Just joined the workforce with $400k in student debt: can you review my financial plan?

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Topic Author
newdocMD
Posts: 5
Joined: Sun Jul 01, 2018 12:07 am

Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by newdocMD »

Hi all, thank you in advance for your help, I am grateful.

I am a 30 y/o single person who finished med school one year ago and have finished my first of 3 years of residency (post-med school training in which I'm paid 54k). I'm living extremely frugally and attempting to put money in the right places. Regarding my loans: because in tax year 2017 I made $25,000 (bc I started work in July), the govt has just assigned me $0/month payments over the next 12 months for the loans, at the end of which the govt will pay off half of the interest that has accrued. So, every dollar I pay into my loans over the next year reduces govt money paid to my loans.

I have saved $14k over the last year, it's all in 5% APY Insight card accounts that are all being closed on 7/1/2018. I want to put all but 3k ('rainy day') somewhere. The big catch with what I put into investments now and throughout this year is that in 24 months I'll have a 300k salary and will no longer have govt paying half of my loan interest - it'll be most important for me to sell non-retirement investments and pay the $400k off in two years.

My thought is to put my money into SWPPX - Schwab's S&P 500 index fund (expense ratio .03%). I'm confused as to whether an index fund or an ETF is a better option for me, the ETF I would choose being Vanguard's VOO. I probably want the one with the best tax implications for liquidating in two years, but please tell me your thoughts.

Otherwise, I am maxing out my HSA ($3,450), I have a ROTH 403b to which I'm currently on track to put in $5000 but should probably increase that. The HSA is invested in Vanguard mutual funds and the 403b in TIAA target date funds.

Any thoughts on what I should be doing with my 14k and any other money I save in the next couple years while I earn ~$56k and the govt pays half of the 25k accumulating annually on my student loans? Any thoughts on what I'm doing retirement-wise?
Xrayman69
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Joined: Fri Jun 01, 2018 8:52 pm

Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by Xrayman69 »

Presumably you now starting a 3 year fellowship thus the continued deferrment.

What is the current interest rate? and is it fixed?

Presume no credit card or other debt given your engaged knowledge of your financial current state.

Is it likely/possible that you can earn more on the investment side than the long term debt interest side?

Currently you are in a very very very low tax bracket compared to near term future bracket. Investing in tax efficient retirement is highest on the typical investment order given the immediate and real direct tax benefits to your paycheck. A few hundred dollars to a person in medical training today has real quality of life benefits as opposed to a few hundred dollars later in your high income earning potential years (let’s say 15 years from now).

When you finish training and are in the regular work force are you the type that will have taken your first job then change jobs because it was not what you thought it was described and now need to move to a different city and move your home or are you going “home”to a practice that you know the ins and outs (your parents practice, uncle or aunts practice, a small town where the hospital already has a contract etc)

If your job is likely to be long term then you can consider coalescing your school debt into a private debt along with a home mortgage to be able to convert some bad debt into “good debt” that has tax advantages. Home mortgage interest is deductible up to 10K annually where as your school debt when making a high salary is not.


I know it’s hard to look at that 400k number and not pay it down, but in current interest rate environment it remains very low compared to years past in which school interest rates as high as 8-10% were not uncommon.

Compound interest with your retirement is powerful particularly when started early. You will NEVER be able to start earlier than NOW. You will be able to write and pay off large chunks of the school debt once completed.

Best advice years 1-3 after you finish training live like you did with minimal creep in your lifestyle compared to residency or fellowship years. Write checks for 20-30K off the school loan biannually while maximizing your retirement and tax efficient contributions from day one. After 3years your school debt now doesn’t look so much like Mount Everest and your retirement is well on its way towards it.
hightower
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by hightower »

I would probably open a Roth IRA and put the max into that each year (5500). Any additional funds left over I would just hold on to as a form of an EF (which it sounds like you want to do anyway with the 3k). That will give you a head start when you start working as an attending and are ready to finally start tackling the big student debt.
Part of me says to throw the extra money at the loans to avoid interest accumulation, but with the government subsidy it's not quite as urgent, plus 14k won't make much of a dent on 400k. Though you will still be adding 25k of debt to your plate over the next 2 years even with the subsidy. It's not an easy decision, but the more important thing is ensuring you really go after those loans as soon as you start making the big bucks. Most importantly, don't upgrade your resident lifestyle until the loans are gone or close to gone. It sounds like you have your head on straight, so I'm sure you'll be just fine
ralph124cf
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by ralph124cf »

Low earning/low tax years make ROTH particularly attractive.

Ralph
Topic Author
newdocMD
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Joined: Sun Jul 01, 2018 12:07 am

Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by newdocMD »

Thanks for the reply. My interest rate on the student loans is 6.125% and fixed. For making zero dollar payments, half of the interest, is waived, so it has an effective rate of 3.0625%. Only other debt is a car loan, 11k left, at 1.49%. Making the minimum payments there of course.

Many are talking about the importance of tax free accounts. It should be noted I am putting $5,000 into the ROTH 403b. The 403b has a max annual contribution of $26,000, which is way more than I can afford. Do you recommend I put all the money I can into this ROTH retirement account? Or is there a split I should do that involves me keeping some money out of retirement accounts and in non-tax advantaged accounts? Maybe, because the principle in the ROTH 403b is something I can withdraw at any time, I should definitely put everything I have in there, and then withdraw principle to pay student loans when I have to.

I thought to invest in non-tax-advantaged accounts with the presumption that my 400k in student loans, with 6% interest, will be something to throw everything at when I start to have to pay it, since I'm unsure of how 'guaranteed' making > 6% is in the market.

If my strategy would be to continue to make minimum payments for my student loans based on my 300k income and let 6% interest accumulate over a period of 10 years, I can put all my money in tax-advantaged accounts now if you advise.

It seems that the first question here is how much to invest in 403b (or should I open an IRA, or is that redundant/no difference?). And the second question is what to do with any money you'd have me invest in non-tax-advantaged accounts.
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White Coat Investor
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by White Coat Investor »

newdocMD wrote: Sun Jul 01, 2018 9:41 am Hi all, thank you in advance for your help, I am grateful.

I am a 30 y/o single person who finished med school one year ago and have finished my first of 3 years of residency (post-med school training in which I'm paid 54k). I'm living extremely frugally and attempting to put money in the right places. Regarding my loans: because in tax year 2017 I made $25,000 (bc I started work in July), the govt has just assigned me $0/month payments over the next 12 months for the loans, at the end of which the govt will pay off half of the interest that has accrued. So, every dollar I pay into my loans over the next year reduces govt money paid to my loans.

I have saved $14k over the last year, it's all in 5% APY Insight card accounts that are all being closed on 7/1/2018. I want to put all but 3k ('rainy day') somewhere. The big catch with what I put into investments now and throughout this year is that in 24 months I'll have a 300k salary and will no longer have govt paying half of my loan interest - it'll be most important for me to sell non-retirement investments and pay the $400k off in two years.

My thought is to put my money into SWPPX - Schwab's S&P 500 index fund (expense ratio .03%). I'm confused as to whether an index fund or an ETF is a better option for me, the ETF I would choose being Vanguard's VOO. I probably want the one with the best tax implications for liquidating in two years, but please tell me your thoughts.

Otherwise, I am maxing out my HSA ($3,450), I have a ROTH 403b to which I'm currently on track to put in $5000 but should probably increase that. The HSA is invested in Vanguard mutual funds and the 403b in TIAA target date funds.

Any thoughts on what I should be doing with my 14k and any other money I save in the next couple years while I earn ~$56k and the govt pays half of the 25k accumulating annually on my student loans? Any thoughts on what I'm doing retirement-wise?
Welcome to the forum. The fund is fine, but I prefer the Total Stock Market Fund to the 500 index fund due to more diversification. Is there some reason you're not funding a Roth IRA?

Are you planning to pay off your loans or go for PSLF? If pay them off, compare a refinanced rate to the effective rate under REPAYE and take the lower one. You can then put additional money there. If you're not sure about PSLF, stick with REPAYE until you are sure.
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
Topic Author
newdocMD
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Joined: Sun Jul 01, 2018 12:07 am

Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by newdocMD »

WCI,

Thanks for your response - I'm looking at your book on my bookshelf right now.

I'm being asked about my lack of a ROTH IRA a lot. Big question: is that not the same vehicle essentially as my employer's ROTH 403b?

Should I open a ROTH IRA and fund that as well as the 403b?

The question of PSLF depends on whether I find my sweet high-paying gig at a hospital that employs its own ER docs or a hospital that's employing me through a private sector physician staffing company. I believe the vast majority of ED jobs are of the latter variety at this time.
Storamin
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by Storamin »

Welcome!

You are in a very low tax bracket right now - take advantage of this. Due to the government covering part of your interest I would put all of what you can into the Roth 403b up until the limit. You state a contribution limit of 26k - how did you figure that out? - I thought it was 18K? Please do not take money out of the Roth 403b to make debt payments!

Funding your HSA to max is also a fine idea, but this is because it's triple tax advantaged. I would not use any other tax deferred saving vehicles because you will probably always be in a very high tax bracket and will fund tax deferred IRAs then.

After that, put your savings into the Taxable brokerage account as you describe. Keep this in taxable and I would NOT sell them off to pay off debt - just invest them for the future. If there is a chance for you sell these and qualify for LT capital gains BEFORE you start making 300k and hit a high tax bracket, that could be an idea. This could even be something like Vanguard Target Retirement 2050, or a simple 3/4 fund portfolio.

Pay off Debt or Invest into Retirement is a question that no one can answer for you - you need to answer this question yourself. You need to determine what your average earnings on Retirement portfolio is in comparison to your average savings from paying down debt. If the investment return from your portfolio > interest rate, invest. If the investment return from your portfolio < interest rate, pay down debt. Some people hate debt, others like it. I personally paid off my MBA loans very fast because I wanted to. Why pay off the $400k debt in two years? Why not pay it off in 10 years? 6% interest is getting up there... but on average your return with 80 stock/20 bonds would still be higher over the LT.
CrazyCatLady
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by CrazyCatLady »

newdocMD wrote: Sun Jul 01, 2018 10:56 am I thought to invest in non-tax-advantaged accounts with the presumption that my 400k in student loans, with 6% interest, will be something to throw everything at when I start to have to pay it, since I'm unsure of how 'guaranteed' making > 6% is in the market.

If my strategy would be to continue to make minimum payments for my student loans based on my 300k income and let 6% interest accumulate over a period of 10 years, I can put all my money in tax-advantaged accounts now if you advise.
I would think long and hard before you decide to only make minimum payments on your loans. I graduated 20 years ago with a smaller balance ($250k) but higher interest (8.25% federal, variable private). By the time I started repayment, capitalized interest added another $50k to my balance. They didn't have PLSF back then and once you consolidated (which I did to get 35 years to repay), refi was no longer an option. I was content to pay the minimum until about 4 years ago when I woke up with a $235k balance and realized I needed to get rid of my loans (which will happen the end of this year). I know it's a different situation, my degree is not medical and I will never make the salary doctors make, but if I had it to do over again, there is no way I would have only paid the minimum on my loans. I say don't make the same mistake I did and instead pay them off as soon as you can once the government stops paying the interest. It's amazing what a relief it is to watch that balance get close to zero. Don't ignore contributing to your 401(k)/IRA, but I would throw all extra money after that at your loans.

It seems that the first question here is how much to invest in 403b (or should I open an IRA, or is that redundant/no difference?). And the second question is what to do with any money you'd have me invest in non-tax-advantaged accounts.
It would probably be smart to do both your 403b and a Roth IRA while your income is low. You'll probably never again be in such a low bracket, and you have a long time to let that money grow tax free.
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Nate79
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by Nate79 »

Congrats on wanting to pay off the debt fast once you get the high paying job. Many people are forecasting return for stocks around the interest rate of your loans so it makes sense to pay off the debt. It's a risk free return that you can't get anywhere else.

For now extra money I would make sure I had a very very healthy emergency fund and any extra put in a Roth IRA. Roth IRA will grow tax free and your contributions can be withdrawn penalty and tax free. I would invest in total stock market in the Roth IRA.
Saving$
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by Saving$ »

1. Put as much as possible into any type of Roth you can while your income is low. That means if loans are deferred keep them deferred, keep paying min on car loan, live like a pauper, etc. You will never in your life be able to recapture any lost Roth "space" so take it now, especially because your income is low. If you can't use all of your work 403b + personal Roth IRA space, then use as much as possible and you are done.
2. When you get a $300k income in 3 years, keep living like a pauper, and also come back here for advice on priority of paying off loans vs. Roth vs. traditional 401k/IRA. The tax landscape is likely to have changed by then. If the $300k starts in the middle of a year, it will be particularly important to carefully plan that year. The first full year of the $300k max out your tax deferred retirement (401k, reg backdoor Roth) and HSA, and throw everything else to the student loans. You might be able to pay it all off within 2.5 or 3 years, and then you can start living like a doctor...
paramedic
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by paramedic »

I am not addressing the bulk of your question, but I noticed that you are being impacted by the 7/1/2018 Insight shutdown.

If I may suggest a couple of options for temporary usage:

Mango Prepaid (6% APY, up to 5k)
Consumer’s Credit Union (4.59% APY, up to 20k)

Good luck.
megabad
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by megabad »

newdocMD wrote: Sun Jul 01, 2018 10:56 am Maybe, because the principle in the ROTH 403b is something I can withdraw at any time, I should definitely put everything I have in there, and then withdraw principle to pay student loans when I have to.

My thoughts exactly. Well, technically you may need to rollover to an IRA first and there may be a 5 year waiting period (you should start a ROTH IRA if you haven't), but you shouldn't need to touch it anyway. By my quick calculations, you will soon have over $150k a year in excess income to throw at the loans so I don't think you will need to touch retirement savings.

I thought to invest in non-tax-advantaged accounts with the presumption that my 400k in student loans, with 6% interest, will be something to throw everything at when I start to have to pay it, since I'm unsure of how 'guaranteed' making > 6% is in the market.

If my strategy would be to continue to make minimum payments for my student loans based on my 300k income and let 6% interest accumulate over a period of 10 years, I can put all my money in tax-advantaged accounts now if you advise.

It seems that the first question here is how much to invest in 403b (or should I open an IRA, or is that redundant/no difference?). And the second question is what to do with any money you'd have me invest in non-tax-advantaged accounts.

When comparing investments to your "guaranteed" 6%, I would use after tax calculations. I would suggest that for you, your tax drag would be something like 45% (excluding capital gains/dividends) once you get settled in your career. I would compare this to your current marginal tax rate (likely less than 20%). You can never get back your annual IRA/403b opportunity for investment and tax savings. Of course, excessive fees on 403b can affect your total return as well (another reason to potentially prefer a ROTH IRA)..
2015
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by 2015 »

Have you perused the blog on whitecoatinvester.com? I subscribe to virtually nothing related to the financial aspect of investing, personal finance, and economics anymore. One of the very few exceptions is TWCI blog. Even though a lot of what's posted there doesn't apply to me because I'm not in medicine, the blog stands out as it's quite straightforward in nature.

https://www.whitecoatinvestor.com/classic-blog/
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neurosphere
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Re: Just joined the workforce with $400k in student debt: can you review my financial plan?

Post by neurosphere »

newdocMD wrote: Sun Jul 01, 2018 11:08 am WCI,

Thanks for your response - I'm looking at your book on my bookshelf right now.

I'm being asked about my lack of a ROTH IRA a lot. Big question: is that not the same vehicle essentially as my employer's ROTH 403b?

Should I open a ROTH IRA and fund that as well as the 403b?

The question of PSLF depends on whether I find my sweet high-paying gig at a hospital that employs its own ER docs or a hospital that's employing me through a private sector physician staffing company. I believe the vast majority of ED jobs are of the latter variety at this time.
I've only skimmed your post and this thread.

But...

If you have any chance for PSLF, deductible 403 contributions earn you a 10% match (at the time you get PSLF). So most folks with a reasonable chance for PSLF should opt for deductible contributions.

If for some reason you feel Roth-type contributions are for you, I would prioritize Roth IRA contributions over Roth 403b contributions because Roth IRA contributions can be withdrawn at any time for any reason without tax or penalty. So there is some overlap with a Roth IRA and an emergency fund. If you fill up a Roth IRA, then you can consider Roth 403b contributions. Again,this is only if for some reason you don't think that PSLF is something that's a reasonable chance for you (because otherwise you should certainly do deductible employer account contributions).

NS
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
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