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Month: February 2020

YFP 141: How to not wreck your marriage because of student loans

Posted on by yfpadmin


How to not wreck your marriage because of student loans

Steven Chung, tax attorney, joins Tim Ulbrich to discuss about a recent article he published titled ‘Student Loans Can Be the Homewrecker in A Marriage.’ Steven also talks about tax considerations as it relates to couples and why it’s so important to communicate this information.

About Today’s Guest

Steven Chung is a tax attorney in Los Angeles, California where he helps people with basic tax planning and the resolution of tax disputes. He also assists people manage their student loans. He also writes a weekly column on the influential legal news site Above The Law. Steven received his law degree from Whittier Law School and and LLM in Taxation with honors and high distinction from Loyola Law School in Los Angeles. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

Summary

Tax attorney Steven Chung discusses how to not wreck your marriage because of student loans with Tim Ulbrich.

He says that the relationships that often work out are the ones in which people fully disclose how much they owe and have a financial plan to pay it off or to pursue forgiveness. If the understanding or shared goals are there, carrying student loan debt shouldn’t affect whether a marriage stays together. On the other hand, Steven says that problems in marriages and relationships happen when the amount of student loan debt a person is carrying isn’t disclosed early enough in a relationship or if a couple has differences in how they want to pay off the debt, their spending habits or financial goals.

If a divorce does happen, there are some variables on what could happen to the loans. If a couple gets married and one person has a lot of loans and the other doesn’t but says that they will pay off the loans, it has to be determined if that was a gift or if the amount that person paid on the loans has to be paid back to them. If that isn’t the case, it’s possible that the loans could be split between both parties. Steven also mentions that if one person is getting a graduate degree during the marriage, the divorce court may say that those loans or tuition has to work collectively to pay it.

Steven also discusses community property states, tax planning with student loans, and what his outlook is on student loan forgiveness.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist. And I’m excited to have joining me tax attorney Steven Chung to talk about how student loans can impact a marriage and strategies that can be taken before and during marriage to mitigate the risks. Now, we’ve talked at length on this show about the student indebtedness pharmacy graduates are facing. And today we shift our focus to talking not about the amount or how to choose the best repayment option for your personal situation but rather, if you have a significant other, best practices for ensuring that you both are on the same page. Steven, welcome and thank you for taking time to come on to the Your Financial Pharmacist podcast.

Steven Chung: Oh, thanks for having me.

Tim Ulbrich: So you recently wrote an article, which we’ll link to in the show notes, and that article is titled “Student Loans Can Be the Home Wrecker in a Marriage.” And as I mentioned, we’ll link to that so our readers can learn more. And I’m going to use that article as the basis for our time together as I think it connects well with what many of our listeners may be facing, and that’s having lots of student loan debt and trying to figure out how to best navigate that if their significant other is in the picture. So for those listening that are not yet married that find themselves carrying student loan debt, what advice would you have for them in terms of how to best disclose or share this information with a future spouse? And why is this so important?

Steven Chung: Well, the thing is, I mean, student loans shouldn’t alone be a — shouldn’t prevent you from getting married. I mean, people come in — I mean, nowadays, a lot of people are coming in with student loan debts and unfortunately, some of them are quite large. But finances are an issue. But as long as both of you have the same financial goals and are willing — have a plan to pay it off one way or another, I mean, it should be doable. I think the problem becomes when No. 1, it’s not just — when the amount of loans is not disclosed early enough or if people just have — the potential spouses have basically incompatible financial habits, I mean, habits and goals. And that can be a problem.

Tim Ulbrich: Absolutely. And one way to wreck a honeymoon, right, is to disclose your student loan debt on a honeymoon. So we should be talking about this in advance, of course. And I think not only the amounts or do you have it but also philosophies around debt. We often talk about on this show that people view debt in different ways. And obviously, everyone has different competing priorities. And so how we’ve been raised and other variable can influence that, and I think so many conversations to be had among couples leading up to that point of becoming married. Now, I’ve seen a lot of data recently about student loans being a reason to delay starting a family. From your experience, do you think the same effect is being had regarding student loan debt impacting one’s decision to get married? Do you sense that for those that are coming out of school today and the debt load that they’re facing, that this is actually having an impact on their decision to get married?

Steven Chung: Oh, absolutely. A lot of people — they usually have two philosophies. One is that they feel guilty about having a large student loan, and they don’t want to burden their potential spouse and their kids. And they think they won’t be able to afford a nice house in a nice neighborhood to raise their kids properly. And the second group of people, they don’t want to get married — they want to marry someone who can either pay off the student loans for them or at least have the same philosophy on paying it off. And it seems like it’s become a problem, especially — it was more problematic during the Great Recession a couple years ago. But even now, the economy’s recovering, people are still kind of wondering about the potential recession and things like that. So it’s kind of making people feel a little — think deeper on financial analysis or some sort of background check, so to speak, on their potential spouse before tying the knot.

Tim Ulbrich: Steven, I was thinking before we recorded as I was preparing for this show, I could see specific situations that could cause difficulty between two individuals if there is not open communication. And three that come to mind — I’m sure there’s many others than three — but I could see a situation where one individual has a lot more debt than the other and a potential for resentment. So somebody that for whatever reason, maybe they don’t have debt through scholarships, parents helped pay for it, they worked, whatever, and somebody else has a lot of debt and potentially some resentment for that situation. Another situation I could see is just different feelings about the debt as I alluded to already and how to repay. You know, some, as we’ve talked about on the show, want to kind of go all in on debt repayment. Others want to take a slower approach with other priorities financially. And the third one I could see is whether or not parents are involved, you know, potentially cosigners or those that had family members directly loan them money. Do any one of these resonate with you more than the others in terms of experiences you’ve seen where this can cause some difficulties and resentment between two individuals?

Steven Chung: OK, definitely by far it is the philosophy on how people want to pay the student loans. There’s some people who want to pay off the debt as quickly as possible. And on the other end, someone just wants to be able to pay the bare minimum and pretty much have the YOLO attitude, You Only Live Once. Those two people, their relationship is probably not going to go anywhere. But usually, the ones that work it out are, like I said, the ones that have — I mean, they fully disclose how much they owe and knowing that, they have a financial plan to try to pay it off or a plan for loan forgiveness if that’s what they want to do and of course at the same time have a financial plan for retirement, buying a house, having children, that kind of thing. So as long as they have that kind of understanding and they’re OK with the spouse’s financial habits and have the same financial goals, whether or not one spouse has a lot more student debt than the other, it shouldn’t matter that much as long as they have some sort of plan to pay it off or to manage it. As for parents being involved or if they’re cosigners, I mean, it’s ultimately up to them. Some people have their parents cosign because they’d rather pay their parents back with interest rather than a bank. Also parents who are a third party might be more forgiving as opposed to a bank who will send collection agencies after them and impose collection fees and possibly sue them, ruin their credit. So there’s a variety of factors that determine whether parents should get involved. So I mean, there’s pros and cons either way, so to speak.

Tim Ulbrich: Yeah, and I think what you had said about, you know, couples working together with their goals is so important. And I think I don’t want that to get overlooked, something we talk often about on this show of why we think it’s so important that couples start with the goals and then of course they get into the budget and make sure they’re not looking at any one specific part of the financial plan in a silo. So you know, I’ll see this often where we may give a talk to a group of pharmacists or maybe a couple in the audience, they come up, and I can tell within 20 seconds if they have different philosophies on how to spend their money, you know, in terms of whether it be debt repayment or other parts of the plan. And I think if two people can agree on the goals and the shared vision, you know, debt repayment becomes a part of that and hopefully that mitigates any concerns or resentment might be there if there are different amounts of debt that people are carrying. Now, you mentioned in your article that for some married couples, as their joint income goes up, it might make sense for them to refinance their loans. Why is that the case?

Steven Chung: OK. Well, generally, what tends to happen is let’s just say a couple makes a lot more money, they were initially on an income-based repayment plan, paying the bare minimum, but it looks like based on their finances, assuming nothing goes wrong, they’ll probably pay it off within like six or seven years. It’s not going to make sense for them to continue paying on a income-based repayment plan for one reason or another, maybe the interest, maybe interest will increase too much and they probably won’t qualify for loan forgiveness. So basically, if they have a plan to pay it off within let’s say 5-10 years, I mean, they probably just want to refinance because of lower interest rates. So they’re basically saving money that way. So I mean, the only drawback is that if they go to a private bank, they don’t have a similar — they don’t have an income-based repayment program like the government does. And they certainly don’t have loan forgiveness programs. So that’s something to keep in mind. But yeah, it’s just really about paying less interest to the banks or to the lenders and their decision to refinance.

Tim Ulbrich: Yeah, and I’m glad you said some of those nuances that you may not get with a private company, obviously loan forgiveness, the potential for income-based repayment plan. And I know we’ve talked about before on the show, but I’ll reference our listeners to our refinance page information where they can learn more, YourFinancialPharmacist.com/refinance. What is it? Who’s it for? You know, what could be the potential savings? Pros and cons? And then we also have refinance offers there as well. Now, what’s your advice to those that are refinancing their loans where there may be a situation, whether that be the bank requests or better off, with both incomes included, where you have both spouses names that are on the loan or if one cosigns the other. What are some of the concerns that you have in that type of situation?

Steven Chung: OK, here’s the thing. If a bank does that, I would run. I mean, it’s just — I think the main drawback is you don’t want to burn your spouse with a loan. I mean, unless you’re absolutely sure that the loans can be paid off and the bank is offering a much lower interest rate, if there’s a cosigner, I mean, I would just run. I mean, there’s so many banks out there, there’s so many lenders out there. I mean, not a lot specialize in student loans, but there’s enough to make it competitive. But if a bank just says, ‘OK, well, we want your spouse to cosign or someone else to cosign,’ then run. I mean, I’d only do it if there’s like absolutely no other choice. It just doesn’t make sense. I mean, there’s so many red flags there.

Tim Ulbrich: And I think that’s a good reminder, Steven. What we have seen, as we’ve said before on this show, this is a $1.5 trillion market, student loans. So there is lots of competition out there in the market, and we often encourage our listeners go out there, shop around, do your homework. These companies I will say seem to becoming more and more aligned with how competitive their offers are, but I don’t think don’t fall into the trap of just one offer, one option. Now, your article brought up an issue that I honestly had not previously considered, which is for those that live in community property states, refinancing pre-marriage student loans during marriage could convert it into a community debt where each spouse will be liable for half of the debt. Can you first explain what it means to be a community property state? And then talk about the impact that this situation could have.

Steven Chung: OK, a community property state, which includes California and a few other states, it just means that anything acquired during a marriage is split 50-50 between each spouses, each spouse. So in the sense of refinancing, there is the potential that refinancing a loan could mean that a loan acquired before marriage turns into a community debt. For practical concerns, it doesn’t have that much of an impact if they stay married. I mean, they’re still going to pay their loans. It’s not going to — I mean, the banks will still go after a person on title, but ultimately, I think where it becomes an issue is when there is a divorce and when if the court will deem the loan a community loan and it might impact how the ex-spouses have to pay the community — the refinanced loan, whether the original spouse is liable in full or do both spouses have to pay 50%. So that’s probably going to be the issue in these type of things.

Tim Ulbrich: So let’s talk about that situation a little bit further with the very important disclaimer that we’re not here to provide legal advice and tax advice and every situation obviously can be different. We know we have people listening all over the country considering different state rules and nuances to each situation. But generally speaking, how does student debt get handled in a divorce situation in terms of shared liabilities? And what factors go into determining that?
Steven Chung: OK. Yeah, the thing is I’m not a family law attorney, so I’m not sure exactly how it works out in a divorce situation. And of course, 50 states have potentially 50 different rules, but the two nuances that kind of come up or at least — well, the big nuance where this might be an issue in a divorce is when, well, a couple gets married. One has no student loans and the other has a large amount of student loans. And then the first spouse offers to pay off the other spouse’s student loans. So in a divorce, what does that mean? Is that a gift to the other spouse? Or is it a loan that has to be paid back? So that’s kind of an issue that tends to come up in divorces. And then of course, even if there isn’t such a case, how would the loans be split? And would the couple have to pay their own loans? Or do they have to somehow pay the loans together? And usually, this situation comes up where a couple gets married and then one spouse during the marriage decides to get like a graduate degree or continues their education. But he needs student loan money to pay for basic living expenses like rent or things like that. So if that is the case, then chances are a divorce court judge will say that the couple collectively should pay a portion of the loans back and shouldn’t be responsible for — and shouldn’t just be responsible to whoever’s on the loan. So that’s kind of the issues that come up during divorce most frequently.

Tim Ulbrich: So my takeaways there are choose your spouse wisely and make sure you have open communication and conversations as far in advance as you possibly can. So let’s shift gears a little bit and talk about tax planning as it relates to student loans when we have two individuals that are involved. And again, important disclaimer, we’re not here to provide tax advice. And we certainly recommend they consult with a tax professional that can look at their personal situation in more detail. But it appears that the biggest consideration when it comes to student loans would be for those that are on an income-based repayment plan and determining whether it would be advantageous to file jointly or separately. What are some considerations here for our audience?

Steven Chung: OK. Let me add a third option and that’s just not getting married and living together. So they’ll just be filing single. But anyway, yeah, one of the things people have to look at when they’re on an income-based repayment plan is whether filing jointly will significantly increase their student loan payments. And of course, usually filing jointly, there is a small tax benefit. You’re usually in a smaller tax bracket. But let’s just say to make it simple you’re paying $10 more in student loans, but you’re saving $5 in taxes by filing jointly. Then you’re better off filing separately because even though you’re paying more in taxes, they’ll be paying even less in student loans, so that’s kind of. But usually for married couples who are both on income-based repayment plans or maybe one of them are, they should contact a tax preparer and have them do an analysis on what their tax situation will be if they file separately and then also look at what their student loan payments will be filing separately versus filing jointly. So and then make the comparison and then file the tax return on I guess whichever will save you the most money. And some people, like I said, there’s a third option. You could stay single. And interestingly, in California, you don’t even have to get married. You can actually choose to be a domestic partnership. I mean, that was an option given to homosexual couples before it became marriage was legalized. But now it seems to be making a comeback in people with large student loans. And this might be a viable option for them or just stay single altogether and just maybe live together, that kind of thing. The second biggest thing is — and this kind of could be down the road is when the income, when the loans are forgiven, that forgiven amount will be called cancellation of debt income. So it’s basically like the government kind of giving you — or somebody giving you money to pay off the loan, although you don’t actually get the money. Generally, there’s two things to consider. No. 1 is they tack the cancellation of debt income is based on your assets versus your liabilities. If your liabilities exceed your assets, then you’re considered insolvent and you will not be taxed on the forgiven debt. But if your assets exceed your liabilities, then a portion or maybe all of the forgiven debt could be taxable. Generally what I tend to tell people is don’t worry about it right now, especially if you’re just starting your careers. You know, maybe like the first 5-10 years, just focus on your career because you don’t want to live your life trying to plan for loan forgiveness. I mean, you’re pretty much throwing money away. And that’s kind of like putting the baby out with the bathwater, so to speak. So after the 5- or 10-year mark, once you kind of know what your salary will be, then you can possibly plan your finances to maximize insolvency or minimize your assets so you can minimize your taxes when loan forgiveness comes. The second thing to consider — and I think this is a very likely scenario — is that I think in about 10 years, that’s when I think the first income-based repayment forgiveness programs will begin. I think by the time, it’s probably not going to be taxed. The forgiveness is not going to be taxed. I think it’s just because a lot of potential candidates, especially Democrats, they are considering passing a law making forgiveness of debt income non-taxable. And as a precedent for that, back during the housing crisis when people were short selling their houses, the banks issued a cancellation of debt income on the amount that the banks lost or the amount of the mortgage that was forgiven, and then Congress immediately passed a law to make sure that the forgiven mortgage debt is non-taxable. So I think we’ll — I feel pretty good that there’s going to be something similar for student loan debtors when loan forgiveness comes. But just in case, I mean, you should probably make plans to maybe rearrange your assets, maybe lease or rent instead of buying, that kind of thing, at least around the time loan forgiveness happens. So yeah, so I think those kind of things you should consider.

Tim Ulbrich: Steven, let me ask you, you know, just this week I’m thinking about trying to reconcile this issue of where we may end up in five or 10 years when it comes to debt cancellation. You know, just this week, there’s news on both sides of it in terms of the Trump administration continuing to want to press forward with ending loan forgiveness and then obviously we have the campaign from the presidential Democratic candidates around debt cancellation, debt forgiveness and free college. And I think that often leaves people like in our community wondering, my gosh, what is the future of this going to be? What do I make of this? And how do I even begin to think and plan around it. And what I heard you say is you really feel like you think — obviously none of us have a crystal ball — but you think we’re going to move in that direction of not having that tax obligation based on some historical precedent. So tell me more about, you know, based on all that you have heard and based on your expertise in this area, tell me more about why you feel like that that’s the path that will go forward.

Steven Chung: OK. Well, the thing with Trump’s plan, he only calls for the removal of what they call the Public Service Loan Forgiveness. And that’s these student loan program where you work for the government or a nonprofit for 10 years and your loans are forgiven and without the cancellation of debt income.

Tim Ulbrich: Right.

Steven Chung: What he actually wanted to do was he wanted to simplify — there’s like several different IBR plans, and he wanted to simplify it into one 15-year plan. The thing is one 15-year plan for undergrads and then 30-year plan for graduate students. So he did not mention whether the loan cancellation will be forgiven. But let’s just say Trump’s proposal passes and loan forgiveness is not for another 30 years for people’s start. I mean, the way things are going now, the student loan numbers are just increasing. There’s no — I see no activity among students and schools to reduce it, to reduce tuition. I mean, just the cost of education is going up, and at some point, it’s just going to get to a point where people are going to be graduating with $300,000, $400,000, or even $500,000 debts. And I’m even starting to see that.

Tim Ulbrich: Yep.

Steven Chung: A few dentists, they’re even graduating like $700,000, $800,000 and even $1 million. There was one story in the Wall Street Journal, an orthodontist in Utah graduated with $1 million in debt. So I think with these numbers, I feel very good that this kind of relief is on the horizon. Of course, I’m not 100% sure, but I just feel good about it.

Tim Ulbrich: Sure.

Steven Chung: And it’s just going to affect so many people that there’s going to be a major outcry. And I think at that point, it’s just going to be a big — I mean, students and also their parents who also cosigned these loans will probably want them too. So there’s going to be an expanded voter base.

Tim Ulbrich: Yeah, I’ve thought a lot about that too. You know, and again, we don’t know what the future will hold. But I think when you think about the vulnerability of the borrower, the focus on costs in higher education and the political outcry that would come from something like that, I think that all of those are important considerations. One of the takeaways I’ve had, Steven, from our time together, which I really appreciate you sharing your expertise, is we often talk on this show — and I know this is second nature for you, but I think here we are in tax season, so it’s a good reminder that we often think about filing our taxes, which it really is just a mechanical retrospective look at what happened. And I think this has been a great reminder on the need to be more strategic, more prospective and to be working with experts, you know, especially as we’re thinking about things like single filed married, and some of those situations when it comes to income-based repayment and thinking on more of a strategic standpoint based on your personal situation. So again, I appreciate your time and appreciate your sharing your expertise. We’re going to link to your article in the show notes as well as your bio. But just here as we wrap, where can our listeners go to connect with you and to learn more about the work that you’re doing?

Steven Chung: Well, I write for a legal website called Above the Law, and my columns appear on every Wednesday. In fact, I just released a column today, although it’s more about tax law and video games, so totally off-topic. I’m also on Twitter. My Twitter is @stevenchung. I just post occasional tax stuff, usually nonsense, but that’s a good way to contact me. Or you can connect with me on LinkedIn or if you’re in the southern California area, you can contact me. My phone number is (818) 925-4699. I’ll be happy to answer any questions about tax planning or filing tax returns, especially this time of year.

Tim Ulbrich: Awesome, thank you. And again, to our listeners, Steven’s a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolves tax disputes. He’s sympathetic to people with large student loans. Many of us can certainly sympathize with that as well. He can be reached via email. We’ll link to that in our show notes or as he mentioned, you can connect to him on Twitter. You’ll also find him writing for Above the Law and also on LinkedIn. Steven, thank you again for taking time to come on the show.

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YFP 140: How Ryan Is Bringing in $11,000 a Month Through College Town Real Estate Investing

Posted on by yfpadmin


How Ryan Is Bringing in $11,000 a Month Through College Town Real Estate Investing

Ryan Chaw, clinical pharmacist and real estate investor, joins Tim Ulbrich on the show. They talk about how Ryan was able to accelerate his financial goals through real estate investing and how he went from zero rentals and zero rental income to $10,755 per month from 18 tenants in four years.

About Today’s Guest

Ryan graduated with his Doctor of Pharmacy in 2015 at age 23.

He was inspired by his grandpa who bought 3 properties in the Bay and achieved financial independence for himself and was able to help cover college tuition for his grandchildren.

Ryan bought his first property in 2016. It was a single family home at his local college. He rented out the house per bedroom and renovated to add extra bedrooms to increase rental profit.

He repeated the same process for each property, buying 1 property each year. He then created a system for getting consistent high quality tenants, managing the tenants, and decreasing expenses through preventative maintenance. He now makes $10,755 per month in rental income.

Three of the properties are on 15 year mortgages and one is on a 10 year mortgage. Ryan took a HELOC out on the first house to help buy the 4th house.

Ryan is now teaching others his system: how to find a college town to invest near, analyzing a deal, generating tenant leads through strong marketing, and how to self-manage college tenants so everything is hands off and automated.

In his free time Ryan travels to many foreign countries to just absorb the culture and life outside of California. So far he has been to China, Japan, Taiwan, the Bahamas, Canada, Paris, London, Germany, and Mexico.

Summary

Ryan, a clinical pharmacist and real estate investor, quickly found his investing niche: college town real estate investing. Ryan started investing in real estate right after he graduated from the University of the Pacific. He now owns four single family homes in Stocktown, California, a college town, and has 18 tenants. By renting out each room individually, Ryan has maximized his income and brings in $10,755 per month.

Ryan’s grandfather owned a couple of rental properties in the Bay Area which not only funded his early retirement but also paid for Ryan and his brother’s college tuition. Ryan saw how impactful real estate investing could be and has the goal of reaching financial freedom so he’s able to do what he wants to do and provide for his family without money restricting his freedom.

Ryan purchased his first rental property in 2016 and has bought another single family home each year after. In high school, he worked a couple of jobs and saved all of that money in mutual funds. After 5 to 8 years, that money turned into $30,000. For his first rental property, he put around 25% down and took out a 10 year mortgage. He also worked overtime at his pharmacy job to help fund it. He purchased his first rental property for $262,000. Ryan receives $2,600 a month in rental income and has a $1,900 mortgage payment.

With the cash flow he brings in from his rental units, he makes sure his emergency fund is funded and averages that he’ll need about $100-200 in expenses monthly for each house. Ryan uses the leftover cash flow to fund his next property.

Ryan said that he thinks investing in student rentals in college towns can maximize your income the most in a single family home. Even though homes are expensive in California, he’s still able to have a cash flow from his properties. In this episode Ryan also discusses how he looks for tenants, handles complaints from tenants about other tenants, and how he built systems and processes.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. It is my pleasure to welcome Ryan Chaw onto the show to share his experiences with real estate investing. Now, as you know, we’ve mentioned real estate investing as a goal we have for 2020 in terms of bringing more information, more examples, more stories, to the YFP community. And today is another great one for you in this area. Ryan has a unique niche of real estate investing in California in college town real estate investing. He’s doing it well in a high cost of living area, and I think his work could translate well to other parts of the country. Furthermore, he is setting out to teach others his game plan and how real estate investing can help accelerate one’s path towards financial freedom. Ryan, welcome to the Your Financial Pharmacist podcast.

Ryan Chaw: How’s it going, Tim? I’m honored to be on the podcast.

Tim Ulbrich: Thank you so much. So glad that you reached out to me, really, really inspirational hearing the work that you’re doing. I’m excited to share that with our community as well. Let’s start with your career in pharmacy, and then we’ll dig into the real estate investing. Tell us a little bit more about your pathway into pharmacy, where you went to school and the work that you’re doing now.

Ryan Chaw: Yeah, so I graduated from the University of the Pacific in Stockton, California in 2015. Soon after that, I started working for RiteAid, and I did a part-time job at Kaiser and eventually ended up doing full-time at Kaiser. And now, I am an infectious disease pharmacist full-time at Kaiser. And from there, I just started investing in real estate. I saved up a lot for a down payment, I worked a lot of overtime, and I also had some money in mutual funds as well, so I just put 20% down on that first property in 2016 and then I rented out per room to college students to maximize my profits. Then I just bought one — I repeated the model. I just bought one each year, and now I’m at four single-family homes with 18 tenants and $10,755 in rental income.

Tim Ulbrich: That’s awesome. And we’re going to dig in to dissect that much further. You know, I think for people that are hearing that that are thinking about real estate investing, it can seem somewhat overwhelming why you went from just starting to, as I mentioned in the introduction, you just mentioned, four units, 18 tenants, roughly $11,000 of real estate income. And we’re going to talk about how you got from where you started to where you are today, really try to break down that plan. But tell us about the why, the inspiration. You know, where did your motivation come from to say, ‘I want to do real estate investing.’ And not even necessarily where you see the long-term, talk about that, but even to take that first ‘risk,’ that first step, that first property, what was the motivation and reason of doing that?

Ryan Chaw: I would say financial freedom, honestly. I just wanted freedom to kind of do what I would like with my life, have more flexibility in my life, be able to provide for my family down the line without having to worry about financials and have money restrict my freedom. So that was the goal for getting into this because eventually, this rental property portfolio will provide me passive income that will pay for all the bills and also allow me to, you know, take vacations, travel, and all of that.

Tim Ulbrich: And so, you know, as I think about your journey, your story, obviously you’re in a higher cost of living area, so you know, I don’t — as someone who is in Ohio, I think wow, real estate, California, crazy expensive, do the numbers even work? But tell me more. So I love the connection of financial freedom. But why real estate investing? I mean, other ways you could have just squirreled money and saved, you could have done other types of investing, you could have started a business. What was it specifically about real estate investing that really peaked your interest to use this as the vehicle to achieve that goal of financial freedom?

Ryan Chaw: I would say part of it actually is — because when I got to pharmacy, I wanted to provide a service for people. It’s the same idea for real estate investing. You’re providing a service for people. And I do interact with my tenants, and some of them I actually help out through the college because I actually went to UOPA as well. So just kind of giving back to that community is one reason why I did this. Another reason why is real estate investing is one of really the best ways to have true passive income and a good amount of it. If you were to invest in stocks, you would need to make — you would have to have like a several million dollar portfolio to get $10,000 a month in passive income in dividends. Right? But real estate, you can achieve it a lot faster, it’s truly a way to create generational wealth. I was actually inspired by my grandpa to get into it originally because he invested in a couple properties in the Bay area when they were cheap, right? And now they just went skyrocketed, right? So the rental income from that paid for not only his life in order for him to retire early but also paid for my college and that of my brother’s as well, so I really realized, this is a great way to create generational wealth.

Tim Ulbrich: I love that. So his experiences in doing real estate investing allowed you to get a jump start in terms of your financial plan by not having the massive debt load we see with lots of pharmacists, which allowed you to accelerate your savings. But even without the $170,000-200,000 of debt that we see with today’s graduate on average in the pharmacy world, I still don’t want to mitigate that it doesn’t mean there wasn’t hard work that was done to get to that first property. You know, often the objection I hear — and I know my wife Jess and I, we really felt like the hump of the first one is so difficult to get over, but for those that are listening or have listened to the Bigger Pockets podcast, they talk about this all the time of that first property, first property, you just got to do it. But I often hear as an objection — and there’s this disconnect between OK, I like the idea of real estate investing, I want to jump in, but my gosh, like where do I get the cash to even get started? So you talked a little bit about 2016, first property, 20% down, but talk to us, even before we analyze that property and that deal, talk to us about how you were able to save up money. What was the strategy that allowed you to have the cash flow to create the savings to get that 20% down?

Ryan Chaw: Yeah, so I actually worked a couple of jobs in high school during the summer. And I would put all my money, save it away rather than spend it into mutual funds at Edward Jones. And so that grew, that portfolio grew over the course of 5-8 years or so. And eventually when I took it out, it was around $30,000. So that was half of my down payment right there, plus I’m investing not in my directly local market, I’m investing in a city called Stockton, which is about an hour away from me in Sacramento. And the prices there for homes were around the $200,000s when I first started. Now, they’re around $300,000s. But compared to the price in Sacramento, you know, Sacramento costs $500,000 to buy a house. So for me, it made perfect sense, you know, I should just drive one hour away and create this system over in Stockton and then the cash flow would make a lot more sense. And yeah, that’s how I got started.

Tim Ulbrich: Yeah, and what I heard there is hustle and sacrifice, you know. And that was really my next question for you. I think many people, especially our California community members, might be thinking, my gosh, it’s an uphill climb to even be able to afford your own personal property, let alone being able to put 20% down on a second one. So how have you reconciled that to be able to cover your own expenses as well as then obviously be in a position to invest?

Ryan Chaw: Yeah, so part of it was a little bit of luck. First property depreciated like crazy. I bought it for $262,000. And you know California, it depreciates like crazy. So it went up to $315,000.

Tim Ulbrich: Wow.

Ryan Chaw: I was able to take out a HELOC from that to basically help pay for each house down the line.

Tim Ulbrich: OK.

Ryan Chaw: So yeah, that was one strategy I used.

Tim Ulbrich: And before we jump into more of that first property, are you living in one of the properties? Or what’s your situation to be able to cover your own personal living expenses?

Ryan Chaw: Oh yeah, great question. I actually do still — I have a great relationship with my family, so I do live with my parents. But you know, if I were to live outside, I would probably find a cheap, a very cheap place to rent, you know, nothing more than like $800 a month.

Tim Ulbrich: Yeah.

Ryan Chaw: But really, my real estate rents would cover that.

Tim Ulbrich: Yep. I love that, though. I mean, you think about the biggest barriers often and people getting started and this would obviously be their own housing expenses and student loans. And you’ve been able to overcome those barriers plus saving at a very early age, took advantage of compound growth, which allowed you to come up with a down payment, you got that first property, and then as you mentioned, you’ve got appreciation, you’re able to draw on the equity of that to be able to get into future properties. So first property, 2016, I think I heard you say $262,000? Is that correct?

Ryan Chaw: Yeah, $262,000.

Tim Ulbrich: OK. And it appreciated up to $315,000. So talk to us about just the numbers on that, roughly. You put 20% down. Talk to us about the rental situation and just so our listeners can get an idea of, you know, rental income coming in, your expenses and what those numbers look like.

Ryan Chaw: So the first house was basically a cookie-cutter property. It was a three-bed, two-bath, and what I do is I add extra bedrooms where I can. So I’ll either put up a wall or I’ll change an extra living room or family room into a bedroom where I can to maximize the profit because each room can rent out for like $600 a month. So for that house, I’m getting around $2,600 a month. And then for my mortgage payment, it’s $1,900 a month.

Tim Ulbrich: OK.

Ryan Chaw: So that’s $700 in cash flow. And this is on a 15-year mortgage, actually a 10-year mortgage.

Tim Ulbrich: Wow, OK.

Ryan Chaw: Yeah, I actually — I think I put a little bit more, like 25% down, but I did, yeah, a 10-year mortgage and you know, by renting it out per room, it really maximizes that cash flow you can get from the house. And then basically from there, we just reinvest the cash flow into the next down payment, into the next one, into the next one, right?

Tim Ulbrich: Absolutely. Tell our listeners about — a little bit more about why you decided a 10-year aggressive repayment versus a 15-, 20- or 30-year.

Ryan Chaw: I would say, you know, I did hear stories about overleveraging. So I wanted to start off a little bit safe, but then I realized it doesn’t really have to be that aggressive. I think another reason why is my end goal is financial freedom, so I want to pay them off as soon as I can because I want that passive, like complete passive income, you know, $10,755 per month coming in like period for the rest of your life.

Tim Ulbrich: Yeah, and I look at that example — this is a really good one. You know, you mentioned the rent at $2,600 a month across the tenants in that unit. And we’ll talk about the strategy and kind of the college town approach that gives you multiple renters. So $2,600 of rental income, $1,900 a month of a mortgage payment but that’s on a 10-year mortgage. So we fast forward 10 years, property is going to appreciate more, so the actual property will be worth a significant amount, which is a big impact on net worth. And then you get rid of a big part of that $1,900. Obviously, you’ll still have property tax, but you won’t have a mortgage payment. And in theory, rents will go up because of the market that you’re in and appreciation, all of these things. So I think hopefully our listeners start to put together the concept of the financial freedom. Break down a little bit further for me — I see in there $2,600 of rent, $1,900 of mortgage payment. I’m assuming that’s mortgage and taxes and insurance that’s in there as well. What would the rest of that $700, how do you reconcile that, you know — obviously you wouldn’t look at that as just being true profit because you’ve got other upkeep, vacancies, other expenses that you’re accounting for. So how do you determine, you know, what of that money, that $700 difference between $2,600 and $1,900, that you hold for those types of expenses? You know, versus that you account as more true profit?

Ryan Chaw: Yeah, so I always recommend having an emergency fund in case something breaks down, maybe $10,000-15,000 would be a good, reasonable emergency fund. I know some people say like six months emergency fund and all of that, but for me, you know, I do have my HELOC, so if I do have to use that, I can always take it out, which is — it’s basically like a credit card with a very low interest rate. So if I want to do that in an emergency, I could do that. But I would say my expenses are around maybe $200 or $100-200 a month or so average. But it really depends, a lot of times, things — because of the way I set up the house, things don’t break down too often. But when they break down, of course it’s a huge expenditure. And that’s what happened on my first house. I didn’t do my due diligence to make sure that everything was in working order before I bought it. And I made some mistakes, huge mistakes, actually. So one Monday, I got a call from a tenant who was saying, ‘Oh shoot, there’s sewage coming out the kitchen sink onto the kitchen floor.’ And this was like at 11 p.m. at night, right? I was like scrambling to call so many different plumbing companies, and it was hard to get ahold of someone because it was 11 p.m. at night to clean up the mess. So they had to put in a sump pump, they had to sanitize everything. That cost a couple thousand. And then we put a camera down the pipe, the sewage line, and then it was, you know, showed a lot of breaks in the pipes and routes in the pipes, so it cost me $6,000 to replace the whole sewage line.

Tim Ulbrich: Oh, gees.

Ryan Chaw: Yeah, it was crazy. So these things do come up, and they happen if you don’t do your due diligence. And so what I learned from that is during the escrow phase of the house, it’s very important to do a sewage line inspection. So that’s just sticking a camera down the sewage line, costs $200-300, but you know, they’ll find all the breaks, all the cracks and grooves in your pipes if there are any, and then you can use that as a negotiating point during the sale. Either have the seller repair it or have the seller cut a check for you to hire someone to repair it.

Tim Ulbrich: I love that, especially when you consider the cost of something like that, of the repair relative to the cost of the preventative, more diagnostic approach. So that’s great, great, great advice.

Ryan Chaw: Exactly. And I also learned not to buy houses that are over 100 years old when I can because that first house was like 100 years old. Crazy.

Tim Ulbrich: So you know, in California, knowing that you have multiple tenants, you’re in a college town — and again, we’ll talk about that more here in a little bit — do you not have to be as concerned about vacancy rates, you know, that you might see in other parts of the country? Or how do you think through vacancy?

Ryan Chaw: Correct. So I do one-year leases for all of my rooms, all of my 18 tenants. And it’s because the demand is so high for off-campus housing, I only charge $600 a month, right? And on-campus dormitories, they charge $1,000-1,200. So that makes sense for a lot of people. You’re getting more privacy, you’re getting a lot more space, right? And just more freedom in general, right? So a lot of people like that and they see that as a good — for them, a good place to stay. And I usually target third- or fourth-year students when I can. Sometimes I have second-year students stay. I rarely have first-year students stay because of the maturity level. Most of them, they’re already in professional school, pharmacy school, right, so they take — I mean, they mainly use the house to study and sleep.

Tim Ulbrich: Yep.

Ryan Chaw: To be honest, yeah. And not only that, the parents kind of visit them and they help clean up the house, so I cut down on the cleaning costs and all of that too. And so yeah, I do one-year lease. They can always sublease during the summer. Some schools like pharmacy school and dental school, they go year-round, so they actually go through summer. So it makes sense for them to do a one.

Tim Ulbrich: I love that. You know, the two objections I’ve commonly heard for college town real estate investing would be the summer period, but obviously you mentioned the one-year lease and the allowance of subleases or programs that have year-round type of offerings, as well as the potential damage and upkeep for a variety of reasons, you know, maturity and so forth and working with professional students — not that it’s immune to that, but obviously you have a lot better chance I think that they’re going to take care of the property and as many pharmacy students know, pharmacy is a small world, and you should be respectful, right, of somebody else’s property. So talk to us about the strategy of college town investing. I think that’s really the niche you’ve built here. And I think it’s really cool. You know, why? How? And what’s been the strategy that this is an area that you want to continue to go into further?

Ryan Chaw: Yeah, so I was first inspired by actually my friend who did this, his aunt basically bought a property right across the street from campus and rented it out to my friend’s friends. And so my friend basically lived there for free. In fact, if I were to go back, I would do the same strategy because for house hacking where you stay in the house, you can actually put down as low as 3.5% down, so I would have even started with that. But I guess I went into student rentals mainly — like I did examine the different tenant pools out there, but really, student rentals is the best way to maximize your profit on the single-family home because of that you’re renting out per room idea. So one of my houses, for example, appraised to rent out for $2,000. They estimated $2,000 in market rent, right? But I was actually — after I added the bedrooms, I was able to get $3,100 a month. So that house, you know, an extra $1,100 every month made a huge difference in my bottom line. And that’s how I’m able to invest in California where the rental rates — I mean, sorry, the housing prices are so high. If you were to do this in other states, you could get the same rent by $500-700 and the price of the properties are only hundreds of thousand — like $100,000 or $200,000. So the cash flow is tremendous. And that’s why I’m helping others and teaching others how to do this strategy because it’s really a great opportunity, especially in other states.

Tim Ulbrich: And it sounds like, you know, I’m guessing some of our listeners may be thinking about, hey, here we are in a really great, you know, 10-11 year run in the market.

Ryan Chaw: Oh yeah. They get the history, right?

Tim Ulbrich: Yeah, what happens to Ryan if this thing flips on its head? But a few things that I think you’ve done really well to protect yourself against that, obviously, it sounds like you’ve purchased properties at a good price point. You’re in a market that’s going to continue to have demand, regardless of what happens. Obviously being in a college town, you’ve got multiple tenants. You’ve built these year-long leases. But also, you’ve got some of your properties — I don’t know if you have all of them on a 10-year, but because you’ve done that and they’ve appraised and you’ve paid off a significant amount I’m guessing of some of those mortgages on a shorter time period, even that one you purchased in 2016, you’re essentially 3+ years in, so you’ve got this cushion with 20% down and this equity built in that even if housing prices go down, let’s say 10-20% overnight, you’ve really got some protection built in there, right?

Ryan Chaw: Oh yeah. For sure. They say you make your money when you buy, right? So I’ve got to make sure I look at several — oh, let’s say maybe 50 deals or so — just throughout the year. And I buy the best one, right? I constantly look at deals so I know what a good deal looks like. So that’s pretty key.

Tim Ulbrich: And what about getting tenants? What’s been your strategy of having a funnel of people that come to you? And I’m guessing this in part has to do with the relationships that you have. But how have you done that I guess initially? And then is there a point where, you know, after you have a good reputation with these students that I think it would be somewhat of a word-of-mouth of kind of passing it, you know, off to the next group that’s coming after they graduate?

Ryan Chaw: Yeah. Exactly. Nowadays, it’s word of mouth. But when I first started out, I did three things: I put signs or fliers up on the campus bulletin boards. That actually worked pretty well. I put a “For Rent” sign on my lawn. I mean, that’s usually how everyone starts out. That actually got me a lot of calls, but they weren’t from students. They were usually from people around the area. And then when I said, “Well, if you were to rent out the whole house, it would be $3,100 a month,” they’re like, “That’s crazy.” So usually, I would get some not very well qualified tenants to that. But then what really helped was the Facebook groups. All campuses have these Facebook groups for off-campus, there’s usually a textbook exchange group, there’s Class of 2020, you know, all these groups. I go onto them, and I write my targeted ads, right? I say, “Hey, we have this place that’s three minutes from campus.” I literally put up the map on there and show them where it’s at relative to their classes. And I get — I would say every time I post an ad, within the first three days, I would get like 10-12 people contacting me. No kidding, this is pretty average.

Tim Ulbrich: Wow.

Ryan Chaw: Yeah. So there’s a lot of people interested. It’s a huge market. You think about it, UOP I think has 7,000 students or so. I only need 18 of those. That’s like .1% of them, right? So yeah. It’s a great market.

Tim Ulbrich: Let me pick your brain on process. You know, as I’m hearing this — and I’m guessing our listeners as well — I hear you talk about things like advertising your properties and responding to interest and dealing with the sewage pipe issues at 11 o’clock at night and having to think about the strategy of finding these deals and you casually talk about adding rooms and putting up walls. And I’m guessing many people are like, oh my gosh, I just can’t even wrap my mind around —

Ryan Chaw: Right.

Tim Ulbrich: — how to process this. Tell me a little bit about your process, your team, what you’re doing versus maybe other things that you’ve really leaned on others to do.

Ryan Chaw: Yeah. So yeah, putting the systems and processes in place is key, so I’m glad you mentioned that. So I have a process for everything. Rental payment, I do through Zell. I require them to use an app called Zell. It’s a direct deposit app, so I don’t have to deal with a check being lost in the mail, right? And it tells you exactly when they pay their rent so I know when they’re late or not so I can charge the late fee if they’re late. Just putting everything in the lease, being very clear, having all clear, set terms and the wordings clear for any potential issues that could arise. Then you just refer back to the lease when the issue happens. I also have a system in place for like managing the properties if something breaks down. So if something breaks down, the tenant will typically send me a text. They’ll say the toilets not working. And so what I do is I just forward the text to my contractors. And I have a team of three contractors. One of them is more creative, he’s the one I use to help build walls and maybe create a hallway if I have to. He’s the creative guy. The other two, they’re more for like run-of-the-mill things like replacing a toilet, putting in a sump pump, things like that. But basically, I just forward a text to them. And then they let themselves in with the electronic lock on the door. So they just put in that code, right, let themselves in, do their job, they go home, and then I have someone else take a look at the work. And they just tell me, yeah, he fixed the toilet or whatever. And then he sends me the bill, and I send him the check. That’s it.

Tim Ulbrich: Awesome. Awesome.

Ryan Chaw: You know, I haven’t been down to Stockton in over seven months now. Right? So it’s great. Everything’s pretty automated.

Tim Ulbrich: And I think it’s hopefully an encouragement, you know, to me, to our audience, that the systems, the processes, you’ve built a lot of this, I can tell, over time. And as I talk about, again, they mention all the time on Bigger Pockets, really not hearing stories like this and feeling overwhelmed but just thinking about that first process. And there will be mistakes, you know, that’s part of the learning.

Ryan Chaw: Yes.

Tim Ulbrich: And really figuring out what the system and process, figuring out what you want to do yourself, what you want to hire out, what capacity you have time-wise, what’s the margins on the properties, you know, all of those things are really important. Now, considering your model where you have several tenants in a property, several students, I have to imagine you run into tenant issues, you know, just by nature of having people involved, probably often even between one another. Tell me about the issues that come up and how you handle those and deal with those.

Ryan Chaw: Great question, Tim. Yeah, so sometimes, you’ll get tenants complaining about other tenants about noise, maybe the other tenants smoking pot or something like that. And what you do, what I learned, actually — and I learned this the hard way — is you want to have the tenant talk to the other tenant face-to-face. Because if I go and call that other tenant, say, ‘Hey, this other guy complained about you,’ then the situation gets worse because the guy is saying, ‘Hey, you talked behind my back. I can’t trust this guy.’ So the situation actually escalates if you do that. So first, have them have a face-to-face discussion. And then if there’s still issues, then you can call up the tenant personally. And then if that still doesn’t work, you can call the parent because all these college students, they have parents, right? And usually after you call the parent, it gets straightened out pretty quickly. But I’ve only had to resort to calling the parent one time throughout my four years of investing. And most of the times, as long as you empower — and that’s the key. You have to empower the tenants that they’re adults now, they need to resolve these issues face-to-face with the other tenants. And once they kind of have that — once you empower them, then the issues get resolved very quickly. In fact, that’s all I have to do nowadays is just I’ll ask them to talk face-to-face. And after that, I don’t get any texts or phone calls or messages or anything like that.

Tim Ulbrich: I think that’s great advice. I didn’t learn that lesson in the real estate world. I learned that lesson in the academic pharmacy in terms of managing other individuals. But I think you’re spot-on. I mean, the second two individuals have an issue with one another and you jump in with one of them but they don’t talk face-to-face, things often get worse in the short term.

Ryan Chaw: Yes.

Tim Ulbrich: And even though the difficult conversation is difficult, it’s important to be had. What resources would you recommend to our listeners that are hearing this and saying, ‘Wow, I’m really inspired by Ryan’s story. I’m interested, I want to learn more.’ Podcasts, books, blogs, what is out there that you draw information from?

Ryan Chaw: Yeah, so Bigger Pockets actually has some great books on rental property investing to get you started. There’s one by Brandon Turner I think on rental property investing. But there’s also some great books for like mindset and kind of theory as well. I would say “The Millionaire Real Estate Investor” by Gary Keller is really good. That one teaches you how to build your teams and forms of that, of creating systems in place. There’s also “Rich Dad, Poor Dad,” of course. That’s a very inspirational book if you guys haven’t read that one. “Think and Grow Rich,” there’s “The Miracle Morning.”

Tim Ulbrich: Great book.

Ryan Chaw: I like that one. That was a great book, yeah, exactly. It teaches you how to take charge of your day. You know, journaling, meditation, those types of things to get your mind in the right place to really handle stressful situations if something comes up.

Tim Ulbrich: I’m really glad you gave some books that were around kind of more of the mindset, you know, morning routine types of things because I think while the x’s and o’s are important, the theme that I’ve now heard as we’re now 140-something episodes into the Your Financial Pharmacist podcast is, you know, those interviews that I reflect on afterwards and say, “Wow, there’s just something really special, something different, something unique in terms of how somebody’s operating, how they’re growing what they’re doing,” the consistent theme I see with you and others that I would say are really, really successful is this concept of mindset. And it’s just different. And I think it’s often this constant quench and desire to learn and to grow and naturally from that, you will see growth that will happen in a variety of areas. It could be business, it could be family, it could be many different things. So I know that you are kind of in this phase where you’re beginning to teach others how to do this, which I think is really cool. So tell us a little bit about that, you know, kind of what your vision is for that, and where our listeners can go to connect with you and learn more.

Ryan Chaw: Oh yeah, for sure. So I believe student housing — the student rental market is the best way to invest in single-family homes, hands down, because you can make the most profit. So I’m teaching others how to do this. I walk them through the whole deal analysis process to make sure everyone gets a good deal. I walk them through the renovations we make. We try to of course eliminate, do preventative maintenance for possible — like eliminating grass and replacing old mulch and cutting out trees and trimming branches and all of that. And then I walk them through the whole marketing process to get tenants in consistently and to screen them and how to manage issues down the line. And they can reach me at — or you guys can reach me at www.newbierealestateinvesting.com. That’s www.newbierealestateinvesting.com. And newbie is spelled newbie. And I have some great resources, you guys can put in, sign up for the newsletter, and I’ll send you some great information. I even have like a deal analysis calculator you guys can take a look at. It’s kind of like the Bigger Pockets one, but it’s more simplified and it has an amortization schedule and everything. And then I also have a great resource you can read through on the different areas of real estate investing because it’s not just student rental housing. Of course, I love that area. But there’s also fixing, flipping, there’s Airbnb, which is also known as short-term rentals. There’s apartments. But really, I think most people, the ones who aren’t millionaires or billionaires or whatever, the best place to start really is single-family housing and just doing the renting out per bedroom house hacking strategy.

Tim Ulbrich: Great stuff, Ryan. I really appreciate you taking the time, and I have a feeling this won’t be the first time that our audience will hear from you. So excited to see what comes for you in the future and as I mentioned to the community, we’re going to keep bringing more examples, stories, hopeful that will give our community some ideas of things to think about. I think this is another great example of a pharmacist who’s doing some really incredible things and is successful. So congratulations on the success that you’ve had. And thank you again for taking time to come on the show.

Ryan Chaw: Hey, thank you, Tim. I’m excited to be able to get on your podcast. Thank you.

Tim Ulbrich: Awesome. And as always, if you like what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating and review on Apple podcasts or wherever you listen to your podcasts each and every week. We appreciate you joining us. Have a great rest of your week.

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Life Insurance for Pharmacists: The Ultimate Guide

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Life Insurance for Pharmacists: The Ultimate Guide

The following is a guest post from Dr. Jeffrey Keimer. Dr. Keimer is a 2011 graduate of Albany College of Pharmacy and Health Sciences and pharmacy manager for a regional drugstore chain in Vermont. He and his wife Alex have been pursuing financial independence since 2016.

For the first 24 years of my life, the only people who really cared about my financial well-being were my parents. Sure, I had a business relationship with my bank; but outside of getting the account set up and telling me to use a bankbook to keep track of it, they (or anyone else in the financial services industry) didn’t really seem interested in me or my money. As I neared graduation though, something curious happened. Seemingly out of nowhere, my email inbox was chock full of requests to meet with people wanting to be my financial advisor.

“Well, well, well,” I thought. Now that I’m about to be a pharmacist and make some real money, I must be important! Right? So I met with a few of these people, and in retrospect, I said a lot of dumb things that didn’t do me any favors. I remember when one guy asked me what one of my major financial goals was, I told him I wanted to buy an Ariel Atom. Now if you don’t know what that is, that’s fine. It’s basically a street-legal go-kart that can go 0-60 faster than a Ferrari and can peel your face back like this:

#LifeGoals

Source: Top Gear (UK), BBC

 

Yeah, looking back on it, I deserved what I got in the end.

After deciding to take one of these people on as my “financial advisor” we had a couple of lunch meetings to discuss my financial situation. I laid my cards out on the table including all of my account balances and all my debts. You’d think we would’ve come up with a strategy for me to build some cash savings and address my student loans, but did we? Not really.

However, there was one aspect of my student loans that seemed to pique this person’s interest.

Was it the balance? No.

How about the monthly payments? Getting warmer…but no.

It was the fact that my parents co-signed them for me.

If for whatever reason I stopped making the minimum monthly payment on my loans, my parents were at risk of assuming that responsibility. A truly unacceptable situation. This, of course, prompted my advisor to ask the question:

“Do you have life insurance?”

“Well…no, I don’t.”

A Basic Overview of Life Insurance

Life insurance is one of those things that no one really wants but many people need. Like any type of insurance, you hate paying for it when you’re not using it, but it can keep the world from falling apart in those rare situations when you need it.

If you have to send in a claim for insurance on your car or your home, you’ll reap the benefits of that claim. However, you’ll never personally reap the benefits of a claim with life insurance because, well, you’ll be dead.

So why get one?

Two words: income protection.

Rarely do people shuffle off this mortal coil without leaving behind some baggage for others to sort out. At the very least, it costs money to put you in the ground; and unless you know a way to work your day job from beyond the grave or set aside a burial fund, someone else will need to foot that bill for you.

But what about the regular bills your income used to pay for? While you won’t be living in your house anymore, I’m sure your spouse and/or kids still want to. How’s the mortgage going to get paid when you’re not around?

As a pharmacist, there’s a very good chance you’re the breadwinner of the house and your income is essential for making household ends meet. But here’s the rub: if something were to happen to you, the financial hit to your household could be catastrophic. And we’re not talking about “no more trips to Disney this year” catastrophic, we’re talking about fast-track to living under a bridge in bankruptcy catastrophic.

But it doesn’t have to be that way and that’s where life insurance comes in.

With life insurance, the people you leave behind can get a cash payout in the event of your death that can act as a replacement for your income. And, if set up properly, a life insurance policy (or policies) can bulletproof your financial plan in the case of your untimely demise.

So how should a pharmacist go about getting a life insurance policy and how do you know which one to get?

At first glance, it seems like a daunting task. But thankfully, getting yourself insured doesn’t have to be complicated. The team at YFP is here to provide tools that can make the process simple and straightforward.

Before we get into that though, we need to talk some more about the types of policies that exist.

Huh?

Isn’t life insurance just…life insurance?

Yes, and no.

A life insurance policy can be incredibly simple or one of the most convoluted financial products in existence. What’s more, individual policy options can complicate things to the point where it’s questionable if the person selling you the policy even understands it. Yikes!

Fortunately for us, there are really only two types of policies: permanent and term. One is good for pharmacists, and one…not so much. First, let’s talk about permanent life insurance, because I’m not done with my story.

Permanent Life Insurance

At this point, the topic of life insurance came to dominate my meetings with my financial advisor and honestly, I found it kind of boring. While I knew I had a duty to protect my parents from my loans if anything happened to me, I was much more interested in what I could do to make money in the markets. After all, isn’t the point of working with a financial advisor is to get rich? Yeah, I was an easy mark.

Picking up on this, my advisor pitched me a solution.

“What if you could take the death benefits of a life insurance policy and combine them with an investment component? Not only could you protect the ones you love, you could also set yourself up for life in the process!”

That’s a win-win if I’ve ever heard one. Sign me up!

And thus, I was sold quite the bill of goods.

The type of policy my advisor sold me on belongs to a family of life insurance policies known as “Permanent Life Insurance.” Permanent policies are just as they say, permanent, and they go by a few different names:

  • Whole Life
  • Universal Life
  • Variable Life
  • Variable Universal Life (VUL)

When you take out the policy, the intent is that you hold it till the day you die, pay premiums on the policy till the day you die, and your heirs get the death benefit when you die. Sounds good, right? But wait, there’s more!

Remember when I said that these types of policies have benefits for you when you’re alive? This is where another part of the policy known as the “cash value” comes into play. In this part of the policy you have an account that exists outside of the death benefit. Depending on the specific policy, part of the premium gets added to this account and it will have either a set rate of return or exposure to the market. In addition, the funds inside can grow tax-free within the confines of policy and be protected from the claims of creditors depending on your state law.

What’s not to like?

A lot as it turns out.

And for most pharmacists, permanent life policies should be avoided like the plague.

But why?

Costs of Permanent Life Insurance

Above all else, these types of policies can be insanely expensive. Compared to the other type of life insurance you can get like term life insurance, you can spend on premiums in a month what you would spend in a year otherwise. How can that be? To answer that, let’s take a look at a snippet from the variable life policy sold to me when I was a new practitioner.

term life insurance

I know there’s a lot to digest there but let me distill it down to one word: fees.

While part of the premium goes into the cash value portion, a good chunk of the premium goes to paying additional fees that get layered into the policy. From sales commissions to general management fees, a lot of the money you pay into these policies doesn’t really go into the cost to insure you.

Oh, and these are just the fees that get taken out of the premiums, we haven’t even gotten to the investment side of things.

If you read my article on stocks, bonds, and funds on the YFP blog, you’ll know I’m no fan of investment fees and you shouldn’t be either. These are the fees that seem small when you first look at them, but over time can eat away a massive amount of your potential gains. The investment fees you’ll find within these policies (like the one above) are usually terrible compared to what you can invest in yourself.

Because of all these hidden costs and fees, permanent life policies are generally products designed to be sold. Sure, there are certain situations where they may offer a benefit, but those are usually limited to high net worth individuals and very well structured policies as part of estate trusts.

But for most pharmacists, especially the new practitioner who’s a HENRY (high earner, not rich yet – yes, that’s an actual industry term for you), the type of policy that gets hawked to you by the “financial advisor” down the street can be safely avoided.

You still probably need life insurance though. This brings us to the other form of life insurance; the one you should get. Term life insurance.

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Term Life Insurance

Where permanent policies tend to be fraught with all sorts of riders and additional layers of complexity, a term policy is very simple to understand. It can be boiled down to two numbers: the death benefit and the term.

  • Death Benefit: The amount of money your heirs receive upon your death.
  • Term: This is the length of time that the policy is in effect.

How a term life insurance policy works is really simple.

If you die within the term window, your heirs collect. For example, if you take out a 30-year term policy on January 1st, 2020, and die at any point before January 1st, 2050, your heirs get to collect the death benefit. If you don’t die by that time, the policy simply terminates and the insurance company keeps all your premiums. That’s really all there is to it.

In addition to simplicity, the other main draw of term over permanent life insurance is the cost. Remember how I said that what you spend on a permanent policy in a month is similar to what you’d pay in a year for term? That’s not far from the truth! And, given the costs associated with investments within a permanent policy, it’s easy to see why the mantra “buy term and invest the rest” makes sense. You simply have a much better chance at building wealth when costs are low.

Here’s an example of how affordable a term life policy is. A 30-year-old woman who’s healthy that doesn’t smoke would only pay about $35 per month for a $1,000,000 policy with a 25-year term.

Costs of Term Life Insurance for Pharmacists

With a term policy, the cost to insure you typically comes down to a few factors.

Death Benefit Amount

A greater death benefit demands a greater premium. You don’t need to be an actuary to prove that one.

Term Length

As term length increases, so do the chances you’ll die within the term window. In order to cover that risk, you’ll pay a larger premium for a policy with the same death benefit over a longer-term.

Age

The younger you are, the less chance you’ll die soon and the lower your premium will be.

Sex

Sorry guys, but women tend to live longer than men and get the advantage here. Unless your state specifically disallows it, all else being equal, women can expect to pay lower premiums than men.

Personal Health

Most policies will require some sort of medical exam and/or documentation of your medical history as part of the underwriting process. Things that come up on your medical exam (bloodwork is usually done), evidence of pre-existing conditions, and most importantly your smoking habits can make your policy more expensive. In some cases where you have a serious medical condition, you might be uninsurable. If you are overweight or obese that can also increase the cost of a policy.

Family History

Usually not a make or break for the policy, but evidence of some hereditary conditions that crop up later in life can increase the cost to insure.

Recreational Activities

Do you enjoy base jumping? How about doing wheelies on the interstate at 100MPH on your new sports bike? If so, it should come as no surprise that the cost to insure against your “unexpected” death is more expensive.

#higherinsurancepremiums

Criminal History

Yes, blemishes on your legal record (speeding tickets included!) can make insurance more expensive.

Additional Riders

If you want bells and whistles on your policy such as the ability to collect ahead of time if diagnosed with a terminal illness, the policy is going to cost more.

While I know it seems like there are a lot of things that can make a term policy unaffordable, don’t worry. These factors go into the pricing of any life insurance policy, even the super expensive permanent policies. What makes term so much of a better deal though is that the simplicity of a term policy commoditizes these policies in the marketplace.

In other words, just like generic drugs, they get super cheap because a lot of companies compete in offering the same product. Unless you’re looking for a policy with a bunch of exotic riders on it, you can shop around to get a good deal. Nice!

What About Workplace Life Insurance?

Many of us nowadays can get life insurance coverage as a benefit through work. In fact, when you first started as a full-time pharmacist, you might’ve seen one of these benefits when filling out your new hire paperwork. In most cases, all you have to do is pick a death benefit and a set amount will get taken out of your paycheck. Simple right? While it may seem like a great idea to get insured this way, there are some good reasons you shouldn’t totally rely on workplace life insurance:

It’s non-portable.

When you leave your job, do you get to take your benefits with you? Nope. While there can be a grace period after you leave, by and large, that policy will be just as terminated as your employment.

It might not be enough.

Typically, the death benefits on workplace life insurance plans are limited. You’ll likely need more coverage than what your benefits allow.

It might be more expensive.

Since there’s rarely a medical exam associated with these policies, the premiums on them tend to be more expensive. If you’re young and otherwise healthy, you could be spending more than you should.

It might not be there for you.

You know what’s sad and sometimes happens when people become seriously ill? They’re forced to leave their jobs. If a serious illness were to result in your death, that workplace plan might not be there when you needed it most.

How Much Insurance Should You Get?

Good question!

Unfortunately, there’s no straight answer to that.

Oftentimes you’ll see the recommendation of 10-12x your annual income getting thrown about, but that doesn’t really take into consideration any of your personal situations. So how can you get a better idea?

Tim Ulbrich and Tim Baker tackled this question head-on in YFP Podcast Episode 44. In a nutshell, you need to make a projection of future income needs and use those projected needs to come up with a death benefit number. Huh? Don’t worry, it’s not as hard as it sounds.

Add these liabilities:

Debts: student loans, mortgages, and other debts

Future expenses: college tuition, burial, and other foreseeable expenses

Income support: How much you feel is enough to support the lifestyle enabled by your income for your loved ones, childcare support if applicable, dependent on the length of time you want to support (ie. 10, 20, or 30 years), include considerations for future inflation (ie. 3-4%/year), investment returns, and taxes.

Then, simply subtract the savings you have from the liabilities listed above and you’ll get a good estimate of what you’ll need for a policy. Want to get more into the weeds? Check out this handy calculator for estimating your coverage needs.

Now, does the number you come up with have to be exact? No! Chances are, things are going to change as life goes on. In the worst-case scenario, you can purchase an additional policy to layer on top of the one you just bought.

Speaking of which, getting additional policies to layer on each other is a legitimate life insurance strategy called “laddering.” As time goes on, most people’s need for life insurance will fluctuate. It might start out somewhat small, increase as a spouse and kids come into life, and then taper off again once the kids have left the nest. For this reason, many people choose to “ladder” multiple policies to accommodate this change in need.

If, at the end of the day, all this still seems daunting (don’t worry, it’s OK if it does), make sure to reach out to a professional that can help you put it all together. The team at YFP Planning is uniquely suited to your situation as a pharmacist and can help you build the best plan possible.

Where Should I Get Coverage and How to Do Get a Term Life Insurance Quote?

Remember how I mentioned that you can shop around for term policies and get a great deal?

YFP has partnered with Policygenius to help you do just that!

Policygenius allows you to compare and shop all of the top, A-rated life insurance companies on one, easy to use platform. Just answer a few questions to determine your coverage needs and you’ll get presented with a bunch of accurate term life insurance quotes to choose from. Plus, unlike other platforms, the information you provide stays private while you shop! That’s right, you won’t get bombarded with phone calls and emails as soon as you hit submit.

What if I Bought a Permanent Policy By Mistake?

Just because you made this bed doesn’t mean you have to lie in it. It is possible to get out of that permanent policy that was sold to you when you were a financial noob. But, and this is a big but, there’s probably going to be some pain. In all instances, you will be cashing out the policy and this will have one or a combination of the following consequences:

Loss of money

Typically in the first few years of the policy, the majority of the premiums you pay go toward sales commissions and fees, not the cash balance. Since you can only withdraw the cash balance, you may take a net loss on the difference between the cash balance and premiums paid. This was me when I finally got rid of mine. In the end, the VUL policy I took out ended up costing me several thousands of dollars lost to premiums.

In addition, there may be surrender charges on the policy. These charges are usually higher for the first few years of the policy and can eat up the entire cash balance in some cases.

Taxes

If you’ve had the policy for a long time and the cash value exceeds the total amount you’ve paid into the cash value through premiums (your cost basis), you’ll be required to pay taxes on the gains.

If that last one applies to you, there’s another strategy to get out of the policy without incurring a taxable event known as a 1035 exchange.

In this exchange, you basically exchange your permanent life policy for another insurance product such as an annuity. While annuities also get somewhat of a bad rap, there are annuities out there, such as variable annuities, that aren’t saddled with the types of fees annuities are famous for.

Finally, before you do anything with your old policy, make sure you have other life insurance! You should only cancel your permanent life insurance policy once your new policy is effective and fully replaces your old coverage.

Conclusion

Life insurance can be an incredibly important component of your financial plan.

From protecting your income and keeping your loved ones from living on the street to even help you sleep better at night, the benefits of having a life insurance policy are immense.

That said, there is a right way and a wrong way to do it. For most pharmacists, the right way is to buy term life and get the best deal on it by shopping around using a site such as Policygenius.

And, as always, if any part of this process seems confusing or you’re just looking to get a second opinion on what to do, make sure to book a call with the team at YFP Planning. You’ll be glad you did!

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YFP 139: Should You Refinance Your Mortgage?

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Should You Refinance Your Mortgage?

Nate Hedrick, the Real Estate RPh, joins Tim Ulbrich to talk about all things mortgage refinancing. They talk about what it is, how to qualify, the costs associated with refinancing a mortgage, how to determine the break even point and how Nate recently evaluated his own mortgage refinance.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he is a clinical pharmacist and program advisor for Medical Mutual. By night and weekend, he works with pharmacists to buy, sell, flip, or rent homes as a licensed real estate agent with Berkshire Hathaway in Cleveland, Ohio. He has helped dozens of pharmacists achieve their goal of owning a house and is the founder of www.RealEstateRPH.com, a real estate blog that covers everything from first-time home buying to real estate investing.

Summary

Nate Hedrick, the Real Estate RPh, is back on the podcast to discuss mortgage refinancing. Nate explains that a mortgage is a bank or lender giving you money to pay for a home and you, the borrower, have a certain amount of time (term) to pay that money back. In mortgage refinancing a lender or bank gives the leftover amount to pay the existing mortgage off and you get a brand new one which essentially resets your loan. It’s possible to refinance your mortgage with the same lender. People chose to refinance their mortgage to reduce their monthly payment, reduce overall interest, get better equity in their home if the house went up in value, eliminate PMI or to reduce the term of the loan.

You likely qualify for a mortgage refinance if you already have a mortgage. To get a good refinance offer, three categories will be looked at: the equity in your home, credit score, and other debt load.

Since this is a new mortgage, you’ll incur the same costs as you did when you purchased your home (closing costs, title fees, etc). Nate cautions that advertisements for no closing costs may not be completely truthful as those costs might be rolled into the loan which you’ll end up paying interest on.

To figure out if mortgage refinancing makes sense for your situation, you have to know your current interest rate and monthly payment, what that rate and payment will change to, what your overall payment is going to be and how long you are going to live in that house. The length you’ll be in your house is really important to consider when looking at refinancing depending on the amount of closing costs you’ll have to pay with your new mortgage.

Nate and Tim suggest exploring several lenders and banks if you’re considering refinancing your mortgage. YFP recently partnered with Credible for mortgage refinancing. You can compare up to 6 lenders at a time and receive quotes in under 5 minutes. Click here to compare multiple lenders with Credible.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. Excited to be here and to welcome back Nate Hedrick, the Real Estate RPH, as we talk about mortgage refinancing, including Nate’s own experiences, and we’ll talk about a question we’ve had from a listener, a community member, as well. So Nate, welcome back to the show.

Nate Hedrick: Thanks, Tim. Nice to be here.

Tim Ulbrich: So I was doing some accounting this morning. I think you officially now may have the record for the number of times you’ve appeared on the podcast. So we’re excited to have you back.

Nate Hedrick: Yeah, I expect my championship belt to be sent in the mail as well. I’ll give you my address after this.

Tim Ulbrich: Awesome. So we’ve talked before. We know how things can get expensive. We’ve done episodes before on home buying, we know of course there’s lots to consider. We did a previous episode on all costs involved in home buying, evaluating the rent versus the buy. It’s not just the mortgage payment, of course it’s the taxes, the insurance, the HOA fees, utilities, etc. And you know, for our listeners, when it comes to the mortgage and how much of a factor that can play in your overall financial plan, it typically is a big chunk of their monthly budget. And unless you move or downsize, many of these costs that come along with home buying are things that you can’t change. However, one thing that you might be able to change is the interest rate. And that can be accomplished through a refinance, which we’re going to talk about here today. So Nate, here we are, 2020, and I think we take for granted rates today in 2020. But rates have not always been where they are today. So just give us a quick history lesson on kind of mortgage interest rates and probably for many of us, what our parents were dealing with back in the early ‘80s.

Nate Hedrick: Yeah, it’s funny. This is something that I actually learned in real estate classes and for some reason, never knew up until that point. But for years, even if you look 30 years ago, early ‘80s, end of the ‘70s, interest rates were like credit cards for houses. I mean, you’re talking 15%, 16%, 17%, 18% for a mortgage, which just — it feels absolutely crazy in today’s world. I mean, we’re at 3.5%, roughly 4% on prime, so that is such a huge difference for us. And it’s something that I don’t think a lot of people even realize if you’re in our generation.

Tim Ulbrich: Yeah, I think so too. And so here we are, as you mentioned, rates, depending on the term, depending on a whole host of factors, which we’ll talk about here today, much, much, much lower, whether that’s 3.5%, 4%, 4.5%, it’s still notably lower than interest rates that were in the teens. And I always give my parents a hard time, ‘Yes, you dealt with that. But also, let’s look at the prices of homes back at that time period.’ So basic definition, mortgage refinancing, what is it in terms of basic things our listeners should know before we talk about the reasons and the hows and all the qualifying factors.

Nate Hedrick: Yeah, absolutely. So a mortgage in itself is just basically the bank giving you money or a lender giving you money to pay for a house. And you have some term to pay that back, whether it’s a 15-year, a 30-year or something in between, you’ve got a period of time which to pay that back. Well, the mortgage refinance is effectively a resetting of that loan. You’ve either got the same lender or a different lender who is giving you the money to cover the leftover amount you have on your current mortgage, and you get a brand new one. And that can be the exact same term, that can be an extended term, a shortened term. There’s all different ways to do it. And we can talk about those details, but effectively, it’s a reset of that loan.

Tim Ulbrich: Awesome. And I think for many folks listening, especially with the rates where they are at today, most notably, we think of a refinance to reduce your monthly payment, reduce the overall interest that you pay over the course of the loan, but what else is out there? Why might somebody refinance beyond those two factors?

Nate Hedrick: Yeah, the ones that I see a lot too are your house has gone up in value, so you actually want to get a better equity on that property so you can actually get more cash back out of your property itself. You can use it to eliminate PMI, that’s actually why my wife and I did it. And we can talk through that, but we actually wanted to get rid of PMI, and it was the easiest way for us to do that. You can actually just reduce the loan term. Maybe if you’re really driving toward that FIRE movement like we’ve been talking about and you want to get that paid down that much faster, you can reduce the actual loan term to a reduced interest rate and a number of other things to basically get that paid off that much faster.

Tim Ulbrich: So if we have somebody listening, you know, I’m going to give them my situation for Jess and I. We moved here to Columbus fall 2018. You know, interest rates really were at — I say ‘peak,’ but again, if we consider this historically, peak is a relative term. But at the time, we got a 30-year mortgage for 6.25% was our interest rate, wasn’t too long ago. And here we are again with rates lower than that. So I’m guessing many of our listeners are thinking, OK, maybe I’ve got a rate where this makes sense. And we’ll talk about how you evaluate whether or not that makes sense and where the break-even is. But how does one qualify? And what are the steps that are involved that if somebody’s thinking or finding themselves in a similar situation, to determine if this is for me, how do I begin that qualification process?

Nate Hedrick: Yeah, so if you currently have a mortgage, you pretty much automatically qualify for a refinance. The tricks to how you get a good refinance come down to a number of factors. So one is the equity in your home. That’s probably the most important factor, quite honestly. Most lenders are going to ask you that up front. So what is your current loan, basically? So if you took out a 90% loan, basically you put 10% down on your house a year ago, you probably haven’t built up a lot of equity in that home, right? You’ve been paying it off for a year, but most of those payments are going toward interest, not toward principal. And the actual equity you have, the ability to refinance probably hasn’t changed very much. There’s not been enough time for it to go up in value. And similarly, you haven’t been able to pay down the debt that you have. So that really is the key factor. How much equity do you have in the home right now? And how has that changed from your original loan? That’s kind of step one. The next thing is going to be based on like your credit score. So if you’ve got a better credit score, you’re going to qualify for better rates. So if you’ve bought the house five years ago, let’s say, and your credit score has gone up 100 points since then, you may qualify for very different rates than you did just that five years ago. So that’s a question to kind of ask yourself. And then beyond that too, it’s just what other factors are going into it? Do you have other debtload that the lender should be concerned about? It’s basically all the questions they ask you on an original mortgage and making sure that you’re a qualified candidate for that original mortgage again.

Tim Ulbrich: And I think that’s where for so many of our listeners, you know, we think of the life stage that often pharmacists, especially new practitioners, are in in terms of so many variables changing where, you know, income may have gone up, credit scores may have gone better, other debt has come down, perhaps they’ve paid down some of their mortgage. And obviously, that would make them more favorable, depending on the personal situation. The one thing, Nate, I’ve seen a little bit — and I don’t know if you’ve run into this — is especially recently as some markets have gotten really hot, if people got into bidding wars on a home where they, you know, were making just crazy offers, well above whatever was kind of market value at the time, and depending on what’s happened in those markets since then and how long it’s been, the appraisal process is going to be very important here to determine what that equity position is, correct?

Nate Hedrick: Absolutely. Yeah, the appraisal’s really what it all comes down to, and that’s effectively the bank sending someone to your home or sometimes they do a desktop appraisal where they’re researching it online only and not actually driving out. But they’re determining what is the market value of your home? There’s no one else bidding on it, right? You’re not actually up for sale. So they have to kind of use other area comps to determine what is the effective value of your home? And we’re going to base our loan on that amount.

Tim Ulbrich: My favorite appraisal story recently, I think I shared this with you, as Jess and I are looking at the refi process — we’re actually in the middle of this right now — is about six months ago, we got a HELOC on the home as we were looking at doing some real estate investing, and we haven’t done anything with it. But at that time, as a part of that, we got an appraisal done. And that came in at $10,000 less than we actually purchased the home. And now as we’re going through the mortgage refinance, you know, it was at our local credit union that I work with. And obviously as lending has become a little bit looser here again in 2020, couple quick pushes of the button on the computer and that appraisal is $40,000 different than the one on the HELOC. Same institution.

Nate Hedrick: Sounds about right.

Tim Ulbrich: And that came out $30,000 higher than we purchased the home. So I think that just speaks to some of the variability you see in the appraisal process.

Nate Hedrick: Yeah, a lot of that speaks to too basically how the banks make their money and how they want to get those loans, right? It’s better to have you in there for a long time. A HELOC is kind of boring to them, so they’re not going to appraise it very competitively.

Tim Ulbrich: But we like to think it’s objective, right? So.

Nate Hedrick: Exactly.

Tim Ulbrich: So let’s talk about costs. I think this is certainly top of mind for folks. You know, of course we can look at it and say, hopefully we get a lower monthly payment, hopefully we’ll reduce the amount we pay over the life of the loan, lots of commercials out there advertising no closing costs. And if somebody goes out and starts to shop, you see a wide range of what’s advertised as $0 closing costs to, as we’ll share an example here from a listener, question what can be fairly significant closing costs. So what are the reason for the differences? And what are some of the costs that are involved in a refinance process?

Nate Hedrick: Yeah, so like I said at the beginning, this is effectively a new mortgage. You’re resetting the button on your actual debt. So the banks and the lenders are going to treat it just the same way. So there’s the same level of closing costs, the same level of effort. They’ve got appraisals, they have to pay for title fees and all sorts of things that need to be taken care of. And while it feels like it should be less because you already live in the house and you already have the title and all that stuff, a lot of those things still persist. So just like when you get a regular mortgage, you will actually get basically a good faith estimate that will lay out all of those costs and what it’s going to be. Now, you talked about no closing costs. And there are some situations where there are truly no closing costs. But a lot of times what that means is that no direct out-of-pocket closing costs. They’re going to roll them into the loan. So if you have $5,000 in closing costs and your current mortgage is $180,000, well, your new mortgage would be at $185,000. And the idea is you just roll that into the loan, you’ll figure it out with interest later. So those closing costs advertisements can be a little bit misleading at times.

Tim Ulbrich: Yeah. And I think that’s such an important point. I’m glad you brought that up is really making sure you’re digging into that good faith estimate and doing your homework to understand what exactly are the individual line item charges, especially — as we’ll talk about in a moment — if you’re comparing multiple offers, getting as close to an apples-to-apples comparison as you can and really understanding what are you paying for now versus what’s being rolled into the mortgage, which ultimately you’re going to pay back with interest, you know, along the way, which may not be a bad thing. It’s just you have to be aware of what you’re working on and weighing how much you want to pay out of pocket versus how much you want to roll into the loan. So to your point, you’re resetting the mortgage, so think of it as somebody who’s buying a home for the first time, all those closing costs, again, you’re going to be evaluating and hopefully something you’re preparing. So I’m somebody listening, Nate, and I’m looking at a situation where OK, maybe I’ve got a 30-year mortgage at 4.5%, I’ve paid off two years, let’s say, 28 years left of a 30-year term, I hear that rates are lower, I’m listening to this podcast, how do I determine whether or not this makes sense? Talk me through how do you think through this process?

Nate Hedrick: Absolutely. So just like when we go to buy a house, right, I recommend all my clients shop around for a couple different mortgages. Right now, lenders are chomping at the bit to get you to refinance with them, even if it’s — this is ridiculous — but even if it’s the current lender you have, they can’t wait to refinance your loan, right? They just want you to secure your business as long as they can. So you give a call to a local branch or a lender that you know or a lender that your listing agent has recommended, anything like that, and they’ll immediately be like, ‘Oh yeah, refinance, let me get you to our refinance department. Here’s our refinancing guy,’ or what have you. And so they’ll be able to tell you quite quickly, you know, based on a 10-question survey that they’ll have over the phone with you, ‘Here’s what we expect your rate to be, here’s what some of the breakdown of what you’d actually pay in closing costs,’ I mean, I called up when we did our refinance, I called up three different lenders and within, I mean, within an hour, all three of those lenders had gotten me a reasonable result of what I was going to be able to refinance with.

Tim Ulbrich: Absolutely. Yeah, and I did the same thing. So you know, I actually reached out to the institution that currently holds our mortgage, and to your point, I think I get something in the mail every three days from them. I haven’t got any phone calls, but I get lots of mail from the current lender. So I reached out to them, I used the Credible tool that we have on the site, which I’ll talk about at the end, and then I went through our local credit union that I’ve done other business with. And I wanted to just see both experience-wise as well as rate-wise and again, trying to compare some of those costs what’s involved as well. And three very, very different experiences. And I think it speaks to the value of making sure you shop around, just like we talk about with many other things on this show, life insurance, disability, professional liability, etc. So breakeven, how do I figure out does the math make sense on this? So instead of just looking at here’s my current rate, here’s my new rate, here’s my current monthly payment, here’s the future monthly payment under refinance. That’s a good start but one shouldn’t stop there, right? So how do I determine whether or not this makes sense and ultimately get to a breakeven point?

Nate Hedrick: Yeah, so the trick is to know your numbers up front. You have to know what your current interest rate is and what you’re actually paying monthly. And then once you start getting these quotes and start talking to these lenders, you’ll have new data to basically plug into that chart and be able to say, OK, if we’re at 4.5% now and we’re at 3.5% later, what is our monthly payment going to go down to? Or perhaps if I am changing my loan term, what is my monthly payment going to go up to or change to or whatever the case is going to be? But what does that look like? What’s that difference? And is my overall payment going to be lower, my overall interest payment over the life of that loan going to be better? Now, most people, not everybody, but most people don’t live the entire 30 years in one house, right? Most people move on. So the other question is how long am I going to live here? Because if you’re saving $1,000 a year, but the closing costs are $8,000, you better be there at least eight more years for it to make actual sense. So that’s a really important question. I think no matter what you’re doing, the breakeven analysis is how long am I going to be here to basically make up that difference in terms of the costs up front versus the costs saved over the course of years?

Tim Ulbrich: So I think that’s a great way of thinking about how long am I going to be here? And I’m looking at the math, right? So if you’re going to save let’s say $200 a month, taking that figure and then looking at the closing costs, let’s say your closing costs are $3,000, your $200 a month, how long does that $200 a month have to be saved ‘til you get to that breakeven of $3,000? But also looking at, as you mentioned, the total amount of interest, the total payout over the life of the loan. One of the most common things, Nate, that I think I see and I’m sure you see often talking with individuals is somebody who maybe started with a 30-year, they now are let’s say 26 years left, and they go to refinance and they reup a 30-year, so they restart the clock, but they only focus on the monthly payment, right? And they don’t consider the fact that they’re then going to extend the loan another four years, which is the progress that they’ve already made. Correct?

Nate Hedrick: I see people doing this with student loans too.

Tim Ulbrich: That’s right

Nate Hedrick: And you guys have more experience than I do, right? They say, ‘Oh, look at my payment’s lower, this is fantastic. Yeah, my interest rate is lower too. I’m sure it’s great.’ They’ve gone from having three years left to now jumping back to 10 years of loan payments. The overall interest paid over that life is tens of thousands of dollars more, potentially. So you have to factor all three of those things in.

Tim Ulbrich: So I think this is where I would encourage our audience to nerd out, create a spreadsheet, right? So you know what I did, as I mentioned, three different institutions, so I worked with my current lender, worked with Credible, which is then shopping around multiple options, which I’ll reference here in more detail in a moment, and then the credit union. But within each one of those, you’re then going to get different options in terms of 30-year, 20-year, 15-year term. And then even within those, you’re going to have different options that range in terms of whether or not you purchase points. So I think I ended up with the spreadsheet of, I don’t know, 20 or 30 different fields, trying to figure out not only what would that be in terms of monthly payment but then also looking at over the totality to try to determine, OK, if I were to continue on this path as is today, how much would be out-of-pocket? And then how would that work out with each one of these? What about the other side of this, Nate? So somebody who let’s say has a 30-year term right now, maybe they’ve got 26 years left to pay and they’re thinking, maybe I’m going to go down to a 15- or a 20-year, how do you think about this from an opportunity cost standpoint? Because on one hand, somebody might say, ‘Well, this is great. I’m going to save x dollars in interest,’ which they could calculate. On the other hand, they might say, ‘You know, do I really want to be making extra payments when rates are so low? Even if I can save interest, could I be using that money elsewhere?’ Talk us through your thought process there.

Nate Hedrick: Yeah. It’s a great question. It all comes down to kind of what your financial goal is, right? Do you want to be throwing extra money at your mortgage right now? Or are you saving that for something else? Maybe it’s more investing or investing in properties or whatever the case may be. So yeah, it’s a good question. It’s going to be different for everybody, but when we looked at it, actually, we had a 30-year rate when we did our refinance. And we took it down to a 15-year because the amount we saved in interest made our payment not that much different. So for us, it was like, well, we’ll just take 10 years off this mortgage to keep paying effectively what we’re paying now. But we’ll know that we’re saving money in the long-term of the interest paid. It was a feel-good thing for us. And sometimes that’s a better driver than crunching all the numbers.

Tim Ulbrich: You know, this reminds me too, Jess and I were recently talking about this as we were looking at, hey, maybe we go down to a 20- or 15-year, and then of course you have the conversation of OK, what pressure is this higher monthly payment going to put on our financial plan? How much margin do we have? You know, do you have a good emergency fund? All the things we talk about on the show. But might there be any life variables that will change that could either increase or decrease that pressure on your margin, right? So you know, I’m thinking of things like potential job loss or could go the other way, a promotion or addition in terms of children to the family or maybe you have children that are moving out of the household and you have more margin. So it can go either way. And I think the conversation that is so common, just like it is with student loans, is it’s easy to say, ‘Well, let’s just opt for the 30-year, the longer term, and then we’ll make extra payments.’ And not suggesting that’s a bad move whatsoever, obviously it depends on your personal situation. I would just challenge, you know, what’s the reality of that happening when push comes to shove? And I think for some, there’s value in kind of forcing that hand with the more aggressive payment whereas for others, that’s not the move to make. So you’ve got to really take a step back and say, behaviorally, what do we need for our plan? How much margin do we have or not have? Would this put us in a tight position? Do we need that type of behavioral solution? Or can we really depend on ourselves to make that extra payment each and every month, perhaps automate that, but have the buffer if you need it for whatever reason?

Nate Hedrick: Yeah, I think that’s huge. And to make it even more complicated, I know when I was looking at rates, the difference in interest between the 15- and 30-year rate were significant.

Tim Ulbrich: Absolutely.

Nate Hedrick: So they’re enticing you even further to go to that 15-year, and it’s like, ah, now I have to do even more math and figure out what I want to do.

Tim Ulbrich: Absolutely. What about points? You know, this is something that caught my attention — and we’ll talk about an example here from a listener that I think can make this process a little bit more confusing. And I know from personal experience, when my wife and I, Jess, purchased our first home back in 2009, I felt like this as I looked back through paperwork, either I didn’t have the memory of the conversation or it was so subtle that all of a sudden, you know, points were applied and I didn’t really have a full understanding of the process. And I think that’s all too common. So talk to us about what are points? Why might somebody consider them? And just make sure that our listeners feel educated and ready to have that conversation with the lender.

Nate Hedrick: Yeah, it’s funny, I’m seeing this conversation come up less and less. I feel like with interest rates where they are right now, points are not as big as they were a couple of years ago. I’m sure they’re still talked about plenty, but I just don’t see it with my clients as much. But what points basically are is a way to buy down your interest rate. So you pay some amount of money, the bank sets what those point values basically are, and you buy down your interest rate. So if it was 5% and you pay a certain amount that the bank sets to basically get that down to 4.75%, you can pay an upfront cost to reduce the interest of the life of that loan. So you know, the basic principle is that you’re giving away up front cash to pay less over the life of that loan. So in the case where you’re like, this is my forever home, we plan on being here 20 years, it may be very advantageous to give up a little bit more cash up front, knowing that you’re going to have a lower interest payment down the road. Now again, with interest payments this low as they are or interest amounts as low as they are today, I don’t see points as being quite as important. But it is a way to kind of if you really want to get that interest rate down as low as you possibly can and you’ve got some extra cash to throw at the problem, that’s not a bad way to do it.

Tim Ulbrich: And does this just come down again to running your numbers and doing a breakeven analysis, again, thinking of factors like time that you’ll be in the home and how much can you let go of that cash now, what other impact does that have on other financial goals, right? I mean, all of these variables come to play?

Nate Hedrick: Yeah, and it’s funny, this one more than any of them really matters on how long you’re going to be in the home. The bank is always going to make the points advantageous at some number — like it will be like, at 12 years, it will break even. So you’ll know. That point is very obvious. So it all comes down to how long am I going to be here for whether or not the points are worth it.

Tim Ulbrich: So let me — that’s a good segway into a question we had from somebody in the YFP Facebook group. And I think this will help us summarize a lot of what we talked about and just hear and give our listeners kind of an inside Nate’s brain look of how you think about this situation.

Nate Hedrick: Dangerous.

Tim Ulbrich: So this question to the group is, “Would you refinance your mortgage” — it comes from Alena — “Would you refinance your mortgage if current mortgage is 4.6% and new one will be 3.3%?” She goes on to say, “It will lower monthly bill by approximately $200,” so lower monthly payment about $200, “and saves $86,000 for the life of the loan.” And that would be over a 30-year fixed period. “But it will cost $10,000 in closing costs. Just want to hear your thoughts.” So Nate, how would you — obviously, we don’t know every variable here. So big asterisk in how we respond and really just meant for us to kind of talk through from an education standpoint, how would you think through this specific scenario?

Nate Hedrick: Yeah, so this is kind of the classic setup, right? The hook is you’re paying 4.6% right now, wouldn’t you rather be paying 3.3%? Everyone listening to this would say, ‘Yes, that sounds fantastic. I want to take a point and some off of my current interest.’ And then again, you take that a step further and you say, ‘How much does this reduce my monthly payment? Wow, it’s $200 a month. That’s great. What could I do with that extra $200?’ And then again, we’re like, ‘Well it’s a 30-year rate, but who cares? Look, we’re saving $86,000 over the life of the loan. Everything seems to make sense.’ Then that $10,000 number kind of jumps in at the end, and that’s when you have to have that, OK, well how long are we going to be here? Right? If I’m saving $200 a month, at what point am I going to be able to say, ‘Well, that $10,000 was now worth it?’ And how confident am I in that decision to say, I’m going to be here for 15 more years or whatever the case may be.

Tim Ulbrich: Absolutely.

Nate Hedrick: That’s when that — it’s no longer a numbers game. It comes down to what is your life looking like? And how long are you committed to that particular home? So that’s, again, this is actually exactly what I ran into when I was doing my refinance, looking oh, great, these numbers looks fantastic. Everything marches out, makes sense. But wait, how much is closing costs? Oh, I don’t know if we’re going to be here nine more years. That doesn’t make a lot of sense for me.

Tim Ulbrich: Yeah. And here is a great other reminder, get out the spreadsheet, start crunching the numbers, and don’t stop at the monthly payment. You know, what we don’t know here is where they’re at in the current term. So now she’s doing a comparison over the life of the loan. So $86,000 saved over the life of the loan, $10,000 in closing costs, so we’ve got to already subtract $10,000 to say what’s the net difference? $76,000. $200 a month savings, so we know that would be $2,400 a year.

Nate Hedrick: Right.

Tim Ulbrich: So we’re looking at roughly four years to get the breakeven. But the question is how confident are you? And the second question I would add is what else is going on? So how much is that $10,000 needed or treasured? So is this somebody that doesn’t have an emergency fund, you know, is paying off lots of student loan debt, is this somebody that has other goals, wants to strategically invest, to do some other things? Maybe isn’t taking advantage of an employer match retirement account that this could help get kind of that match component if they contribute? So lots of variables here that I think would really get to, again, as we talk about over and over again on the show, not looking at one part of your financial plan in a silo but really taking a step back and saying, what else is going on? Now, if this is somebody who has no debt, every other part of their plan is humming, full emergency fund, they’ve got retirement accounts that are being maxed out, they think they’re going to be in their home forever and they’ve just got cash laying around, which sounds like a pretty sweet position to be in, right, they might look at this differently, right, than somebody else who is a little bit more pressed.

Nate Hedrick: And watch too — it’s funny. This is another great example of when the bank will come and say, ‘Well, it’s $10,000 in closing. But don’t worry, we’ll roll that into the loan.’ So now all of a sudden, your math, it doesn’t actually track as well as it did. You’re paying interest on that $10,000. So watch that. Watch where they’re going to set you upfront with here’s $10,000 in closing costs, and then they’ll roll it into the loan at the back end.

Tim Ulbrich: So one of the things I want to mention as we wrap up here is we are excited about a partnership we’ve rolled recently with Credible. And this really mirrors what we’re doing with some of the other things on life and disability of trying to bring our audience as many options as they possibly can to be able to shop around. And so Credible allows you to, on our platform, check six lenders. You can check the rate with them, and they do a soft credit pull, so it will not have a negative impact on your credit. Very quick, I went through this myself, less than five minutes, very user-friendly platform. And I will say, as somebody who did not have such a great experience with a platform like LendingTree, where I was getting harassed with phone calls for I think really, a couple months, to be honest, I thought this here, they did a nice job here of allowing you to see rates, shop things around, but I wasn’t getting hounded with phone calls. And you only have to upload documents once. So again, as we always say, just as I did, I wouldn’t stop here. I think this is a great place to start. But go to your current lender if you’re refinancing, you know, go to a different lender if there’s a unique product that’s in your area. And again, compare multiple options. And I think Credible is a great resource to get started doing that. And you can learn more and do that by going to YourFinancialPharmacist.com/reduceyourpayment. Again, YourFinancialPharmacist.com/reduceyourpayment. So Nate, talk us through, you just did this. Right?

Nate Hedrick: I closed on it less than a month ago.

Tim Ulbrich: Yeah, and yours was somewhat unique. So I think it would be interesting for our listeners to hear that experience, your thought process, and how you arrived — even if that one may not apply to many people that are listening, I think it’s just a good reminder of thinking of all options that are out there and for them to hear how you and Kristin thought through that process.

Nate Hedrick: Absolutely. So we bought our house five years ago now. It was five years ago in September. And when that five-year mark kind of hit, that’s when I said, ‘We should probably look at refinancing. Rates are really low, we’ve been here for a couple years. Hopefully there’s some good equity built.’ So we started pursuing it, and one of the main drivers was the fact that we’d been paying PMI. So again, fast forward — or rewind before. I was a listing agent before I knew what I was doing in terms of buying a house. We bought early, we put 10% down, we said, this is going to be great. And then we were paying $100 a month in PMI.

Tim Ulbrich: Been there, done that.

Nate Hedrick: Yeah, exactly. Many, many listeners I’m sure are in the same boat. And we actually went to our lender first, and we said, ‘Hey, can you get rid of our PMI? We’ve been paying this much, we think our equity is this. I did my own listing agent appraisal, which is worth nothing, but here’s what I think the house is worth.’ So we applied and they said, ‘No, absolutely not. You have to have x, y, and z loan-to-value.’ They basically said no. So I said, ‘Fine, then I’m going to refinance out of it.’ And I started getting quotes. I went to our current lender, I went to kind of a big bank. I went to one of the lenders that I use for my investing properties, which is kind of a little bit smaller and they’re a little bit more crafty with what they can do. And I just started comparing quotes and kind of getting an idea of what the landscape looked like. And my first thing that I got hit with was, ‘Here’s all your closing costs. This is how much it’s going to cost you.’ And then Kristin and I had to have that discussion, OK, well, how long do we think we’re going to be here? And we’re really kind of in a tossup right now. I think, you know, sometimes we say three more years. Sometimes we say 10 more years. And it’s really hard for us to put a number on that. And so that made the conversation that much more difficult. So anyway, I went back to that small kind of hometown lender that we use for our investment properties and started having conversations about, what other options are there? Is there anything we need to get creative? And actually, she presented me with a pretty unique option that it’s effectively a mortgage, but it’s more of a home equity loan. So you have to have you’re already in the house. It’s only for refinances, and it’s a Home Equity Line of — it’s actually a home equity loan, a home equity term loan is what the official term is. And with this particular product, they had a deal going on where it was a new branch, they wanted to drive business and create value like every other bank, and they offered it with $0 appraisal fee, $0 closing costs, not just rolled in closing costs, but $0 closing costs. And a fixed rate interest, which is huge. No prepayment penalties. I mean, all the things that I was like, ‘Well, this is going to be the catch. And this is what’s going to stop this from working.’ But all of those things I worked through, and there was really no catch. So I had a couple more conversations. I actually called up Tim Baker, our financial planner, made sure it made sense with him too because I hadn’t seen this product before. And everybody said, ‘Yeah, this looks great. I think you’re good.’ And yeah, it’s been a really great way for us to refinance. We got our interest rate cut by a full percentage point, and we didn’t pay $1 in closing costs. The appraisal was free, all that was free. And the kicker, my favorite part of the whole process, was that again, we’d been in the home for five years, so when they came out to do the appraisal, they looked at the improvements we’ve done, they looked at the market around us. We actually — I scheduled the appraisal the day after I knew a house down the street was closing.

Tim Ulbrich: Well played, well played.

Nate Hedrick: It helps to be an agent, right? And so we had this great other property supporting our value. And we gained like $30,000 in equity — actually, $35,000 in equity from when we purchased the house. So immediately after we refinanced, we went out and we got a home equity line of credit for the extra equity that we’d built in. And it was a great way for us to kind of group those together and set ourselves up for more success.

Tim Ulbrich: Such a good example of reasons to refinance. Not only the lower rate, but obviously you mentioned the PMI piece but then also with the increase equity, opening up a HELOC option if you’re trying to do other things, which I know you are, real estate investing, things like that. So I think too, this was a good reminder — and I had a chance to talk with that institution, just trying to learn more — it’s a good reminder of just to think creatively and look at all solutions. And if I understand this specific product correctly, it’s not a new product. But it makes sense in the current interest rate market that we’re in whereas historically, maybe it hasn’t made as much sense. And what I’ve found is that as I compared that option for us where we think we’re going to be in the home for a very, very long time, it wasn’t as competitive rate-wise.

Nate Hedrick: Right.

Tim Ulbrich: But I think that was what was unique about your situation is that perhaps there’s a move in the shorter term. And to find a solution that had maybe not the best rate but a close rate but didn’t have all the costs up front made sense for your situation. So I think, again, just a reminder that there’s not one solution that fits everyone out there.

Nate Hedrick: And for us too, it didn’t even reduce our monthly payment. I think I mentioned already, but we dropped from a 30-year, which we had paid five years on, down to a 15-year loan, so the idea being that if we are here for a little bit longer period of time, now we’ve got — we’re overall reducing the cost of the total cost of the loan by taking off that 10 years. So we didn’t actually reduce our payment by that much every single month, but the overall value of it was there.

Tim Ulbrich: Awesome. So Nate, this is great stuff. And as always, love having you on the show, picking your brain. Here, we’re talking about refinancing. But I know there’s some listeners that maybe aren’t in a refinance situation, might be looking to buy for the first time or they’re in a home and instead of looking at refinance, they want to actually move to another home. And then I think we’ve got that unique connection with you and the concierge service that we do with obviously you wearing the dual hat of a pharmacist as well as a real estate agent. So tell our listeners more about for those that are in that situation, either buying for the first time or looking to move, where they can go to learn more and what that service is all about.

Nate Hedrick: Yeah, absolutely. So through our partnership together, we’ve kind of launched the YFP concierge services, which is a great home buying experience you can take part in for absolutely free. The way it works is you work with me, we have a 30-minute planning call, kind of go through some of your priorities, talk about budget, talk about what you’re looking for in a home, location, all that great stuff, to figure out what’s going to be a good fit for you. And then I actually set you up with a local real estate agent. One of the things that I do is interview a bunch of local agents in the area that you’re looking, make sure I’ve got somebody that’s going to line up with your priorities and what you have in mind. And then I get you guys connected and I stay a part of that process the whole time. So we’ve had a number of clients actually go through the concierge services to find a home. We’ve had some in Baltimore, I’m working with one in Washington right now. We’re kind of all over the place, which is really fun. And it’s been a great way to if you don’t know the area very well or if you don’t know any agent in the area or you just want that peace of mind knowing that you’re going to get somebody really good that’s been vetted by another real estate agent, it’s a great opportunity to kind of work with us to make sure that you’re getting the best experience possible.

Tim Ulbrich: Awesome. So to our community members, you can go to YourFinancialPharmacist.com, and then we have a page you’ll see there, you can click on at the top. We have a header “Buy or Refi a Home.” And from there, we have an option to find an agent, and you’ll see more information about being able to connect and work with Nate. So Nate, thank you as always, and looking forward to having you on at APhA this year. So for our community members that will be at APhA, Nate will be joining us out there at the booth. So we hope you’ll stop by and say hello. And as always, appreciate your contribution to the show.

Nate Hedrick: Happy to be here, as always.

Tim Ulbrich: Awesome. And as a reminder to our listeners, if you like what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating and review in Apple podcasts or wherever you listen to your podcasts each and every week. Have a great rest of your week.

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YFP 138: What You Need to Know About Retirement Accounts in 2020

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What You Need to Know About Retirement Accounts in 2020

Tim Baker, our own fee-only CERTIFIED FINANCIAL PLANNER™, joins Tim Ulbrich to talk about key retirement and tax numbers for 2020 and the SECURE Act.

Summary

There have been several changes to retirement account contribution limits for 2020. In addition to these changes, the SECURE Act was passed at the end of 2019 which also carries several changes that affect retirement savings. On this episode, Tim Ulbrich and Tim Baker dive into some of these changes.

Although the increase in contribution limits is small, this will hopefully allow pharmacists the opportunity to save a larger portion of their salary to meet their retirement savings goals quicker. To start, 401(k), 403(b), Thrift Savings Plans and most 457 plans have an increased contribution limit of $19,500 with a catch up amount of $6,500. IRA accounts are typically used to supplement 401(k) or 403(b) accounts. While the contribution limits for 2020 are the same, what’s changed is the phase out numbers. Those filing married filing jointly aren’t eligible to contribute to traditional IRAs after earning a modified AGI of $206,000 and for those that are single that eligibility ends at a modified AGI of $75,000. There have also been changes to the Roth IRA and HSA deduction limits.

Tim and Tim also discuss the SECURE Act (Setting Every Community Up for Retirement Enhancement) which is effective January 1, 2020. This act carries several changes in retirement taxes, but three main changes are the change in the required minimum distribution age (RMD) to 72 years old, the elimination of an age limit for traditional IRA contributions and access to retirement benefits for part-time workers. Tim and Tim also discuss changes in 529s and the requirement for plan administration to offer projections for lifetime income and nest egg information.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to this week’s episode of the Your Financial Pharmacist podcast. Tim Baker is back on the mic to join me as we nerd out for a little bit about changes to retirement accounts in 2020 and the recently enacted SECURE Act, including what you should know and the implications this may have on your retirement savings strategy. Tim Baker, welcome back.

Tim Baker: Hey, Tim. What’s going on?

Tim Ulbrich: What’s new and exciting in Baltimore?

Tim Baker: Oh man, just living the dream, yeah. I feel like I’ve been awhile since I’ve been on the podcast. I feel like I keep saying that. But yeah, things are good. Family’s good, good Christmas. And what’s good on your end?

Tim Ulbrich: Going well. I can’t complain. Excited to have you back on the mic. I know we’ve been doing the Ask a YFP CFP segment. We’ve been bringing you on, and we would encourage our listeners to continue to submit questions if you have them. That’s been fun. But exciting year ahead, looking forward to the American Pharmacists Association meeting coming up. Hopefully we’ll see many of our listeners out there as well in your backyard in D.C. So it’s going to be a fun year. We’ve got a lot of exciting things planned for YFP. OK, so we’re going to tackle, as I mentioned in the introduction, these important updates as it relates to retirement contributions in 2020, the SECURE Act. So first, let’s talk about changes to retirement savings contribution limits. And we’re going to nerd out a little bit here on numbers, but we’ll link in the show notes to some articles that if our listeners want to go back and see these numbers, reference tables, they can do that easily without having to worry about jotting them down or hearing them and remembering them. So we’ll go through that, and then we’ll dig into the SECURE Act a little bit further. So here we are, a new year, 2020, which means new limits on retirement savings accounts. And while we’re not going to in this episode dig into the ins and outs of investing, including terminology, how to prioritize savings, we did already talk about that in detail in our investing month-long series in November 2018, which included episodes 072, 073, 074, 075, 076. And we’ll link to those in our show notes. So Tim Baker, let’s start with the changes to 401k, 403b, Thrift Savings Plan and most 457 plans, which for the sake of our discussion, we’re going to group those together. So refresh our memory on how these accounts work and then the changes to contribution limits on those accounts in 2020.

Tim Baker: Yeah, so most of us have the 401k, a 403b, if you’re a Tim Church of the world and work for the VA or the government, the TSP, the Thrift Savings Plan. These are retirement plans that are typically sponsored by the employer. And the 2019 limits were $19,000. Going forward in 2020, they’re actually $19,500. And the catchup limits if you’re out there and you’re age 50 and older, the catchup limit after you’ve reached that age goes from $6,000 to $6,500. So again, these are typically the contributions that are coming out of your paycheck that get automatically contributed into this account and then invested for the purposes of retirement. So a little bit — and these get adjusted pretty regularly. I feel like when I was studying for the CFP way back when, these were in the $17,000 or $18,000.

Tim Ulbrich: Yeah, I remember that.

Tim Baker: And then they creep up. And it’s just kind of to account for inflation and that type of thing.

Tim Ulbrich: Yeah, and I think this number is important. So we’re talking about $19,500, obviously we’re talking about pre-tax savings here. So these are going to be taxed later on at the point of distribution. And we’ll talk about required minimum distributions here in a little bit as we talk about the SECURE Act. But I was thinking about this this morning as I was driving in, Tim, $19,500. While that may seem like an insignificant jump from $19,000, if you look back to when they were in the $17,000s — and I also think about this in the context of pharmacists’ salaries that are remaining somewhat stagnant or even in some spaces getting adjusted down, I think that these numbers continue to go up. And we’ll talk about the same thing on the IRA side. What this means for pharmacists is likely, in many cases perhaps, a greater opportunity to save a greater percentage of their salary if that’s something that they’re able to do. And just to refresh our memory, this does not include employer matches, correct?

Tim Baker: Correct. This is just your own contribution through your paycheck. It does not include what an employer matches. So that limit is actually much, much higher.

Tim Ulbrich: OK. So $19,500, as I mentioned just a few minutes ago, we’re not going to talk in this episode about the priority of investing, whether that be 401k, a 403b, or should you be putting money in an IRA? But we did talk about that back in the fall of 2018. OK, so what about IRAs, Tim? Give us again a brief overview of IRAs, the limits that we’re seeing for 2020 and the catchup provisions as well.

Tim Baker: Yeah, so the IRAs are pretty stagnant. So just to back up, the IRA is typically what you use to supplement what you’re putting into your 401k, 403b, so it’s something that you typically open up yourself, either at a Vanguard or Fidelity, a TD Ameritrade, and basically set it up and fund it yourself. Or you can do it through a financial advisor as well. The amounts are pretty much the same from 2019 to 2020. It’s still $6,000 that you can contribute into a traditional IRA and a Roth IRA in aggregate, meaning if you put $4,000 into a traditional, you can only put $2,000 into a Roth IRA. And just to back up a little bit further, Tim, just when we think of Roth, a Roth IRA, we think of after-tax. So typically, the example is if you make — and we’ll use lower numbers because of the number phase out — but if you make $50,000 and you put $5,000 into a Roth IRA, you’re taxed on $50,000. You get no deduction. If you make $50,000 and you put money into a traditional IRA, it’s as if you’re taxed on $45,000. So your taxable income goes down. So that money inside of the IRA grows tax-free. And then when it comes out, if it’s a traditional, which it hasn’t been yet taxed, it gets taxed. If it’s a Roth, which has already been taxed going in, it doesn’t get taxed. So the thing to remember is it’s either taxed going in or taxed going out. The growth it enjoys in the middle, in the actual pot, is tax-free. So the numbers are the same between 2019 and 2020. What is a little bit different are the phase-outs. So those inch up a bit. So as an example, if you’re a single individual in 2019, if you made $64,000-74,000 in Adjusted Gross Income, the deduction that you would receive would slowly go away. And then anything over $74,000, you would get no deduction. For 2020, that goes up $1,000, so now it’s $65,000-75,000. So typically the people that I’m talking to that still get a traditional IRA deduction are you students, residents, fellows out there that are going that route. And then same thing with on the Roth side of things. So once you make a certain amount of money, you can’t even contribute to the Roth. And that’s where we can kind of talk about the back door Roth conversion. So for 2019, for a single individual, once you made $122,000-137,000, it would start to phase out the contribution that you could make in there. Once over — and now in 2020, it goes from $124,000-139,000. So it goes up a touch. So if you’re in that low $120,000s, you can still put money into a Roth. But if you start creeping up to that number, then obviously the door slams shut and then we typically do a non-deductible traditional contribution that we bought back door into a Roth. So — and we’ve done, I think we’ve done podcasts on that before, I think Christina and I.

Tim Ulbrich: Yeah, we have. Episode 096 with Christina Slavonik, How to Do a Back Door Roth IRA, so I would point you to that episode. So just to summarize, Tim, contribution limits for IRAs remain unchanged from 2019 to 2020, $6,000 in 2019, $6,000 in 2020. But what we did see is some changes to the income limits going up in terms of where those phaseouts and contributions are allowed. So we’ll link again in the show notes to some articles of tables that you can look at those in more detail. So if we put the two of these together, Tim, we know for many pharmacists, you know, they’re thinking about saving for retirement in the context of a 401k, 403b, TSP, 457, as well as an IRA. So now between the two of those, excluding the employer match portion of a 401k, 403b, we’d be looking at north of $25,000 that they’re able to contribute between those. So not too bad, right?
Tim Baker: Yeah. And the other thing that we haven’t talked about that’s worth mentioning is the HSA. So the HSA has changed a bit, you know, for — this is assuming you have a high deductible health plan, you can couple that with a Health Savings Account, which for a single individual, the contribution amount moves from $3,500 to $3,550. So a little bit. And then the minimum annual deductible moves from $1,315 to $1,400. And then for a family, it’s $7,000 to $7,100 and then the deductible moves from $2,700 to $2,800. So that is, again, we’ve talked about that I think at length before. That’s the black sheep of all the different accounts out there because it has that triple tax benefit, which is a really nerdy way to say it goes in tax-free, it grows tax-free, and then it comes out tax-free if it’s used for qualified medical expenses or once you reach a certain age, you can use it for whatever you want. And the nice thing about that, Tim, is that it doesn’t matter how much money you make. You could make $50,000 or $50 million. You still get that deduction, that $3,550/$7,100 deduction.

Tim Ulbrich: Yeah, an extra $50 or $100, you know, matters, right? So from $3,500 to $3,550 for individuals in 2020, and up from $7,000 to $7,100 for individuals that have family high deductible health plan coverage. So we talked about HSA, we’ve talked about IRAs, we’ve talked about the 401k, 403b’s, etc. And so again, I think the take-home point here is making sure people are aware of what these contribution limits are, how they’ve changed, and what opportunities they have for them because ultimately, as we think about prioritizing savings and how this fits in with the budget and where you’re going to allocate your dollars, these three buckets typically are a big part of the long-term savings strategy. And really taking the time to say OK, among all of these priorities, these options that I have available here, obviously you’ve got other options in the brokerage market as well, what am I going to be doing in terms of savings? And which of these do I have available to me? And we know that HSAs aren’t available to everyone, but it seems to be we’re seeing this certainly is a growing area. And I would reference our listeners all the way back to Episode 019, where we talked about how HSAs fit into the financial plan. Obviously, the numbers then were different than what we’re talking about here. But the concept of the HSA remains the same. OK, so that’s Part 1 where we wanted to talk about the 2020 contribution limits and the changes and make sure our listeners are ready. One thing I want to ask you, Tim, before I forget and we jump into Part 2 here and talk about the SECURE Act, remind us of the timing of when those contribution periods end. So end of calendar year, going up until the tax limit deadline of April 15, so when — what is the timeline if somebody is listening who said, “You know what? I could have contributed $6,000 in a Roth at the end of 2019, but I only did $5,000. And here I am at the end of January. What options do I have?”
Tim Baker: Yeah, so for most of these retirement plans — not necessarily the 401k, the 403b, but for the IRAs — you can contribute all the way up until April 15 of this year for 2019.

Tim Ulbrich: Yep.

Tim Baker: Now a callout here because I’ve seen this with our own custodian who we manage client accounts with, and I’ve actually seen it when I logged into a client’s Betterment account here recently because we were in the process of moving that over. It’s kind of a weird thing, so I would caution — or I’d have our listeners look at this is the — when you turn the calendar — so let’s pretend, Tim, that you have at the end of 2019, you have $4,000 into your 2019 IRA contributions. So you still have $6,000 to go, right?

Tim Ulbrich: Yep.

Tim Baker: When the calendar turned — I’m not sure because I don’t know all the custodians — that January contribution actually gets counted towards 2020, which makes no sense at all because most people, the reasonable thing is like OK, fill the 2019 bucket before you start doing 2020. So you actually have to go back to the custodian, like Betterment or in our case, TD Ameritrade, and say, “Hey, let’s backfill that bucket that we still need to kind of top off before we go into 2020.” So it’s just one of those things that we have this first quarter of sorts to finish off our contributions. But the logic in a lot of these — you know, the way we contribute to our IRAs is just flawed, in my opinion. And I’ve seen this pop up a few times. So definitely something to kind of call out if you are doing this on your own.

Tim Ulbrich: So is the suggestion there then they reach out to the custodian and make sure that gets allocated correctly?

Tim Baker: Yeah. Like to me, and to me, it’s like something that I, I’m kind of talking to TD and some other institutions like why is this a thing? You know, 99 out of 100 people I would think would say, OK, if I still have 2019 contributions to make, it should be coded — I’m not a developer — but it should be coded as such as a default. So what I do is I would log in and typically, when you log in, you can see your contributions year-to-date, and it will show you basically in this period of time, it will show you your 2020 contribution, which should read $0, and your 2019 contribution, which should be — if it’s not $6,000, you should still basically backfill that until you go to 2020. It’s just this weird quirk that — and I kind of expected more from Betterment because they’re a newer kid on the block, and it was just one of these weird things that’s off. So to me, it’s use all of that up before you go onto the kind of the current year.

Tim Ulbrich: Come on, Betterment. We expect more. No, I’m just kidding.

Tim Baker: I know, I know. I don’t know, we’ll probably get a letter from them, like an angry letter.

Tim Ulbrich: Yeah, I’m sure. Yeah. Alright, let’s jump into the SECURE Act. We’re going to continue to nerd out a little bit here as we transition from numbers to talking about some recently enacted legislation that has fairly significant implications.

Tim Baker: Yeah.

Tim Ulbrich: And really a shoutout here to Tim Church, who kind of brought this forward to say, hey, we need to be talking about this. There’s some really unique provisions in here that may apply directly to our audience or at least to be aware of as we think about retirement saving strategies for the future. And I think in the midst of end of year, as this was passed at the end of December, obviously we’ve got a lot going on at the federal level that I think is drawing attention away from things like this. I think it got lost in the mix. So let’s talk for a moment, Tim, just start with what is the SECURE Act? And then we’ll talk about specifically some of the major changes that may be of interest to our audience.

Tim Baker: Yeah, so the SECURE Act stands for Setting Every Community Up for Retirement Enhancement, SECURE Act of 2019. These acronyms kill me. And being former military, I can appreciate a good acronym, but come on. So this is really the second piece of major legislation in the last 24 months, the first being basically the Trump tax code, the Tax Cut and Jobs Act, which had pretty fairly sweeping changes. And this is really — you typically don’t see this in a 24-month period. These typically happen over decades. And when we actually dug into the Act, pretty significant. This was passed by the House I believe in May. And then language in the Senate, and we kind of thought it would be buried. But in kind of the final days of the year, I believe it was passed on the 20 of December. It became law and actually became effective on January 1 of this year. So I was caught a little bit off guard, to be honest, about the big change. And I had heard about it and was kind of following it from a distance. But when it actually came through, I was actually surprised because obviously, with everything going on Capitol Hill, it’s just a lot swirling around. And they were able to actually get something done.

Tim Ulbrich: Well, and I think to be fair, like things don’t typically move this quickly, right? So we see something that passes December 20, 2019, and then with a couple exceptions here, really the Act is effective January 1, 2020, although some of the pieces are coming further behind that. But I think there’s some major, major things in here. And we’re not going to hit everything about the SECURE Act or we would I think put our audience to sleep, perhaps induce a couple car wrecks for those that are driving. So we’re going to hit the high points. We’re going to link in the show notes to some additional information that our listeners can go learn more about this. So please don’t interpret that we’re talking about every single piece of the SECURE Act. But why don’t we start, Tim, I think what really got a lot of press, even though it may not apply directly to where our audience is today, is around the changes in the required minimum distribution age. So talk to us about what that is. It’s not a concept we’ve talked a lot about on the show. And then what were some of the changes that happened related to that distribution age from this Act?

Tim Baker: Yeah, so — and I have a pretty, I want to say a pretty great graphic that I designed way back when that I sometimes will dust that off. But to kind of talk about RMDs, so — and maybe we need to post that somewhere. But so an RMD, a Required Minimum Distribution, is basically — so let’s pretend, Tim, you have a bunch of retirement accounts. And you have $1 million in a 401k, $1 million in a traditional IRA, and $1 million in a Roth IRA. How much money do you actually have? The answer is not $3 million, unfortunately because those — the traditional IRA and the 401k are all basically pre-tax dollars. So Uncle Sam has yet to take the bite of the apple. So when that gets distributed, they basically take their taxes. So in those $1 million accounts, if you’re in a 25% tax bracket, you get to keep $750,000. And then they keep $250,000. The Roth IRA, because it’s gone in after-tax, it goes free. It comes out tax-free. So after awhile, you know, after you work and you retire and you reach 70.5 years old, the government raises their hand and says, ‘Hey, Tim Ulbrich, remember all those years when we allowed you to basically have that money grow tax-free? We want our piece. We want our piece of the apple.’ So what they do is they force a required minimum distribution, which it looks at the balance of the account and then a ratio based on your age, and it applies it to that. And let’s say the first year, when you’re 70.5 years old, you have to distribute $2,000. And then every year, it gets bigger.

Tim Ulbrich: So it’s a forced contribution — or a forced withdrawal, right?

Tim Baker: It’s a forced withdrawal, right. So then you can invest that somewhere else or spend it or whatever. But for a lot of people that are like, oh, I don’t really want to use this money. I want to keep it growing so it kind of can be a disruptor, especially if we’re moving retirement to the right, which we’re seeing. So the big change, which is — I think it’s really a minor change because I think like it’s something like only 20% of the people are actually being forced to take RMDs. Most people are spending it down before that. I believe that’s the number. It moves from 70.5 years old to 72 years old.

Tim Ulbrich: OK.

Tim Baker: So they give you a little bit more runway on the back end to not have to touch those kind of those pre-tax accounts, which is typically the IRA, the 401k, 403b, that type of thing.

Tim Ulbrich: So it gives you an additional year and a half to let that money sit and grow before you have to take those forced withdrawals. But I think this — I’m glad we’re having this discussion because, you know, we talked before in the investing series about some of the strategy around taxable — you gave a great example. You’ve got three buckets of $1 million in a 401k, traditional IRA, Roth IRA, you don’t really have $3 million for those two. Now the third one, in the Roth IRA account, you’ve got $1 million there.

Tim Baker: Yeah.

Tim Ulbrich: And I think that’s one of the other advantages of a Roth account is you don’t have a required minimum distribution age, if my memory serves me correctly.

Tim Baker: Correct. Yep.

Tim Ulbrich: So you know, again, if we think about what’s happening to lifespans and as you think about where you’re at in your retirement savings and the potential whether you will or will not need that money at that age, I think that’s a really important consideration as we think about retirement savings strategy. Even though this year and a half may not be, you know, something that is monumental, I think it’s just a good reminder of how we’re thinking about the back end of taxes when it comes to our savings.

Tim Baker: Yeah, I kind of like the — it’s like, to me, it’s like who makes these rules up? It’s like 59.5 years old, 70.5 years old. It’s like, can we just use round numbers please? It’s like what? And again, it kind of is like the theory versus the application. And it’s just — it’s crazy. Yeah, I don’t understand it.

Tim Ulbrich: So in addition to the change in required minimum distribution age, we also saw that there is no longer, with the SECURE Act, no longer an age limit for traditional IRA contributions. So you know, again, obviously it may not be as meaningful for our audience in the moment. But this is really, really significant news in that previously, you couldn’t make traditional IRA contributions if you were 70.5 or older, but that’s no longer the case, right?

Tim Baker: Yeah, and it’s kind of — to me, I’m still kind of unsure how this works because if you think about it, it’s like, so you would basically be able to — now you’re able to contribute that if you’re still working and you have compensation, you can still contribute to a traditional IRA. And before, you couldn’t once you reached age 70.5. So they take that age limit off. I guess the question I have is like, OK, let’s pretend I’m 73 and I’m still working. Do I take a RMD and then just put it right back in?

Tim Ulbrich: Oh, right.

Tim Baker: You know what I mean? I don’t know. And I actually just thought about this now. Before, once you reached 70.5 years old, you typically just put it into a Roth. But again, like the idea is that the government wants you to spend that traditional, that pre-tax bucket down because they want their tax revenue. But I guess you can, I don’t know, maybe you can contribute that? I don’t know, I don’t know.

Tim Ulbrich: Yeah, maybe if we asked the representative that posed that about the age as well as that provision, maybe we’ll get a “I don’t know,” you know?

Tim Baker: Yeah, yeah.

Tim Ulbrich: And talk about that.

Tim Baker: Yeah, so you take the money out and then you just contribute it again? I guess if you have compensation, I guess that’s OK. But yeah, so again, what they’re trying to do — and I think we’re going to see more and more of this because I think the whole of traditional retirement, it’s going to go away. And I think they’re going to — even like the 10% penalties and things like that, I would imagine in 10, 20, 30 years, it’s going to look a lot different.

Tim Ulbrich: I would agree. So third thing here I want to talk about, because I think especially as we’ver seen more pharmacists that are transitioning to part-time work for a variety of reasons, is some interesting changes to your access to retirement benefits for part-time workers. So here we’re talking about employer-sponsored retirement plans. So talk to us about where we’ve been on this — and you know, this was actually kind of new news for me as I got up to speed — where we’ve been and what’s changed here as it relates to part-time workers and access to retirement benefits that are employer-sponsored.

Tim Baker: So one of the ways that a lot of employers are kind of getting around some of the costs of manpower and FTEs is to hire mostly part-time employees. And one of the reasons they could do this is if they had a 401k, you could basically exclude that from as a benefit. So the rule before the SECURE Act was that part-time employees who have worked 1,000 hours or more during the past year must be granted access to the 401k. That rule stays the same with the SECURE Act. The difference is now that part-time employees who have worked more than 500 hours per year for three consecutive years now must be allowed to enter into the 401k. Now, the caveat here, Tim, is that this sounds great. And I think we’re in alignment, obviously we’ve set up our 401k recently at YFP and we’ve included our part-time employees as part of that because obviously this is kind of the stuff that we talk about and we believe in it. The problem with this rule, though, is that the earliest a part-time employee can participate in a retirement plan due to this kind of second three-year rule that’s now still with the 1,000-hour rule doesn’t take effect until 2024.

Tim Ulbrich: Right, because of the delay.

Tim Baker: Yeah, the plans don’t start counting until 2021.

Tim Ulbrich: Yeah.

Tim Baker: So it’s good, but not for a couple more years. So I think we’re heading in the right direction. And again, I think what we’re seeing — and sometimes we hear it on the trail with politicians — is that one of the problems is employers are just hiring temp workers and part-time workers, which — it’s really because of an economics play because the true cost of a full-time employee with health benefits and retirement benefits and all that kind of stuff can be pretty steep. So I think this is a step in the right direction to kind of open up the door for a lot of part-time employees to save for retirement.

Tim Ulbrich: I agree with you. I think it’s a step in the right direction. I think the time period, because of the three years, because this doesn’t start until 2021, I’m a little bit disappointed by that. I mean, to me, this is a sooner rather than later thing. And I think from what I was reading, it looks like there’s still final rules that are in development here. So I think this is a stay-tuned type of thing. And to be clear here, this does not mean that employers have to contribute in terms of a match but rather that they will be required to allow the employer to participate if they meet the requirements that are set forth and that we just talked about.

Tim Baker: Yep.

Tim Ulbrich: And I share — you know, I’m pumped about what we’re doing at YFP in this area and some of our other benefits that we’re offering. I think it’s — it’s fun to be probably one of the most rewarding parts of 2019 is to be thinking about it from an owner’s standpoint of saying, “How do we want to invest in our employees? Why do they matter?” And philosophically, we’ve all been in employee roles and here we now are on the other side of it and how can we enact things that will increase employee satisfaction, retention, or we just feel like is the right thing to do?

Tim Baker: Yep.

Tim Ulbrich: What about — I mean, I think those got a lot of the headlines. What were some other things that stood out to you in the SECURE Act that, you know, might have been or is of interest to our audience?

Tim Baker: It’s funny because I was actually just talking about this. We do — as part of our financial plan, we do like an education presentation. And I’m going to have to go back because I was like prophesizing about, ‘Oh, I think the 529 will look a lot different in the future and blah, blah, blah,’ and I had not dug into the specifics about it yet. But so a little bit of the backdrop is that the Tax Cuts and Jobs Act a couple years ago expanded the use of 529s for K-12 expenses.

Tim Ulbrich: K-12, yep.

Tim Baker: Which was big because basically before that, the 529 was kind of like the retirement account for education where you had this long accumulation phase before your kid was born to 18, and then you would basically decumulate when they went to school. Now, the 529 — and now I say ‘now,’ but a couple years ago when they changed it, it could actually act as a pass-through. So you could put money in to get your state tax deduction and then pay for private kindergarten, first grade, etc. So the further expansion in the SECURE Act, the SECURE Act qualified education loan repayment is that it allows the 529 to basically distribute to make loan payments, which sounds like it would be an automatic thing. You have loans, and we have a balance in the 529, like that should have happened before. But the law basically includes an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 per planned beneficiary and $10,000 per each of the beneficiaries’ siblings. So again, you know, maybe not like a — I think this is a good foothold, but to me, I don’t think there should be a limit, to be honest. If there’s a 529 balance, put it towards the loans. So now homeschooling expenses still didn’t make the bill. They didn’t make an effort —

Tim Ulbrich: Come on now!

Tim Baker: I know, it’s like, get with the program. So still, that needs to happen. And then the second thing that happened is that, with the 529, it includes expenses for apprenticeship programs now. So if you’re going for an apprenticeship or your kid’s going for an apprenticeship, fees, books, supplies, required equipment, the program does need to be registered and certified with the Department of Labor, but that’s big. And that’s one of the things with a lot of parents that are like, ‘Well, what if little Johnny doesn’t want to go to education — get college?’ And my belief is that still, I think we’re going to keep going in that direction of opening up what the 529 can actually be used for. We just need to. We need to.

Tim Ulbrich: Yeah, that one, although it seems small, got me fired up, you know, in a positive way. I just think that we’re seeing certainly a transition of more people going into trades and other things.

Tim Baker: Yeah.

Tim Ulbrich: And I think from a parent concern, it’s something I think about often that hey, I’ve got four boys and maybe two go to college, two don’t, maybe four don’t, maybe four do, whatever. But to have that flexibility, you know, and that option available I think is huge. And I agree with you, I think we’re going to see more in this area. There were certainly other changes in the SECURE Act. You know, one of the things that stood out to me was a new requirement for plan administrators to offer projections for lifetime income at least once a year, info about the nest egg size, so you know, we might see, individuals might notice some more paperwork and things that are coming as a part of their 401k. But lots of changes here, and I’m glad we were able to talk about these as well as the 2020 changes to the contribution limits in the retirement accounts and the HSA component that we talked about a little bit earlier. So Tim Baker, excited to have you back on the mic. And I think this is a good place to remind our listeners as we’re talking about saving for retirement and new contributions and how do you prioritize these and where does this fit in with the rest of your plan, we offer fee-only comprehensive financial planning at Your Financial Pharmacist. Obviously, you’ve been leading that service for us. And we’ve got some exciting developments coming in 2020 with that. And if you want to learn more about that, YFPPlanning.com, you can set up a call with Tim Baker and see if that’s a good fit for you. And then we’ve also got some great calculators that Tim Church has been working on, one of them around projecting retirement savings and nest egg, so you can find that over at YourFinancialPharmacist.com. As always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, don’t forget to leave us a rating and review in Apple podcasts or wherever you listen to your podcasts each and every week. Thank you for joining us, and have a great rest of your week.

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