Advice on loans vs. investing for two married physicians?

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Advice on loans vs. investing for two married physicians?

Postby will34 » Wed May 22, 2013 2:07 am

Hi all, I am brand new to the forum. I must say that I have learned a lot reading the forum over the past few hours, but mostly I have learned that I have a lot to learn. Long story short, my wife and I are finishing medical residency (both late 20's) and were approached by a financial adviser. While the financial adviser opened my eyes to some of the investment possibilities available, I wondered if I needed to pay someone such a large fee to manage our money. Ultimately, with the help of a financially savvy friend, that led me to Bogleheads. I'm looking for any advice or opinions on our best financial strategy over the next year. Specifically, investing vs. loan repayment. 401(k) vs. IRA, etc.

1. Late 20's married couple, both physicians
2. $240k student loan debt at 6.8%
3. $12k each in 403(b) from residency, invested in Vanguard 2045 target retirement
4. Working as independent contractors next year, approximate combined gross earnings ~$500-600k

Initially I thought that paying off loans as quickly as possible would be most beneficial; but after learning about the solo 401k plan, I am wondering if we would be better off maxing a 401k and then paying off loans with the remainder. Thanks in advance for any advice / tips!
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Re: Advice on loans vs. investing for two married physicians

Postby ogd » Wed May 22, 2013 12:27 pm

The loans are very high interest, at 6.8%. If you can't refinance them into lower interest, then it's worth paying them off first. That interest is hard to beat in today's market, even in tax-advantaged accounts, e.g. Jack Bogle's estimates for equity returns over the next 10 years are 7%-ish. And that's a volatile 100% stock portfolio; paying off the loan gives you that "return" with no volatility.

What gave me pause for a bit is that in your income range you generally bump against 401k contribution limits on a regular basis, so it's sometimes worth it to take a little hit from the loan interest in order to not waste a few years' allowed contributions (tax-advantage space is precious). But in your situation, the Solo allows pretty high limits, so I'd say don't worry about it. Or maybe stash a little bit to get used to investing before you start committing serious cash.

Whatever you do, don't get an expensive advisor. They'll cost you an arm and a leg and they won't earn it by any means. I usually recommend the "advisor lite" financial planning that Vanguard offers, or if you must a reputable fee-only advisor.
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Re: Advice on loans vs. investing for two married physicians

Postby Grt2bOutdoors » Wed May 22, 2013 12:32 pm

Check out - whitecoatinvestor blog written by one of the posters on the forum EmergDoc.
Avoid buying Whole Life Insurance or Annuities.
Take this advice from Dr. Bernstein - Your broker is not your buddy.

If you can read medical books, you can pretty much manage your own money and save the expense and hassle of having to pay for someone else's vacation to Tahiti (the broker) or his nice new Land Rover.
Last edited by Grt2bOutdoors on Wed May 22, 2013 12:43 pm, edited 1 time in total.
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Re: Advice on loans vs. investing for two married physicians

Postby EmergDoc » Wed May 22, 2013 12:35 pm

Be sure to thank you friend. He has done you a tremendous service.

This article may help. I wrote it with people like you in mind:

http://whitecoatinvestor.com/student-lo ... investing/
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: Advice on loans vs. investing for two married physicians

Postby IlliniDave » Wed May 22, 2013 12:39 pm

I'd be inclined to max out the 401(k) then after that make my top financial priority paying the loans off. With the income you stated you should be able to hit the loans pretty hard even after the retirement investment. It may delay ramping up the lifestyle for a short time, but now that you've completed your educations, the debt is doing nothing for you but creating a financial drag. And yes, I'm one of those people who just hate debt. :)
Don't do something. Just stand there!
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Re: Advice on loans vs. investing for two married physicians

Postby BolderBoy » Wed May 22, 2013 12:43 pm

Don't let the advisor get his hooks into you!

Set up and FULLY fund the solo 401k plans every year BEFORE tackling the loans. The 401k contribution opportunities are lost once the contribution year is past.

Welcome and do thank your friend for point you to this site.
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Re: Advice on loans vs. investing for two married physicians

Postby will34 » Thu May 23, 2013 6:46 pm

Thank you to all for your advice. It seems as though opinion is somewhat split between paying off the loans as quickly as possible and fully funding a 401k first and paying off loans with the remainder. I am taking that to mean that the two options are likely fairly equal.

Emergdoc, the friend of mine who pointed me toward Bogleheads also pointed me toward whitecoatinvestor.com . Since then, I have been reading the blog extensively for investing and insurance tips. Thanks for the great resource.

My current plan is to open 401k's, fund them as much as possible, and pay the student loans after. We will definitely still be living the "resident lifestyle", and most of our cost of living expenses (housing & auto) will be covered by agencies, so hopefully we will have a decent amount of cash left over to pay loans. I'm planning to use Vanguard for our 401k's, especially since we already use them for our 403b's. I am going to need to research asset allocation, as all we have been doing is choosing the Target retirement 2045 fund because it sounded like the right thing for our age. Are these Target Retirement funds considered to be good ideas? I'm going to read The Boglehead's Guide to Investing on vacation next week, which I'm hoping will help!

Thanks again for all the help.
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Re: Advice on loans vs. investing for two married physicians

Postby Laura » Thu May 23, 2013 9:15 pm

The Target Retirement funds are an excellent choice so I wouldn't hesitate to use them. The question of which one depends on your risk tolerance level more than anything else. The 2045 fund has an asset allocation close to 90/10 which means you could expect a very large drop in the value if the market drops. If you can tolerate that then go ahead. If you want something slightly more conservative the 2035 is at 85/15.

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Re: Advice on loans vs. investing for two married physicians

Postby Toons » Thu May 23, 2013 9:28 pm

"I wondered if I needed to pay someone such a large fee to manage our money"
Unequivocally No.
Study the WhiteCoatinvestor web site that was posted by EmergDoc,a wealth of information and knowledge that should help save you thousands over your investing life by NOT paying an advisor to manage your money. :happy .
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: Advice on loans vs. investing for two married physicians

Postby mnvalue » Fri May 24, 2013 1:02 am

Your combined income next year is double your loan balance. Max out the 401k this year first. You'll be able to pay off the loan in full next year, max out the 401k next year, and still have money to spare.
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Re: Advice on loans vs. investing for two married physicians

Postby awval999 » Fri May 24, 2013 1:10 am

mnvalue wrote:Your combined income next year is double your loan balance. Max out the 401k this year first. You'll be able to pay off the loan in full next year, max out the 401k next year, and still have money to spare.


Well... no. They will have to pay taxes. $500k = $250k after taxes and $17,500K x2 into the 403b/401ks. I'd probably live on the $125k, treat yourself to a well deserved "I made it" vacation, and use the other $125k to pay off the loans. I'd pay off the loans over 2 years. Then boom. You are free. Choose to live the lifestyle you want after that.
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