doing so for your particular state.
-Invest some of that cash into taxable accounts. Maybe keep a cash buffer, but do invest some.
-I am divided on the 'commerical property idea'. As others said, MANY of us doctors have been royally screwed over in real estate deals. We are smart at what we do and tend to think therefore we can do almost anything. History has shown itself that often times Doctors lose at real estate. You DO have the benefit of needing a place for YOUR practice; having your own place has obvious advantages vs renting. I just dont have a final opinon on this; just be certain you proceed extremely cautiously!!!!
-Dont take too much or too little risk. The BEST way you or I can increase our wealth and income is to work more. Practicing more medicine will ALWAYS beat the market. On the flip side, our families and such are important and thus it becomes an important balance. Personally, we went with the "Age in bonds" idea (32%). We wanted to take risk, but certainly not too much risk. I think high income earners need to focus more on preserving wealth than creating it.
-If you havent yet, google firecalc and look at it. If we can put just 50K a year into the market for the next 20 years, we will be in AWESOME shape. I guess that gets back to our goals being to preserve wealth. I will be very happy if I can just maintain what I put into the market today, to have the same purchasing power in retirement. As I said, if I want to be better off, I can work more and place more today into those accounts. I think thats better in the long term than taking a bunch of risk right now...
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Re: Well compensated, not so knowledgeable Dr.=BEGINNER!

Post by pkcrafter »

Nice post TroutMD. Just an observation, but as a group, MDs seem to be risk takers, often getting into risky things they don't fully understand.

One thing I wonder about that I haven't seen addressed is asset protection for high net worth professionals. What do doctors use for this? I'm not referring to insurance, but estate planning issues and perhaps annuities in some states.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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