Help a new investor with his finances/portfolio...

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Help a new investor with his finances/portfolio...

Postby Wesley » Wed May 08, 2013 11:36 pm

Emergency funds: $38,000 (about 5 months)
Debt:
-Medical School Loan #1 (Sallie Mae) – $62,000 (2.75% variable)
-Medical School Loan #2 (ACS) - $79,000 (2.625% fixed)
-Car Loan - $22,000 (3.25%)
-Mortgage - $580,000 (5.625% APR) – Doctor’s loan with 0% down and no mortgage insurance

Tax Filing Status: Married
Tax Rate: 33% Federal, 4.63% State
State of Residence: Colorado
Age: 36
Desired Asset allocation: 75% stocks / 25% bonds
Desired International allocation: 25% of stocks

A bit about myself – I am a 36-year-old physician (completed fellowship 1 ½ years ago), married to a nurse practitioner (currently stay-at-home mother) with a 1½ year old boy and 2nd child on the way. I invested in 403b/457 accounts when I was working for 1 ½ years during my training. My wife invested in her retirement accounts while working as a nurse. Both are a mess, as we had no idea what we were doing. I am now in private practice and just became eligible for our 401k plan, but have yet to start investing in it – I am actually working on opening a non-prototypical retirement plan with Fidelity to have access to their low cost Spartan index funds. As you will see below, we have made poor choices in our investment choices in the past (and lack of investments), but I have been doing my homework and reading and am ready to get my financial plan in order (with your help hopefully). Additionally, in two years from now I will likely be offered partnership in our practice and will need to take out a hefty loan (~$1.2M); however, if our reimbursement doesn’t change (I know it likely will), my salary should triple. Recent partners have been able to pay off the buy-in loan in 3 years.

Current Portfolio size - ~$136,000

Current retirement assets

Taxable
1% ($850) cash (for investing)
3% ($3,660) Citigroup (C)
3% ($4475) General Electric (GE)
4% ($5280) Vanguard Small Cap Index (NAESX – ER 0.24%)
4% ($6000) Vanguard REIT Index (VGSIX – ER 0.24%)

His 401a (old)
19% ($25,200) Fidelity Equity Income K (FEIKX – ER 0.54%)
9% ($12,000) Keeley Small Cap Value Fund (KSCIX – ER 1.13%)
** I have access to switching to any Spartan Index Fund

His 457 (old)
12% ($16,000) Vanguard International Growth Fund Admiral (VWILX – 0.36%)
** I have access to switching to any Spartan Index Fund

His Roth IRA
Unfortunately I do not have an IRA, but am interested in starting a backdoor Roth IRA

Her 403b #1 (old)
7% ($8900) Fidelity Select Medical Equipment and Systems Portfolio (FSMEX – ER 0.83)
6% ($7500) Spartan Extended Market Index Funds (FSEVX – ER 0.07%)
5% ($7200) Fidelity Latin America Fund (FLATX – ER 1.02%)
** Access to 208 Fidelity funds including the Spartan funds

Her 401a (old)
5% ($6200) Fidelity Select Medical Equipment and Systems Portfolio (FSMEX – ER 0.83)
4% ($5200) Spartan Extended Market Index Funds (FSEVX – ER 0.07%)
4% ($5000) Fidelity Latin America Fund (FLATX – ER 1.02%)
** Access to 208 Fidelity funds including the Spartan funds

Her 403b #2 (old)
6% ($8700) Fidelity Contrafund (FCNKX – ER 0.63%)
4% ($5250) Metlife Stable Value Option (not a fund – ER 0.82%)
3% ($4200) CRM Small/Mid Cap Value Fund (CRIAX – ER 0.88%)
1% ($1750) Fidelity International Discovery Fund (FIDKX – ER 0.84%)
1% ($1100) Dreyfus/The Boston Company Small/Mid Cap Growth (SDSCX – ER 0.78%)
1% ($800) PIMCO Real Return Fund (PRRIX – ER 0.45%)
1% ($770) PIMCO Total Return Fund (PTTRX – ER 0.46%)
** Access to Vanguard Index Funds and Fidelity Freedom Funds

Her Roth IRA
Unfortunately my wife does not have an IRA either, but again we are interested in opening a backdoor Roth IRA

Contributions

New annual Contributions
$17,500 his 401k (plus a 3% automatic “safe harbor” contribution)
$5,500 his backdoor Roth IRA
$5,500 her backdoor Roth IRA
I also have access to a profit sharing plan (I believe the total of my 401k, safe harbor, and profit sharing plan can equal $50,000), but am not planning on contributing to this right now until I buy into partnership (I will need the disposable income as I pay off my buy-in).

Available funds

Funds available in his 401(k)
Hartford Money Market HLS – ER 0.68%
Calvert Income – ER 1.23%
Goldman Sachs High Yield – ER 1.05%
PIMCO Real Return – ER 0.85%
PIMCO Total Return – ER 0.85%
BlackRock Global Allocation – ER 1.17%
Invesco Van Kampen Equity and Income – ER 0.81%
American Century Large Company Value – ER 1.12%
American Funds The Growth Fund of America – ER 0.97%
Davis New York Venture – ER 0.89%
Eaton Vance Large-Cap Value – ER 0.98%
Janus Forty – ER 1.2%
SSgA S&P 500 Index Sec Lend – ER 0.43%
Alliance Bernstein Samll/Mid Cap Value – ER 1.15%
BlackRock Mid Cap Value Opportunities – ER 1.29%
Federated Mid Cap Value Opportunities – 1.23%
Pioneer Mid-Cap Value – ER 1.23%
Legg Mason Clear Bridge Small Cap Growth – ER 1.35%
Oppenheimer Main Street Small & Mid Cap – ER 1.24%
Invesco International Growth – ER 1.4%
Pioneer Emerging Markets – ER 1.94%
Templeton Foreign – ER 1.19%
Eaton Vance Worldwide Health Sciences – ER 1.83%
Invesco Real Estate – ER 1.31%
Ivy Global Natural Resources – ER 1.29%

Questions:
1. Thoughts on my new company’s 401k plan? I am planning on opening a non-prototypical retirement plan through Fidelity so that I have access to low-cost Spartan index funds due to what I see as poor choices available through my groups’ 401k plan. I have tried to persuade my group to change our 401k plan to no avail. I was offered the non-prototypical approach, which would cost me $225 per year to maintain. My $17,500 contribution and 3% safe harbor would be diverted to this plan and allocations would be at my discretion. I like the idea of simplifying our portfolio, so was planning on a 3-4 fund approach using the Spartan total US market (FSTMX), total International market (FSIIX vs. FSGDX?), total bond market (FBIDX), and possibly REIT index funds (FRXIX). Thoughts?
2. Do my desired allocations seem appropriate?
3. I have read the posts on paying down debt vs. investing and still have questions… It seems that I should not be in a hurry to pay down my student loans yet (both are low rates, but one is not fixed). My home mortgage is not ideal; however, for me to refinance to a ~1% lower rate, I would need to come up with 10% down (or my house would need to appraise at $50k more than I paid – which is possible) and an additional ~$10k in closing costs/escrow/etc because it is a doctors loan with no money down/no mortgage insurance. I can only finance 90% of the value of my home with refinancing a doctor’s loan according to my bank. And then there is my car loan, which would be nice to pay off, as the interest is not deductible and would help with cash flow. I am not sure where to place my disposable money – student loans, refinancing mortgage, pay off car loan, or backdoor Roth IRA?
4. Please help me clean up our old retirement plans and streamline a new, future 401k plan. I have been doing a lot of reading (this website, Four Pillars of Investing, A Random Walk, and The Boglehead’s Guide to Investing). I am on-board with the Boglehead’s way, but am still a newbie. Any and all advice is greatly appreciated! Thank you in advance!
Wesley
 
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Re: Help a new investor with his finances/portfolio...

Postby xram » Thu May 09, 2013 7:35 am

I'm a new doc as well. Finished residency 1.5 years ago.

Consider paying off car loan and mortgage before any additional taxable investing.

I'm not an expert on mortgages (I'm getting my first one right now) but yours seems kinda high. We locked in 2.5%. Can you refinance?

http://whitecoatinvestor.com/retirement ... -roth-ira/

http://whitecoatinvestor.com/top-7-fina ... void-them/

My best advice would be the following: Keep expenses low and save save save. Treat every dollar as if you are making 20K per year and not 600K per year. Honestly. It works. Luckily I have a wonderful wife that thinks this way as well. In our first year we paid off probably 50K in CC, 35K used suburban, 50K private loan, 10K private loan etc etc etc until now all we have is stafford loan(s) to pay off. But they are forgivable upon death or disability so some argue to treat them like a free "life insurance policy" and dont pay them off right away but rather save that money for your family and kids because if you kick the bucket those loans go away anyways. I drive a 2008 Jetta and will drive it until the wheels fall off. I laugh at all the old docs driving corvettes etc. First, what a waste of money and also they look ridiculous. Anyway, good luck. Lots of smart people on here will give you more direct advice regarding funds and such things.

Here are some good intro videos as well.

http://www.bogleheads.org/wiki/Video:Bo ... philosophy
Last edited by xram on Thu May 09, 2013 7:42 am, edited 1 time in total.
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Re: Help a new investor with his finances/portfolio...

Postby Wesley » Thu May 09, 2013 2:38 pm

Xram,

Thanks for the advice... I am looking into options for the refinance of my mortgage, but as we took out a doctor's loan (maybe not the best decision), we have little equity in the property yet. It's looking like I'd have to come up with 10% of the loan value in order to refinance, which may not be the best use of extra money at this moment. I think my next step will be as you suggested - pay off my car loan.

And I am an avid follower of the White Coat Investor - good stuff!

Thanks again... any other advice?
Wesley
 
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Re: Help a new investor with his finances/portfolio...

Postby xram » Thu May 09, 2013 4:55 pm

Wesley wrote:Xram,

Thanks for the advice... I am looking into options for the refinance of my mortgage, but as we took out a doctor's loan (maybe not the best decision), we have little equity in the property yet. It's looking like I'd have to come up with 10% of the loan value in order to refinance, which may not be the best use of extra money at this moment. I think my next step will be as you suggested - pay off my car loan.

And I am an avid follower of the White Coat Investor - good stuff!

Thanks again... any other advice?


I'm still a newbie myself. There will lots of people on here to help you.

Just remember it is hard to get a 5.65% return right now. So anything you can do to pay down the house is the same as earning 5.65% return.

good luck
xram
VTI, VBR, VTWV, SCHH, VXUS, VEA, VWO, VSS, FM, VNQI, VBTLX, VFITX, SCHP, VWITX, IBONDS, EEBONDS, EF(EverBank), UTAH-529
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Re: Help a new investor with his finances/portfolio...

Postby xram » Thu May 09, 2013 7:30 pm

bumpy
VTI, VBR, VTWV, SCHH, VXUS, VEA, VWO, VSS, FM, VNQI, VBTLX, VFITX, SCHP, VWITX, IBONDS, EEBONDS, EF(EverBank), UTAH-529
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Re: Help a new investor with his finances/portfolio...

Postby Calm Man » Thu May 09, 2013 10:13 pm

OP, you have taken on a tremendous amount of debt already and are looking to take a huge amount more in the future. Assumptions hopefully will pan out but they may not. I am seeing reimbursement rates being cut and depending on what happens with this whole health care mess it may be cut a lot more. The partners love buyins from younger people as it is solid money in their pocket and they literally get indentured servants working for them. I don't know what to recommend but you will be carrying about 2 million in debt so how you invest a far less amount of money pales in comparison. Good luck.
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Re: Help a new investor with his finances/portfolio...

Postby EmergDoc » Wed May 22, 2013 4:16 pm

Wesley wrote:Emergency funds: $38,000 (about 5 months)
Debt:
-Medical School Loan #1 (Sallie Mae) – $62,000 (2.75% variable)
-Medical School Loan #2 (ACS) - $79,000 (2.625% fixed)
-Car Loan - $22,000 (3.25%)
-Mortgage - $580,000 (5.625% APR) – Doctor’s loan with 0% down and no mortgage insurance

Tax Filing Status: Married
Tax Rate: 33% Federal, 4.63% State
State of Residence: Colorado
Age: 36
Desired Asset allocation: 75% stocks / 25% bonds
Desired International allocation: 25% of stocks

A bit about myself – I am a 36-year-old physician (completed fellowship 1 ½ years ago), married to a nurse practitioner (currently stay-at-home mother) with a 1½ year old boy and 2nd child on the way. I invested in 403b/457 accounts when I was working for 1 ½ years during my training. My wife invested in her retirement accounts while working as a nurse. Both are a mess, as we had no idea what we were doing. I am now in private practice and just became eligible for our 401k plan, but have yet to start investing in it – I am actually working on opening a non-prototypical retirement plan with Fidelity to have access to their low cost Spartan index funds. As you will see below, we have made poor choices in our investment choices in the past (and lack of investments), but I have been doing my homework and reading and am ready to get my financial plan in order (with your help hopefully). Additionally, in two years from now I will likely be offered partnership in our practice and will need to take out a hefty loan (~$1.2M); however, if our reimbursement doesn’t change (I know it likely will), my salary should triple. Recent partners have been able to pay off the buy-in loan in 3 years.

Current Portfolio size - ~$136,000

Current retirement assets

Taxable
1% ($850) cash (for investing)
3% ($3,660) Citigroup (C)
3% ($4475) General Electric (GE)
4% ($5280) Vanguard Small Cap Index (NAESX – ER 0.24%)
4% ($6000) Vanguard REIT Index (VGSIX – ER 0.24%)

His 401a (old)
19% ($25,200) Fidelity Equity Income K (FEIKX – ER 0.54%)
9% ($12,000) Keeley Small Cap Value Fund (KSCIX – ER 1.13%)
** I have access to switching to any Spartan Index Fund

His 457 (old)
12% ($16,000) Vanguard International Growth Fund Admiral (VWILX – 0.36%)
** I have access to switching to any Spartan Index Fund

His Roth IRA
Unfortunately I do not have an IRA, but am interested in starting a backdoor Roth IRA

Her 403b #1 (old)
7% ($8900) Fidelity Select Medical Equipment and Systems Portfolio (FSMEX – ER 0.83)
6% ($7500) Spartan Extended Market Index Funds (FSEVX – ER 0.07%)
5% ($7200) Fidelity Latin America Fund (FLATX – ER 1.02%)
** Access to 208 Fidelity funds including the Spartan funds

Her 401a (old)
5% ($6200) Fidelity Select Medical Equipment and Systems Portfolio (FSMEX – ER 0.83)
4% ($5200) Spartan Extended Market Index Funds (FSEVX – ER 0.07%)
4% ($5000) Fidelity Latin America Fund (FLATX – ER 1.02%)
** Access to 208 Fidelity funds including the Spartan funds

Her 403b #2 (old)
6% ($8700) Fidelity Contrafund (FCNKX – ER 0.63%)
4% ($5250) Metlife Stable Value Option (not a fund – ER 0.82%)
3% ($4200) CRM Small/Mid Cap Value Fund (CRIAX – ER 0.88%)
1% ($1750) Fidelity International Discovery Fund (FIDKX – ER 0.84%)
1% ($1100) Dreyfus/The Boston Company Small/Mid Cap Growth (SDSCX – ER 0.78%)
1% ($800) PIMCO Real Return Fund (PRRIX – ER 0.45%)
1% ($770) PIMCO Total Return Fund (PTTRX – ER 0.46%)
** Access to Vanguard Index Funds and Fidelity Freedom Funds

Her Roth IRA
Unfortunately my wife does not have an IRA either, but again we are interested in opening a backdoor Roth IRA

Contributions

New annual Contributions
$17,500 his 401k (plus a 3% automatic “safe harbor” contribution)
$5,500 his backdoor Roth IRA
$5,500 her backdoor Roth IRA
I also have access to a profit sharing plan (I believe the total of my 401k, safe harbor, and profit sharing plan can equal $50,000), but am not planning on contributing to this right now until I buy into partnership (I will need the disposable income as I pay off my buy-in).

Available funds

Funds available in his 401(k)
Hartford Money Market HLS – ER 0.68%
Calvert Income – ER 1.23%
Goldman Sachs High Yield – ER 1.05%
PIMCO Real Return – ER 0.85%
PIMCO Total Return – ER 0.85%
BlackRock Global Allocation – ER 1.17%
Invesco Van Kampen Equity and Income – ER 0.81%
American Century Large Company Value – ER 1.12%
American Funds The Growth Fund of America – ER 0.97%
Davis New York Venture – ER 0.89%
Eaton Vance Large-Cap Value – ER 0.98%
Janus Forty – ER 1.2%
SSgA S&P 500 Index Sec Lend – ER 0.43%
Alliance Bernstein Samll/Mid Cap Value – ER 1.15%
BlackRock Mid Cap Value Opportunities – ER 1.29%
Federated Mid Cap Value Opportunities – 1.23%
Pioneer Mid-Cap Value – ER 1.23%
Legg Mason Clear Bridge Small Cap Growth – ER 1.35%
Oppenheimer Main Street Small & Mid Cap – ER 1.24%
Invesco International Growth – ER 1.4%
Pioneer Emerging Markets – ER 1.94%
Templeton Foreign – ER 1.19%
Eaton Vance Worldwide Health Sciences – ER 1.83%
Invesco Real Estate – ER 1.31%
Ivy Global Natural Resources – ER 1.29%

Questions:
1. Thoughts on my new company’s 401k plan? I am planning on opening a non-prototypical retirement plan through Fidelity so that I have access to low-cost Spartan index funds due to what I see as poor choices available through my groups’ 401k plan. I have tried to persuade my group to change our 401k plan to no avail. I was offered the non-prototypical approach, which would cost me $225 per year to maintain. My $17,500 contribution and 3% safe harbor would be diverted to this plan and allocations would be at my discretion. I like the idea of simplifying our portfolio, so was planning on a 3-4 fund approach using the Spartan total US market (FSTMX), total International market (FSIIX vs. FSGDX?), total bond market (FBIDX), and possibly REIT index funds (FRXIX). Thoughts?
2. Do my desired allocations seem appropriate?
3. I have read the posts on paying down debt vs. investing and still have questions… It seems that I should not be in a hurry to pay down my student loans yet (both are low rates, but one is not fixed). My home mortgage is not ideal; however, for me to refinance to a ~1% lower rate, I would need to come up with 10% down (or my house would need to appraise at $50k more than I paid – which is possible) and an additional ~$10k in closing costs/escrow/etc because it is a doctors loan with no money down/no mortgage insurance. I can only finance 90% of the value of my home with refinancing a doctor’s loan according to my bank. And then there is my car loan, which would be nice to pay off, as the interest is not deductible and would help with cash flow. I am not sure where to place my disposable money – student loans, refinancing mortgage, pay off car loan, or backdoor Roth IRA?
4. Please help me clean up our old retirement plans and streamline a new, future 401k plan. I have been doing a lot of reading (this website, Four Pillars of Investing, A Random Walk, and The Boglehead’s Guide to Investing). I am on-board with the Boglehead’s way, but am still a newbie. Any and all advice is greatly appreciated! Thank you in advance!


1. Your 401K sucks. I'm not sure what "non-prototypical" means, but if you somehow can get a 401K that allows you to buy Spartan funds that sounds pretty good. Even if you could just add a brokerage option where you could buy ETFs that would be great. My brokerage option (Schwab PCRA) is $200 a year, similar to your "non-prototypical approach." Sounds like a good deal to me, at least once you have any reasonable sum in the plan. The more I think about it, I bet you can either buy Fidelity funds or buy ETFs through a fidelity brokerage account with your "non-prototypical." You also need to look at your other 401K fees aside from the ERs of the funds in it.

2. Your asset allocation is fine. Personally, I buy into the research on small and value and if the future resembles the past, small and value stocks will provide a boost to your portfolio's returns. Only you can decide if it is worth the hassle, but the numbers I've seen seem to show that even if all an advisor does is add small and value to your portfolio then he likely earns back his fees for you. Simple is great, but if 7-10 funds gets me an extra 1% a year, it's worth dealing with the additional complexity to me.

3. Quit buying cars on credit. When you pay this one off keep making payments into your bank account and you can purchase your next one cash. You don't mention your income, but most gastroenterologists I know should be able to buy a good used car with half a month's salary. Your mortgage rate is ridiculously high. Refinance. The fact that you have 0% equity is an issue, but not an insurmountable one. Call the various "doctor loan" providers and ask for quotes for a no-cost refinance. I bet you can find one that'll lower you to at least 4% with no cost to you. That 1.625% is a lot of dough when you owe a lot of money. Seems reasonable to drag out your student loans for now knowing about your upcoming buy in costs (which I find surprisingly high but I guess if you own some real estate and equipment afterward it's probably okay.) Debt management seems like a big issue for you especially knowing you're soon going to add $1.2M to it. I'd probably even lower my emergency fund to pay off some of that debt. Do you know the rate your practice loan will be at?

4. This part's easy. Roll your old 401Ks into your new one. Then you only have to deal with your new one and your Roth IRA. I'm not sure if you can roll a 401a in, but do it if you can. You probably can't roll your 457 in. Just get a Spartan fund in it and adjust your 401K accordingly. I'd try to combine all of her 403B/401as into one account, perhaps one of her 403Bs. You could roll it out to an IRA, but that would prevent her from doing a backdoor Roth IRA unless you converted the whole thing, which might not be a bad option depending on the size. What to do with your taxable account depends on the ratio of your basis to value. If it doesn't cost you any taxes, I'd liquidate it and use it to pay down debt or to max out retirement plan contributions including backdoor Roth IRAs.
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
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Re: Help a new investor with his finances/portfolio...

Postby Wesley » Thu May 23, 2013 9:40 pm

Thank you for your replies... very helpful!

1) I agree, my work's 401k does suck... that's why I'm doing the "non-prototype" retirement account, which I think is the same as your brokerage account EmergDoc. It will only cost me $225 per year and will allow me to invest in anything Fidelity offers (ie: Spartan funds).
2) Thanks for the advice about allocations - any advice into the 7-10 fund approach?
3) I agree about the car buying... it was before I "learned the way of the Boglehead" :-) I already paid off our other car and now my car is down to $17,000 - trying to get rid of bad debt first. I am looking into refinancing my house as well and trying to figure out if it makes sense given that I have little equity in the home itself. But I agree - with the way interest rates are today, 5.625% is too high. With regards to the $1.2M buy-in, it is steep, but it includes buying into the company, several buildings/endoscopy centers/equipment, a pathology company, an anesthesia company, and a small research company. Our group apparently has a deal with a local business bank to secure the loan with the ability to pay off the debt within 3 years after buying-in. I do not know the exact details yet, and will certainly look at it closely before signing anything...

Thanks again...
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Re: Help a new investor with his finances/portfolio...

Postby Laura » Thu May 23, 2013 10:35 pm

I suggest selling your taxable investments and paying down your car loan. The REIT in your taxable account is a bad investment for the long term since it throws off a lot of taxable income. If your income is going up significantly in the next few years taking the hit and selling all this now is probably the best option for the long term.

I agree with rolling over every thing that you can to consolidate. I don't believe you can roll a 401a into a 403b so you may be stuck with that account. It could roll into an IRA if you want to give up the easy backdoor roth option. So, if you consolidate and remove your taxable account you could end up with (please correct my percentages):

33% his old 401a
14% his old 457
0% his backdoor roth
0% his new 401k
41% her combined 403bs
15% her old 401a
0% her backdoor roth

New Contributions
$17,500 his 401k (plus a 3% automatic “safe harbor” contribution)
$5,500 his backdoor Roth IRA
$5,500 her backdoor Roth IRA

You could do this:

his old 401a
15% Spartan Total Market Index
18% Spartan Total Intl Index

his old 457
14% Spartan US Bond

his backdoor roth
0% Vanguard Total Stock Market Index

his new 401k
0% Spartan Total Market
0% Spartan US Bond

her combined 403bs
41% Spartan Total Market

her old 401a
15% Spartan US Bond

her backdoor roth
0% Vanguard Total Intl Stock Market

New Contributions:

his Roth
$5.5k Vanguard Total Stock Market

his 401k
$12.2k Spartan Total Market
$7.8k Spartan US Bond

her Roth
$5.5k Vanguard Total Intl Stock Market

I assumed you were adding about $20k total into the 401k. If that is not close then you should recalculate the new contributions.

You end up with a much less complicated portfolio that should be easy to manage going forward. You can shift things around again once you start taxable investing following payment of debt.

I hope this helps.

Laura
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Re: Help a new investor with his finances/portfolio...

Postby zebrafish » Thu May 23, 2013 10:52 pm

I think you're very deeply in debt, and in the next few years you plan on sinking yourself even further in the hole. I would focus very much on paying down debt as fast as possible.

I'm a physician, and I've been where you are. I made the decision to sacrifice and pay down debt. I sleep better at night and do not regret making this choice at all.
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Re: Help a new investor with his finances/portfolio...

Postby rainyday1 » Fri May 24, 2013 4:25 am

Have you considered how long it will take you to net enough to pay down all this debt? As zebrafish pointed out, you are very deeply in debt, to the point where I was shocked to see you were even considering an additional 1.2 million! Currently, you owe 743K. I don't see your income here, but you list your tax bracket as 33%. I sincerely hope this year your tax bracket will be 39% because you need to be in the top bracket to clean this mess up in a reasonable amount of time. So consider 39% + 5% (state tax) + property taxes + car taxes etc. You will have to gross 1.5 million just to pay the principal on your current debt. That's not including anything else. It sounds like you are enjoying the doctor lifestyle, so don't underestimate how much that costs to maintain - especially when the kids get a bit older.

If you took on the additional debt, then you're looking at having to gross 4 million just for the principal alone. If you're making a million dollars a year, then maybe it's fine. But I can tell you a million a year doesn't go as far as you might think after tax and retirement, especially when you think of your other costs to maintain the doctor lifestyle. Clean up the mess you have now and then think about buying in to the practice.

I see that you have already dismissed others' advice to pay down your current debt, so take this for what it's worth. It takes much longer than you think to accumulate that kind of money after tax! Perhaps you plan to work forever or think you will love your job so much that you might want to work forever. The wonderful thing about having no debt is that you can build up an investment portfolio that will buy you freedom. You may get to a point where you would like to work a few less hours and see your kids more. With no debt, you can use a significant portion of your salary to create a passive income stream for yourself. If you're constantly making debt payments, you never do much but tread water and pray that someone will want to buy you out when you're ready to retire.

Like I said, take it for what it's worth. I'm ultra-conservative when it comes to saving and spending but we sure sleep well at night and have no worries for retirement or our kids' educations.
rainyday1
 
Posts: 64
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Location: Hong Kong

Re: Help a new investor with his finances/portfolio...

Postby Wesley » Sat May 25, 2013 3:51 pm

Thank you all for your responses… I do appreciate all the input and truly am taking it to heart.

Thank being said, I am a bit confused with some of the comments and maybe you can help me clarify and learn…

Yes, I do have a large amount of debt already:
Car - $17,000 now at 3.25%
Two Medical School Loans - $140,000 now (some fixed at 2.625%, some variable at 2.75%)
Mortgage - ~$580,000 at 5.625%

Looking at the bottom line, it is a lot, but the only real “bad” debt I see is my car, which I hope to have paid off in the next 2-3 months.

With respect to my medical school loans, that was inevitable. I had to take out loans to cover my education and like 86% of graduating medical students in 2012 (https://www.aamc.org/download/152968/data), I graduated with a lot of debt. I made the mistake (in the past) of deferring my loan repayments while in residency, but have been trying to pay them down since I finished residency. The average debt for the graduating medical student in 2012 was $166,750 – this is the reality of medical training these days. I have not paid them off faster due to the simple reason that their interest rates are low.

And my mortgage – I probably should not have bought such an expensive house with 0% down, but I did. I am trying to refinance to decrease my debt and improve my cash flow.

Rainyday1 and Zebrafish – I have and am not dismissing others advice to pay down my debt. In fact quite the opposite. That is what brought me to this website and your forums… I am looking for advice. According to the Boglehead website, maybe I should not be paying down my student loans yet given their low interest rates (http://www.bogleheads.org/wiki/Paying_d ... _investing) – this website suggests that I should invest in my 401k and backdoor Roth IRA before paying down my loans. That is why I am here – to get the opinions of how to do this from people that know more about finance than me. And, by your comments, am I to assume you feel that I should have my mortgage paid off before accepting a partnership in my group and buying-in? Large buy-in’s are a reality for a number of subspecialties – I will be buying into my share of both hard and soft assets and will reap the benefits immediately. In fact, the past few partners were able to pay off the entire buy-in within 3 years due to their increase in salary. While I do have a nice house (not outrageous), I am living below my means otherwise and applying any surplus of money to emergency funds, paying off bad debt (cars), and then deciding on paying off student loans vs mortgage vs investing. I could have my car and student loans paid off within 2 years when I have to make a decision about partnership (which will triple my income), with only a mortgage remaining – but should I? Should I put money towards loans that have an interest rate of 2.625 – 2.75%? And I cannot see paying off my mortgage before investing in my career.

Maybe I am missing something… maybe I am wrong… please, help me learn.
Wesley
 
Posts: 16
Joined: Sun Dec 09, 2012 11:08 am

Re: Help a new investor with his finances/portfolio...

Postby rainyday1 » Sat May 25, 2013 5:51 pm

The problem with good debt is that you still have to pay it back. So in my mind, there is no distinction between good and bad debt. You have gone out and created a lot of overhead right off the bat. It's very difficult to win with money if you have an insane amount of overhead. You still don't say your income, but I assume it's somewhere in the mid-six figures? We have been earning this level of income for about a decade, and we have saved probably 60 - 85% of it. Even with that level of saving, the portfolio does not accumulate as fast as you would think! I can't imagine we would have much of a portfolio if we had taken on tons of debt right at the beginning.

Debt also creates risk. What if something happens to you? Your wife would be deeply in debt without your income anymore. She would be left with nothing - unless you carry a very significant life insurance policy (even more than you should have now).

The other problem I see is that you are getting a late start. Others have had a 15-year head start on you. Doctors don't get paid enough for all the time they have to spend out of the workforce training! If you drag out your debt repayment, you look up and you're 50+ with retirement and college approaching at the same time. Suddenly, with two colleges to fund, savings goes on the back burner again.

Listen, I'm not a doctor, so I will let the other docs speak to the partnership stuff. I just hate to see doctors get tangled up in messes like this because you work so hard for so long to get to be a doctor. I'm one of the few who believes docs do not get paid nearly enough for all the sacrifices they have to make. Your overhead is starting to spiral out of control. I agree with Calm Man - what you do in your portfolio really doesn't matter when the amount pales dramatically in comparison to your debt. You talk about how easy it is to pay back the partnership debt. Well, then start practicing now, get focused and pay off this debt you have. More income won't necessarily make it easier for you to pay back more... you'll find it's very easy to "treat yourself" to things once you're making so much more unless you have a lot of discipline.

Do I think you should wait until your mortgage is paid off to take on more debt? Well, that would be ideal, but I would at least have it paid down significantly and refinanced into one without an insanely high rate.
rainyday1
 
Posts: 64
Joined: Thu Jan 28, 2010 10:22 am
Location: Hong Kong

Re: Help a new investor with his finances/portfolio...

Postby Laura » Sat May 25, 2013 6:19 pm

I agree with rainyday that your debt is very worrisome. You are one injury away from putting your family into bankruptcy if you don't have disability insurance and life insurance to cover all of these debts. Taking on more is an extremely risky gamble for your family's future. That said, buying into the practice may make sense long term so in the meantime you need to get rid of as much current debt as you possibly can. Pay off your car loan and as much of the mortgage as possible. To be honest, I would even consider selling that house to get out from under that kind of debt so that you take on the $1.5 million in debt to buy into the practice which will apparently significantly increase your income. Take on that debt with no other debt. If you really can pay back that business loan in 3 years, great, do it. Then, once you have all of that under control, save 20% for the down payment on another house and buy it and focus on your investing. You can continue to contribute to your retirement accounts because once that tax advantaged space is gone you can't get it back but other than that it should be radical debt reduction all the way.

I realize that selling the house is a radical solution and that you would need to pay rent but you probably need to continue living like a student for several more years and keeping expenses low until you can get out from under what could be $2 million in debt very soon. That means reducing your living expenses which will require the buy in from your wife.

Your investment portfolio is a function of your overall financial situation and right now your net worth is negative and looks like it will just go more negative in the next few years. We are encouraging you to get that net worth to a positive number before taking on more business debt. It is only once all that debt is gone that you will be able to start building positive net worth. Hopefully that positive number will grow rapidly if you have a very large paycheck. It also sounds like your income should be high enough to start saving for college for your children once all this other debt is gone.

You and your wife have some decisions to make based on your family priorities. Either way, make sure you have sufficient disability insurance and life insurance in place to cover whatever decisions you make.

Laura
Laura
 
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