Portfolio Review before Medical School

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Portfolio Review before Medical School

Postby medstudent12 » Wed May 22, 2013 6:43 pm

I am married and will be starting medical school this fall. As I will not have a ton of extra time over the next few years, I am trying to get everything in order now, as well as learn a bit regarding investing. Just wanted to check to see if you all had any recommendations/suggestions regarding our portfolio and future plans.

Emergency funds: Yes
Debt: Single credit card with balance paid in full every month.
Will be taking out educational loans this fall: Projected to be $42,722 @ 6.8% and $22,404 @ 7.8%. Rinse and repeat three more times for four years total. Interest will accrue but not capitalize until after medical school ends in four years.
Tax Filing Status: Married Filing Jointly
Tax Rate: 15% Federal, 0% State (Federal tax rate will likely decrease over the next four years, State rate will change after moving to new state)
Age: 21
Desired Asset allocation: 90% stocks / 10% bonds (but see below)
Desired International allocation: 15-25% of stocks

Current retirement assets

NOTE: Percentages in [brackets] indicate percentage of overall portfolio, percentages in (parentheses) indicate percentage with respect to the individual account. See below for further information.

Her Roth IRA at Vanguard - ~$14,000
(Currently at Primerica in loaded funds with high ERs; in the process of transferring)
[40%] (100%) Vanguard Target Retirement 2055 Fund (VFFVX) (0.18%)
Note: This is currently allocated into [25%) (62.8%) Total Stock Market, [~11%] (27.1%) Total International, and [~0.04%] (10.1%) Total Bond II.

Her 401k at Fidelity
- ~$13,500
(Once she leaves her current job for the move, will likely transfer to IRA at Vanguard and then convert to the above Roth. See below for further information.)
[20%] (50%) Dodge & Cox Stock (DODGX) (0.52%) – Large cap blend (with value tilt?)
[20%] (50%) Fidelity Low-Priced Stock (FLPSX) (0.88%) – Mid cap value

Projected Allocation for Taxable Account at Vanguard - ~$7,000
(Note: See Question 3 for further information.)

[0.03%] (15%) Vanguard S&P 500 Value ETF (VOOV) (0.15%)
[0.03%] (15%) Vanguard S&P 500 Growth ETF (VOOG) (0.15%)
[0.03%] (15%) Vanguard Extended Market ETF (VXF) (0.14%)
[0.03%] (15%) Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) (0.25%)
[0.04%] (20%) Vanguard Total Bond Market ETF (BND) (0.10%)
[0.04%] (20%) Vanguard Short-Term Corporate Bond ETF (VCSH) (0.12%) for a slight tilt towards shorter-term bonds, given likelihood of rising interest rates in the next few years.

Current Overall Portfolio AA:
74% Domestic Stocks
14% International Stocks
12% Bonds

Contributions
Not planning on contributing to Taxable Account during medical school.
RE: Her Roth – due to an unfortunate incident with Carpal Tunnel, we may be collecting long-term disability for five years for my wife. If that is the case, we will try to max out her Roth while in school each year. If not we will hold off and will begin maxing out at least one of our Roths during residency.

Questions:
1. Right now the accounts are a bit disjointed. My plan is to transfer her 401k into a Traditional IRA with Vanguard once she leaves work. We will likely be in an even lower tax bracket once I am actually in school, so at that point I will plan on converting those funds into her Roth IRA (the TR fund). Thoughts?

2. If I do that, that will essentially leave us with her Roth IRA (which will then have about $27,500 in it), which for simplicity’s sake I’m planning on leaving in the Vanguard TR fund until after residency. We’ll max out my Roth IRA (which will likely also just be in a TR fund at Vanguard) during residency, unless my program offers a matched 401k or 403b, in which case we’d prioritize that up to the match, then max out one Roth, and then use any extra funds to pay off loans (starting with the one @7.9%).

3. I’m sort of treating the taxable account as not necessarily part of the overall portfolio, though I included the relevant percentages above for completeness. I just sold her poorly performing single mutual fund with a high ER and load at Primerica. These funds are now sitting in the Vanguard Prime Money Market Fund [VMMX], but I am planning on splitting it into the AA listed above (unless you all have some better suggestions!). This account will mostly serve as a “playground” for me as I explore/learn more about investing while doubling as a relatively liquid moderate term savings account if absolutely needed in the event that we somehow exhaust our emergency fund (thus the 60/40 split – I can tolerate some risk with this account and want it to have some growth potential, but would like at least some of it to be “there” at all times). The general plan is to hold these funds over the long term, reviewing performance quarterly and rebalancing annually, trying to avoid selling funds unless 1) it has performed poorly for at least 2-3 years or 2) some other major change within the fund and 3) I’ve held it for at least one year (for tax purposes…not that that will really make much of a difference over the next four years. Better to get in the habit now, though, I suppose.

4. Immediately after residency, I would probably roll any 401k/403b funds into my Roth IRA while still in a relatively lower tax bracket. Once I’m an attending, I won’t be eligible for this (but could still potentially to backdoor contributions, if I so desired). For the first 3-4 years, I am currently planning on aggressively paying off the remaining loans (perhaps $50-80k/year), while perhaps contributing $5-8k towards investments. Given the newer high interest rates and high loan burden that I’ll have, I’d rather just get these taken care of ASAP. After they are paid off, I would be able to contribute around $50k/year towards investments. Ultimately, I’d like to be able to retire in my early- to mid-fifties and just continue working because I (hopefully) enjoy it for a few more years.

5. I feel that the Target Retirement funds are a good option during medical school and residency, since I will be busy doing other things. Once I have more time on my hands, though, I wouldn’t be opposed to switching things up a little bit if I feel that the TR AA at that time is no longer appropriate. For example, I don’t know if many of you are familiar with Sound Mind Investing, but it seems like they do well with their Fund Upgrading strategy (see performance here: http://www.soundmindinvesting.com/visit ... istory.htm). Or I’d just stick with index funds. Thoughts?

6. Also, I know bonds aren't the most tax-efficient vehicle for taxable accounts, but given the relatively small amount of money that will actually be located here, does it really matter all that much?

Sorry for the mega-post. Thanks in advance for any input.
medstudent12
 
Posts: 41
Joined: Wed May 22, 2013 6:39 pm

Re: Portfolio Review before Medical School

Postby Laura » Wed May 22, 2013 9:43 pm

medstudent,

Congratulations on being accepted to medical school and for looking at financial planning now rather than later. The key to your financial future is your education and the debt you are about to take on. That debt and those interest rates will hang over your financial future for years to come so you need to prioritize your efforts toward keeping that as low as possible. That will be far more important than any particular asset allocation over the next four years.

I agree with moving your wife's Roth and 401k in the Target Retirement fund at Vanguard. Just set it and leave it alone.

For the taxable money, I believe you are about to make a mistake. First, if you have $7k then you should borrow $7k less. If you want to keep it as a possible expansion of your emergency fund then none of it should be invested in stocks. You could lose 50% of that money if the market drops like it did just a few years ago. Why risk it when you can get a guaranteed 6.8% by avoiding taking on $7k more in debt. On the other hand, you also mentioned planning to make this a long term investment which means that you really don't want to hold tax inefficient investments like bonds in your taxable account. Your tax rate for the next few years will be pretty low so it won't make much difference in the short term but when your income goes up those won't be good choices.

On the other hand, you mention roths. Will you be earning income while in medical school or will that wait to the residency? Since it sounds like your wife has worked this year then I suggest you take $5.5k and put in a roth for her. You can also contribute $5.5k to a your IRA even if you don't have earned income yourself as long as she does. This is where you should put that $7k if you insist on not keeping it as part of your emergency fund. In a pinch you can withdraw your contributions to a roth but none of the earnings. This allows you to set up the long term investment you were talking about yet have flexibility. I suggest using a Target Retirement fund in your roth. You can even invest in a more conservative Target Retirement fund closer to the 60/40 you mention. If you don't need the money and start working then you can shift to a different, more aggressive, Target Retirement fund later without any cost or tax consequence.

Overall you are to be congratulated on focusing on this now. I suspect you will do very well in the future. One last point, in addition to debt, focus on the other insurance you need - disability insurance. If you lose your ability to practice medicine your income will be severely affected.

Laura
Laura
 
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Re: Portfolio Review before Medical School

Postby relentless » Wed May 22, 2013 10:19 pm

Assuming you will have Roth 403b in residency/fellowship I would not worry too much about acquiring Roth space as you can borrow extra your last couple years of training and get lots of Roth space then. That is more or less what I did in fellowship.

I would actually consider liquidating some or all of the 401k money after January spaced over several years if you are not going to have earned income. You will pay 10% penalty but potentially no tax if below standard deduction. That would greatly reduce your interest costs on the loans over the next 7-12 years. You are going to be taking on a LOT of debt.
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Re: Portfolio Review before Medical School

Postby medstudent12 » Fri May 24, 2013 4:16 pm

@ Laura: Thanks for your candid advice. I'll continue with the Roth IRA transfer from Primerica to the Vanguard TR fund, and when my wife quits her current job will bring her 401k into at least a traditional IRA at Vanguard. I'm thinking it might be best to wait until we're in a slightly lower (10%) tax bracket to make the conversion into the Vanguard Roth?

With regards to holding off on the taxable investments, I totally understand why that would be misguided at this point and will definitely hold off on that - we'll put that $7k to better use. As for disability insurance, the school offers a "mandatory" package. I'll know more details on this as I get a bit closer.

@relentless: What interest rates were you able to get on those loans? I don't know that I'd feel comfortable taking out more loans simply to invest, especially given the high loan burden I'll already have by that point. And with respect to the 401k, while I understand the need to manage our loan burden, I do want to strike somewhat of a balance between loans and the future. At this point, I'll probably continue with the plan to roll the 401k into her Roth, eventually, after she quits. But I'll certainly keep that in the back of my mind. :happy
medstudent12
 
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Joined: Wed May 22, 2013 6:39 pm

Re: Portfolio Review before Medical School

Postby relentless » Fri May 24, 2013 11:13 pm

medstudent12 wrote:What interest rates were you able to get on those loans?

7.25%.

medstudent12 wrote: I don't know that I'd feel comfortable taking out more loans simply to invest, especially given the high loan burden I'll already have by that point. And with respect to the 401k, while I understand the need to manage our loan burden, I do want to strike somewhat of a balance between loans and the future. At this point, I'll probably continue with the plan to roll the 401k into her Roth, eventually, after she quits. But I'll certainly keep that in the back of my mind. :happy


I would contend that taking out extra loans to allow you to invest is exactly what you are already planning to do by default in leaving the money in the 401k--just in a risker way. (Note: I am assuming that you and your wife will have no taxable income otherwise. Not sure how the disability insurance payments on your wife counts which depends on if you paid premiums pre-tax or post-tax)

Here is how I am looking at it: For each dollar you leave in the 401k, you are effectively borrowing 90 cents more than had you taken that dollar out and paid the 10% early withdrawal penalty and used for med school expenses. The relevant interest rate for comparisons is 7.8% which is your marginal cost of borrowing. So with simple interest, after 1 year that 90 cents would be 97 cents and after 2 years, $1.04. Then, after 7 years, you would have accrued 49 cents in interest for every dollar left in the 401k up front (actually more if you start compounding the interest earlier). Of course, there could be gains within the 401k to offset the interest cost but there could be losses to magnify the costs--who knows?

If as an alternative, you raid the accounts now then wait until the last 12 months of training, you can borrow enough to replenish those retirement accounts and then pay off in the first 6-12 months as an attending, paying perhaps 8 cents (or less) on the dollar in interest by paying off quickly. Of course when you get to your final year of training, you can always opt not to do this. With your current plan, you are committed up front.

I would also add that once you are an attending, you will likely be able to tax defer 50 K or so with profit sharing plans, etc.
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