The following is a guest post from Brandon Dyson, PharmD, Co-founder tl;dr pharmacy
Note: The following is a sample chapter from tl;dr pharmacy’s guide: Mastering the Match. If you are looking to get a residency, Mastering the Match is the best place to start. It walks you through every step of the process; from how to make yourself a competitive candidate to how to nail the interview. In this post, I’ll talk about how (shockingly) expensive it is to get a residency and some ways that you can help lower that cost. If you want to give yourself the best possible chance to win the residency of your dreams, check out Mastering the Match here.
Money Talks: The Price of the Pharmacy Residency Quest
So you’ve decided you want to apply for a PGY1 residency. You, like so many others before you, have felt the rising pressure of holding patients’ lives in your hands and are not quite ready to take the reins all by yourself.
Or you’ve realized during your fourth-year rotations how much pharmacy school ISN’T teaching you, and you’re having an “oh-crap-there’s-so-much-I-have-left-to-learn” moment. I’ve so been there. (Sometimes still there, tbh). Which brings us back to your decision to apply for residency.
While the rest of Mastering the Match will prepare you for the residency process, this chapter is about the math. We’re pharmacists, we like math.
And no, this section is not about numbers in increments of 5s (#shoutouttomyretailphriends!). Nor will it have first-order decay equations a la vancomycin dosing.
WAY more complex then we are about to get into
This is simple arithmetic, but it is so necessary to know ahead of time what you’re getting into financially with the residency application process. Money is all about planning.
So let’s get started.
The residency search process can be broken down in 3 major phases:
Phase 1: The application
Phase 2: The Midyear trip
Phase 3: The interview trips
Now let’s take that exact same list and attach estimated costs to each piece to get a rough budget.
Grand Total for Residency Application Process
(with 4 applications and interviews): ~$4600
Phew! That’s a lot of money! Granted, it’s just an estimate, and there are certainly tweaks that can save money. Let’s break this down a little further and talk about where the plusses and minuses might be on this estimate. And we’ll also discuss a few tips to do this in a more thrifty manner.
The Application
There, unfortunately, isn’t much wiggle room to be had here. The only thing I’ll say is to be realistic and thoughtful in your decision to apply to a program. Don’t just apply to 25 programs willy-nilly because you heard so-and-so was going to apply to that many and you feel you have to in order to increase your match chances. That can quickly add up at $43 extra per program application!
This will be you if you apply to 25 pharmacy residency programs
scattered across the country
This is YOUR job search, and if a program isn’t really on the table for you (whether due to interest, distance from home, etc.), it’s ok to NOT apply! That being said, if you have the residency-or-bust attitude and the money to back it up, by all means, go for the gold.
Just remember, all it takes is one program to match. Refer to the many other sections of this guide for more advice on researching programs and the match process.
The Midyear Trip
Travel and Accommodations
There are many ways to save money here! There isn’t much leeway with flights unless you’ve saved up airline points on a travel credit card. You can also book WAY in advance when prices are generally lower.
Where you can really make an impact on your budget is with ground travel and hotel costs.
For ground travel, try to share airport shuttles with other classmates. There will likely be several of you getting into the same airport at similar times, so coordinate ahead of time to book shuttle transportation to and from the airport.
Even if you have to wait 30 min (or more) for other people’s flights to arrive; trust me, you have plenty to do to prepare for the Midyear. So grab a coffee and kill some time in baggage claim. It’s worth it to be able to divide the shuttle cost between up to 8 people for a van instead of just you in a taxi (because, math).
It’s a similar story for the hotel. This may surprise you, but you do not need to stay at the Ritz and drink Dom from fine crystal glasses. You don’t need to buy scotch that’s old enough to legally vote from the hotel bar. Be conservative here. A decent hotel one more block away from the convention center will serve you well.
That being said, I also wouldn’t book too far away from the convention center because you will be going back and forth A LOT. And those cute dress shoes are pretty much awful to walk in. Plus carrying your poster tube and your purse (or your European carry-all for the guys reading this). You don’t want to be a hot mess when you do finally arrive at the showcase.
Another thought on the hotel. Just like with ground transportation, sharing is caring. You don’t have to be besties with a person to share a room for a few days. More than likely, if it’s a classmate, they aren’t a serial killer. So you should be ok to bunk in together for the convention. At least figure 2 to a room so you can each have your own bed. But if you have good friends going and can be comfortable 4 to a room, go for it! (#sleepover!)
Another caveat here…
You do actually have to get some sleep during this convention so you don’t look like the walking dead when you’re telling the RPD why you want their program. So don’t just room with anybody for the sake of saving money. Especially if that somebody is only attending Midyear to hit up Bourbon Street or The Strip. Know what I’m sayin’?
Professional Attire
There are plenty of other places on the internet that can give you much better fashion advice than I can. This section is about how to find something without spending an arm and a leg. You don’t need to be all Armani for this event. Pharmacy residency programs are just looking for conservative, clean-cut, professional attire.
So if that suit happens to be off the rack at TJ Maxx, go for it! If you’re like me and have a hard time finding well-fitted business attire at discount stores, then it’s ok to invest in a nice suit (still doesn’t have to be Armani…a department store works just fine). THEN use the discount store for your dress shirt, business bag, belt, shoes, etc.
If you have a suit already, use this section of the budget to account for dry cleaning. Use a dry cleaner you trust but that isn’t too expensive. You want your suit to come back to you in good shape (viva la suit!). Then, if you’re a careful packer and you hang that suit up in your hotel bathroom right when you get checked in, it shouldn’t be too wrinkly. (And the shower steam can help diffuse minor wrinkles so you don’t have to mess with finicky hotel irons). Online reviews will often point you in the right direction for which dry cleaner does good work for the right price in your area.
Meeting Registration
There’s no getting around the meeting registration. The only tip here is that if you’re not already an ASHP member by the time of registering, it’s worth the $51 for a student membership to go ahead and join. You still come out ahead rather than paying a non-member meeting registration fee ($340 + $51 vs $480 for non-members).
Business Cards and CV Copies
Not every program at Midyear is going to accept these, it’s true. But you’d really hate to have an RPD ask for your CV or contact information, and you don’t have anything to give them. In this case, it’s better to have and not need than to need and not have. Have some copies of both on hand.
Luckily, business cards are cheap to design and print at most big box office stores. There are also online options like www.vistaprint.com. Maybe one of the student chapters of APhA or ASHP at your school is providing business cards through a fundraiser. Just go with the basic package (no glossy finish needed here, peeps), and monochromatic tones will be just dandy.
Don’t go overboard on your student pharmacist business cards…
Same with your CV copies. This is Midyear, your CV is likely going to end up in a box with hundreds of others for reference if needed. Don’t print it on vellum and douse it with the scent of sexy professionalism. It will not make you stand out (at least not in a good way). Just basic white paper copies will be fine. You don’t need to splurge on the thicker stock resume paper. The content of your CV is more important than the material it’s printed on.
Thank You Notes and Postage
There are mixed thoughts about this whole thank you note ordeal with Midyear. Some advise to always send a handwritten thank you note. Others say an email will suffice. In the end, it’s up to you to decide.
But for those of you who choose to walk the path of handwritten, mailed thank you notes for Midyear, you should know something…
The USPS doesn’t mess around. Forever stamps may be good forever, but that doesn’t mean their price stays the same forever. Hot damn, they’re expensive little buggers! So if you’re planning on sending a thank you note to every soul you meet at each program, just know a book of 20 stamps is currently sitting at $10.
Oh and don’t go out and buy Hallmark thank you cards. The dollar store sells some classy, simple multi-packs. It’s ok to send similar-looking cards to people within the same department. Pharmacists won’t be offended by getting the same card – it’s what’s on the inside that really matters! (#awww)
The Interview Trips
Scheduling
While many of the same concepts as the Midyear trip apply here, there are some additional tips to remember. If you have programs in a similar geographic area, see if you can arrange interview dates around the same time. Perhaps you interview with one program on a Friday and another the following Monday. (That’s what we southerners like to call a twofer – two programs for one flight!)
Plus, you’ll have the weekend to check out the area and see if it’s somewhere you’d really like to live for a year. If you’re a Planner Level: Expert, you can even use that time to check out some housing options you’ve researched beforehand.
Travel and Accommodations
Try to use what I’d call the family and friends discount. You know a person you can crash with for a few days? Call ‘em! An extra bonus is the built-in tour guide and transportation for the area.
Oh, but even with all this talk of being frugal, don’t be a total Scrooge – dinner, and drinks on you, of course. They’re saving you a lot of money, you can spend a little of that as thanks. It’s called common courtesy, people.
Professional Attire
Use what you have. There’s absolutely no need to worry about getting a different suit because, gasp, the programs already saw me in this suit with this shirt! This isn’t Fashion Week in NYC, and you’re not interviewing with Tim Gunn. Trust me, programs don’t remember or care (remember, they saw 10,000 other people in suits that day). Unless of course, your suit is purple. (Don’t do it. Just don’t. And I only say that because someone will. Every year. Long story short, please don’t buy or wear a purple suit.)
NOT you at Midyear…
Bonus Tip!
We have to talk about taxes. You know what you’re doing with all of these interview trips, right? Yes, you’re looking for a residency program… but you know what that really is? A JOB! Save ALL of your receipts because, in a rare stroke of governmental goodwill, you can write off job search expenses when you do your taxes! Woot woot #adultwin.
Final Thoughts (tl;dr)
So there you have it, a rough estimate of what costs you can expect from the pharmacy residency search process. Of course, it is just that – an ESTIMATE. There are certainly people who will spend more, but there are also people who will shell out less during the entire cycle.
Remember too, that during this time of interviews, you will also begin the process of applying for licensure in one or more states and registering for the NAPLEX and MPJE. There are (heavy) costs here as well, and you have to factor these in when you’re budgeting for residency interviews.
Generally, licensing costs can be about $1000 for your first state, which includes the NAPLEX ($575), the MPJE law exam ($250 per state, non-MPJE state law exams are similar), state licensure fees (variable, ~$150-300 per state), and background checks (~$50/state).
Additional states can run you ~$500 each (MPJE, state licensure, and background check fees). You can see how graduation is not exactly cheap (there’s also a cap and gown and matriculation fee associated with graduating most pharmacy schools…it’s usually about $100). You either need to be loaded or disciplined with your money to make this work without having the heat turned off in your apartment.
With all of this being said, please Please PLEASE (and I can’t say it enough!) do not let the numbers scare you away from pursuing residency if that is truly what you want to do! It really CAN work (as evidenced by thousands of people every single year)!
There are fantastic residency programs all over this country, and you may not have to go far from your current location to find one that fits what you’re looking for. So your travel budget may be very different than the sample person above who flew all over the country interviewing.
Remember, it just takes one program, and it doesn’t have to be the famous one on the other side of the country. It may be the solid program a 3-hour drive away. Use this as a guide and an awareness tool, and apply it as you see fit.
On episode 76 of the Your Financial Pharmacist podcast, Tim Ulbrich, founder of Your Financial Pharmacist, and Tim Baker, YFP Team Member and owner of Script Financial, wrap up a month-long series focused on investing by fielding questions posed by, YOU, the YFP Communityin this rapid fire investing Q&A edition.
Summary
Tim Ulbrich and Tim Baker tackle several questions during this investing Q&A episode.
Q: Is it better to hold company matched retirement contributions to pay off 20-25% interest credit cards that I had to live off of between residency and my job? A: This may be a situation where you should hold off contributing to retirement and pay off your credit card debt quickly. Tim Baker would suggest to a client to look at strategies for debt reduction while growing income. The additional income can be applied to the debt. This is also dependent on how fast you can get out of credit card debt.
Q: 401k Roth or before tax 401(k) which is the preferred option? The before tax 401k lowers taxable yearly income but we’ll pay taxes on the growth or the Roth 401k is tax free growth over time but higher taxable income at the end of the year. I can’t decide which is the best route. A: There is no one bad way as you’ll either pay tax now or in the future. If you think taxes today will be lower than taxes in the future, go with Roth. If you think taxes will be lower in the future, maybe wait to pay taxes. Tim Baker leans toward the Roth component.
Q: What are your thoughts for proper investing strategies for current pharmacy students? A: Don’t invest anything as a student. Put that money into an emergency fund, toward your credit card situation, or put that additional money toward the accruing interest on your student loans. If you fall in the 10% that graduate without student loans, look at things like an HSA or IRA. Tim Baker offers a student/resident package with a reduced fee to help you establish a foundation and not miss out on wasted opportunities.
Q: Can you go over how to rebalance a portfolio? A: When you set an allocation for your portfolio, over time it is going to drift. When it does, you need to rebalance it. To do so, you sell and reinvest. This usually happens once or twice a year. You can set alerts if an allocation drifts over 5%. Talk to your advisor, company or Tim Baker to do this.
Q: Can you review pros and cons of active and passive funds? A: Active funds believe that the market is not perfectly efficient and that you can achieve above market returns through security selection, market timing or both. Passive investing means that you believe the price of the stock market is efficient and that you are unlikely to outperform the market on a consistent basis. 9/10 actively managed funds underperform passive funds.
Q: Have you guys talked about HSA accounts and risks/benefits and how they fit into a long term financial strategy? A: Yes, in episodes 19 and 73. Follow-up question: Do HSA accounts need to be deposited throughout the year or are these ok to max out contribution limits anytime during the year? A: Like with an IRA or 401(k), it doesn’t matter when you max the contribution out.
Q: How do you feel about investing apps, like Robinhood and Acorns? A: Tim Baker needs to do a review of them as this question comes up a lot. A lot of these solutions believe in low cost investing. Tim Baker likes the concept of building wealth over time and these apps may provide a way to save money without the emotional ties.
Q: Can we do 401(k), IRA and Roth IRA all three? What are the limits in each? Which other options to turn to for tax saving purpose? A: Yes, it depends on the income limits. Tax saving purpose options are HSA or 529 accounts.
Q: What is your thought on robo investors (Betterment etc)? I am a Federal employee, and so my retirement investments go into my TSP. However, I am looking at options for taxable investments beyond what I currently have with an advisor (the fees are making me consider other options). I know that index fund investing with Vanguard or Fidelity offer attractive low fees, but leave me open to issues with taxes on dividends unless I manually do my own tax loss harvesting (which I am reading and learning about, but don’t feel comfortable taking on my own just yet). Betterment does this for me at a higher fee than index investing on my own, but significantly less than an advisor. So, is something like Betterment “good enough” for taxable investments for those that want lower fees but still a more hands off approach? Thank you! I have loved catching up on your podcasts and am, 7 years post graduation, finally getting a better grasp on finances than I ever have. A: Tax harvesting is looking at the gains you make in a year off of your investments. You can sell loser stocks in your portfolio to offset your taxable gains with the goal of breaking even. Betterment or robo advisors can do this automatically and financial advisors also have tools for this. If you do this on your own, you have to do it manually which could take a lot of time.
Q: If I’m a 1099, and have been contributing to a SEP IRA, and decided I want to take advantage of a backdoor Roth, what steps do I need to take to move my money to make it work? A: In a backdoor Roth IRA, you move money from a traditional to Roth IRA. This is a legal way to fund a Roth IRA.
YFP Episode 019: How Do Health Savings Accounts (HSA) Fit Into a Financial Plan?
Episode Transcript
Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 076 of the Your Financial Pharmacist podcast. Excited to be here alongside our financial investing expert, Tim Baker, as we’re going to take questions from you, the YFP community in a rapid fire format. So Tim, we’ve got lots of questions on investing. And I think you’re on the hot seat today.
Tim Baker: Yeah, I think I’m ready. I’m ready to go. We have lots of questions, lots of engagement in the Facebook group, so hopefully we can get some of these questions answered.
Tim Ulbrich: Yeah, it’s been a fun month. I think this is a topic that we identified — as we were planning out the month of November, we identified we haven’t done enough on investing. We got that feedback from the community, we heard you, we listened, and hopefully we haven’t overwhelmed on the topic of investing. But knowing it’s such a critical part of the financial plan, we want to give it the attention it deserves. So if you haven’t been with us for the month, make sure to go back and check out the topics we’ve already covered in terms of priority investing, some of the behavioral biases, how to evaluate your investing accounts, DIY versus robo versus an advisor. And here, we’re wrapping everything up with a rapid fire Q&A format. And so for those that submitted questions via the YFP Facebook group, via LinkedIn, via email, thank you. And for those that have a question, make sure to join the YFP Facebook group if you’re not already part of that community. Or shoot us an email at [email protected]. Alright, here we go. Ready?
Tim Baker: Let’s do it.
Tim Ulbrich: Alright, Peter from the YFP Facebook group asks, “Is it better to hold company-matched retirement contributions to pay of 20-25% interest rate credit card that I had to live off between residency and my job?”
Tim Baker: Yeah, this is a great question. And I typically will say an addendum to the certainties in life are death and taxes. I typically will say the part three really should be if you have a match in your retirement plan, the third part is you probably should put that money in and get the max. Free money, you’ve heard us talk about that time and time again. So this might be one of the situations, however, that you might want to pump the brakes. And I think a lot, Tim, it deals with the timeline of things. So if this is something that we can put the retirement contributions on hold and do a gazelle-like sprint, as Dave Ramsey would say, and get through the credit cards, that might be where it would make sense. If we’re talking about a longer term horizon, we’re talking about a debt load of 20-25%, what I would actually do with a client here is possibly look at strategies for debt restructuring so you can get some breathing room. And then my thing is, OK, like how can we grow the top line? How can we grow the income? Not necessarily put the retirement contributions on hold but to apply all that extra income towards kind of the predatory debt levels. So it might be in your case, Peter, that it does make sense and it does make sense to put it on hold for a year or a short time frame and get through it as quickly as possible. But if I’m your advisor, I would say, hey, is there anything that we can do to make additional income so we can kind of keep the match going but also keep aggressive on the loans.
Tim Ulbrich: Yeah, and Peter, I’d point you back too to Episode 026. Tim Baker talked about baby stepping into a financial plan, specifically with a focus on consumer credit card debt and emergency funds. And I think that that would help even answer this question further. We obviously talked about in Episode 068 when we went through the pros and cons of the Ramsey Baby Steps. And via YFP team member Tim Church in the Facebook group saying, “Great question. Thanks for sharing. If you put your match on hold, how fast could you get out of credit card debt?” And so I think that’s the question of at what intensity, as you referenced, would you be able to get this paid off? And then obviously, how do you feel about having that 20-25% debt?
Tim Baker: It’s a great question by Tim Church.
Tim Ulbrich: Alright, Rachel from the YFP Facebook group asked, “401k Roth or before tax 401k?” So referring to a traditional 401k versus a Roth 401k. “The before-tax 401k lowers taxable yearly income but will pay taxes on the growth, where the Roth 401k is tax-free growth over time but higher taxable income at the end of the year. I can’t decide which is the best value.” Now, in Episode 073, Tim Church and I talked about the priority investing. We broke down the differences between traditional 401k, Roth 401k, we talked about IRAs. So I think what we didn’t get into as much in that episode was this whole idea of if I’m weighing between traditional contributions where I’m going to defer the payment of taxes to the future but lower my taxable income versus a Roth contribution where I’m paying taxes now, and I’m going to reap the benefits later. How do you weigh the balance of where to be prioritizing there?
Tim Baker: Yeah, and I think without being too simplistic, again, I think this is one of the things that I think sometimes we look at and we’re like, I don’t know what to do. And it’s almost like paralysis by analysis. And to me, I think it’s the same thing — and I kind of equate it to the avalanche versus snowball. There’s really no one bad way. I mean, you’re going to pay the tax either now or in the future. So you know, again, to back up just so everyone is crystal clear because we had a few questions around this. When you have a 401k, this is typically administered through your employer. Your employer will say, hey, Fidelity, Vanguard, whoever, we want this benefit for our employees as means to recruit and retain, we’re going to set up this 401k and we’re actually going to match. And we’ll say 3%. So it’s basically quarterbacked, in a sense, by the employer. So in this particular investment account, you basically put in a set amount, and everybody — these are 2018 numbers — can put in $18,500. So every year, that’s what you can put in. That’s what you can put in as a maxing out your 401k. Now, concurrently, your employer will incentivize you to put money in by matching a certain percentage. So they might say, hey, if you put in 3%, we’ll put in 3% and match that dollar-for-dollar. And there’s different things. They might say, we’ll match the first 3% and then 50% on the next 2%. So you have to put in 5% to get the full match and essentially, they’re putting in 4%. So I know there are a lot of numbers out there. In the 401k system, you basically have a traditional 401k, so that’s all pre-tax dollars. So it goes in pre-tax, it grows tax-free, and then when you distribute that in retirement, it comes out taxed. So in retirement, you’re going to be taxed on that amount you distribute. What’s becoming more and more popular these days is the Roth component of that. So anytime you see Roth, think after tax. So you’ll actually have what is basically almost like two subaccounts. You’ll have a traditional 401k, which you could put money into. And any match that you get from your employer goes in there. And then you’ll have what looks like a secondary account, which is your Roth 401k. So it’s going to look like two subaccounts, which is all after-tax money. And those monies cannot be co-mingled because you have a pre-tax bucket and an after-tax bucket. So the mechanics of that is it goes in after-tax, meaning you don’t get any tax deduction. So that money actually flows through onto your tax return. It grows tax-free, but in retirement, when you’re looking at a Roth 401k, and there’s $1 million in there, you actually have $1 million that you can distribute. Versus a traditional 401k, if you have $1 million in there, you don’t necessarily have $1 million because Uncle Sam still needs to take his bite of the apple. So those are really the same components. Now, in terms of your ability to contribute to that, it’s an aggregate. So between if you put $10,000 into your traditional 401k, you can only put $8,500 into your Roth 401k. So that’s the 401k. So to kind of go back to the question of which is better, if you think that taxes today will be lower than taxes in the future, probably best to go with the Roth option. If you think that taxes will be lower in the future, it might be worth to defer and wait to pay the taxes in the future. So and again, we’re really trying to look at the crystal ball here. I kind of lean more towards — and I think some of the studies that show, well, if you put money in pre-tax and it grows, that you’re going to pay a higher amount of tax on more money, essentially. And there’s studies that kind of support I think both sides. I think what I’m trying to say here is don’t get caught up in the minutia. I think if anything, I would go more towards the Roth component. But again, like when we talked about in the tax episode with Paul Eikenberg, which was Episode 070.
Tim Ulbrich: Yes.
Tim Baker: 070. There are different strategies out there. So it could be a tax strategy where you are looking to defer or you’re look to avoid. So it just depends, I think. If you have a handle on your tax situation, you’re going to know what makes the most sense for you and kind of your household. So lots of stuff there. I would be remiss to not mention IRAs here, which are similar in a sense that instead of the employer basically quarterbacking it, this is your own Individual Retirement Account that you are — there’s typically no match there. There is no match. But you’re basically putting money into an account and investing it on your own. And we can talk about that a little bit more.
Tim Ulbrich: Tim Baker, preaching and teaching. I love it.
Tim Baker: I’m trying. It’s a lot of stuff. I don’t want to confuse anybody.
Tim Ulbrich: No, it comes up so much. And I think your point’s a good one that we’ve talked with so many new practitioners that are getting that paralysis by analysis. So I think like anything else, take some action, get started, continue to learn, get some help along the way. But don’t do nothing because it seems so confusing.
Tim Baker: Right. And you can always — I mean, it’s the thing like year to year, you can always look at when you’re truly doing financial planning and kind of tax planning strategy, it can change year-to-year. So you might look at your pre-tax money and say, it doesn’t make sense to pay the tax on it today and actually get into some of the nitty gritty. I think for a lot of our listeners, just like how do I get started and what should be the bucket I focus on?
Tim Ulbrich: Yeah, and if you’re somebody who’s not resonating with the audio version of this, and you want to read this and be able to break it down, we spend a lot of time in Chapters 12 and 13 and 14 of “Seven Figure Pharmacist” breaking down investment terms and strategies and retirement accounts and taxable accounts. And so if you need some more time to digest it, look at it, you check that out, sevenfigurepharmacist.com. Alright, we’ve got a question — actually, we got several questions via LinkedIn this time, which was cool. Scott asked, “What are your thoughts for proper investing strategies for current pharmacy students.” So we’ve talked at length about student indebtedness, coming out, and I think when we talk about students, we tend to only focus on debt. So here Scott’s asking, well, what about investing? “I know that if I have time and I can invest and get compound growth, should I get started as a student? If so, what’s the strategy?”
Tim Baker: Yeah, so I typically give the least sexy answer to this question as I can because I get this like when we talk to pharmacy schools. And if it were me, I think the conservative approach to me would say I wouldn’t really invest anything as a student. If I’m a student, any additional income that I have, I’m either kind of going back to Episode 026 where we’re talking about baby stepping into a financial plan where we’re focused on do you have a solid emergency fund? Do you have — what’s your credit card situation looking like? And then from there, I think if I have a solid foundation, any additional money that I had that I want to — I’ve had students ask me about, hey, what do you think about the cannabis industry? What do you think about bitcoin? And I’m like, no, don’t do that. You guys have $160,000 in debt on average. So the least sexy answer is I would apply all of that money back to the interest on your loans that’s accruing. Because what happens is once you get through your P4 year, you pass your boards, you go through your grace period. And around this time of year, you’re going to hit repayment. Any of the interest that you’ve had that you’ve accumulated since the loans originated when you took the loans out — and that’s going to capitalized, which means that it basically moves from the interest side of the ledger to the principal side of the ledger. And now, that interest is accumulating interest on top of interest. So it doesn’t sound sexy, and I get it. Now, if you are one of the 10% of pharmacists out there that doesn’t have student loans, then I would definitely look at things like the HSA, the IRA, and obviously maxing out. And maybe it might be worth spending some time about how I typically advise clients to fill their investment buckets, which would be essentially get your match and your max in your 401k. And the example that I gave, if you have a 3% match, you typically want to put 3% in. And then typically, there you want to go into the IRA world, which is you setting up an IRA at Vanguard or wherever. And you’re putting $5,500 in per year, which is $458.33. So get into that monthly rhythm of putting that money in. And then you typically want to go back into the 401k and max it out, so that’s where you’re getting the $18,500. And then if you exhaust that, then that’s typically where you want to go into the taxable accounts that we’ll talk about here in a little bit. And what I didn’t say is probably along with the max of the IRA, in that second step, if you have a high deductible plan, maxing out the HSA, which is for a single person, $3,450. And for a family, it’s $6,900. So again, if you’re a student, I would focus on all the boring stuff. If you have the debt, if you don’t have debt, then that’s how to start filling your buckets. Now, if you don’t have an employer, obviously, you would want to go right to the IRA and start doing that. But it also depends — to kind of make this answer longer than it should be — is what is your goal? So if the goal of the investment is just to build wealth and put money towards retirement, that’s great. But if you’re investing for purposes like a wedding or something like that that you have a little bit more runway, then maybe you go straight to the taxable account. So lots of stuff, kind of lots of little pieces.
Tim Ulbrich: And I’m glad you brought up the 10% because we don’t talk about the 10%. I mean, if you look at the AACP data in any given year, when they publish the graduating student survey, 10-12% of students report they have no student loan debt.
Tim Baker: Which is a lot.
Tim Ulbrich: Yeah, it’s great. And I think we’re so often preaching to the 88% probably, but I think what just to highlight what you said there is keep your eye on the prize of graduating with as little student loan debt as possible. And I think it can be exciting to jump into investing or it can be exciting to do these other things that are opportunities there, but if you’re contributing some to investments while you’re in school, all while you’re taking on credit card debt or you’re taking on more cost of living, tuition and that’s compounding in interest, obviously, we’re kind of fighting against the effort that we’re doing. So I think this is a good time to talk about what you’re doing with the student resident financial planning services. We haven’t really talked much about that, but if we have students and residents who are listening, saying, I’ve got all these competing things, I’d love to work with Tim Baker talking about financial planning, what are you doing with the student resident package?
Tim Baker: Yeah, so I basically, what I do with students and residents — and I think it to me I think a lot of people are like, oh I don’t have the money or I’m too early in this process. But I think one of the things that I see is especially when it comes to like the foundational stuff, which includes cash flowing, budgeting, student loans, emergency funds, is it could potentially be — and not to speak in hyperbole — it can be hundreds of thousands of dollars swing in terms of your student loans and how we attack them. So what I’m really trying to do is present an offering that focuses on the student and focuses on the resident. So in those years, we can still work at a much reduced speed because I realize that there’s not a whole lot of income. But we’re setting the foundation to the financial plan. So the idea is to work with you guys, that population earlier, and then hopefully feed you into comprehensive financial planning like you and Jess are doing. But I think the swing — I know a lot of planners out there that say, hey, come talk to me after you’re through your residency. And I’m kind of thinking of a counterpart that I have that works with physicians. And my thought is that there’s a lot of wasted opportunity when you don’t have a sound financial plan in place almost immediately. And I think back, Tim, when we went back to USC and we were talking to basically the school, the pharmacy school out there, and we were talking to the P4s. And I was kind of like, I don’t know, probably begging is not the word, but like imploring their P4s, they’re in no better of a situation in that moment to be intentional about their finances.
Tim Ulbrich: Absolutely.
Tim Baker: And really be conscious of and having a plan for their student loans and especially if it’s like a PSLF option if they go into residency. There’s a lot of moving pieces there that I think if you can nail those first few years, that will set you up. So you know, I get fired up about it, and I like working with really all of my clients, but I think the students and residents, there’s so much opportunity there to get in front of.
Tim Ulbrich: Absolutely. So YourFinancialPharmacist.com/financial-planner will give you all the information for those that are interested in learning more. Michael and Audra via the YFP Facebook group are asking about rebalancing. So this idea of rebalancing a portfolio, can you go over how to rebalance, maybe what it means and a step-by-step process. And as you’re working with clients, how often do you do that?
Tim Baker: Yeah, so I think ultimately, when you set an allocation for your portfolio, over time, the investment portfolio’s going to drift. So the example that we can give in very broad terms is Tim, if you come into the office and kind of look at —
Tim Ulbrich: Your new office.
Tim Baker: New office, yeah, in Baltimore. Pretty excited about that. So if you come into the new office in Baltimore and you sit down and say, hey, I really want to save for retirement. I kind of put you through what’s called an investment policy statement. We’re going to build out like what that looks like. A big part of it is going to be the risk assessment. And the risk assessment, it’s going to basically return like an allocation. So it might say, when you answer these questions, you should be 80% in equities, which are stocks, and 20% in fixed income or bonds. So you know, there’s like a general rule of thumb out there — I typically don’t use this — but you could say as a general rule of thumb, just take 100 and then subtract your age, and that’s what you should be in equities. So if you were at 100, and you were 20 years old, you would be in 80%. And I don’t necessarily subscribe to that, but it’s kind of just rough math there. So say, Tim, you need to be 80% in equities and 20% in fixed income. Then you could essentially — and I think we’ve talked about this on the podcast, which a lot of financial planners would maybe argue with me. But I think that you can build a very diverse portfolio just essentially using two funds.
Tim Ulbrich: With low fees. Tim Baker: With low fees. Basically, a total market fund and an aggregate bond fund. So you would buy, if you had $100,000, you would buy $80,000 in a total market fund and $20,000 in an aggregate bond fund. Now, I slice it a little bit thinner. You know, I’ll do more large cap and small cap and international. But I think if we use the example of one fund that’s 80% and one fund that’s 20%, over time, that’s going to drift. So over time, it’s going to be 85%, maybe 90% in that one fund and 10% in the other. So in that moment, your portfolio is more risky than essentially you sign up for. So what you would do is you would say, OK, now the portfolio has grown from $100,000 to $120,000, but I’m exposed too much because I’m in a 90% allocation, so you would essentially say $120,000 by .8, and that’s the target that you would want your total market, that equity to be in. So you would essentially sell off some and basically reinvest it into the bond to rebalance. Now, you typically want to do this once or twice per year because really, it just saves on costs. So typically, I have alerts on my investment accounts that basically alert me to trade. In most of the retirement plans, you can actually set these up. So if it drifts over 5%, then it will rebalance for you.
Tim Ulbrich: Yeah.
Tim Baker: So if you don’t know how to do that, obviously I would say to talk to someone at that, whether it’s Fidelity or whatever, talk to this, they can help you or reach out to me or another advisor that can help you with that.
Tim Ulbrich: So this might go into the behavioral biases, but I’ve found that I like having somebody else rebalance. Not because I think it’s difficult to do, per say, but what I found myself doing is I would go into my accounts, and I’d start sticking my fingers in it. And then I’d start saying, ooh, international, 10%. I keep reading the news, what’s happening with international stocks, and you start inserting all these biases. And I start adjusting and shifting things. Where if you and I agreed on an investment policy and strategy and we’re not reacting to the world of today but we’re looking at the long-term play, I’m less likely to do that, right? Or I’m going to at least engage with you before I make those decisions or whomever. So I think it just speaks to — and this gets to the next question about active versus passive funds, which I’m going to pose to you. But it speaks to that strategy of not necessarily leave it and forget it, but once you develop a strategy and a mindset, we’re in this for the long-term play. We’re not in it for the news of what’s happened in the DOW this week, right?
Tim Baker: Right.
Tim Ulbrich: So let’s talk about active and passive. So another question via the Facebook group, “Can you review the pros and cons of active funds versus passive funds?” I think we have some biases here probably. We’ve talked about those before. But what are the main differences and what should people be looking for?
Tim Baker: So an active investor basically believes, they believe that the market is not perfectly efficient. So if I’m an active investor, I basically think that I can achieve above-market returns through essentially security selection, market timing or both. So I’m smarter than the average bear that if I’m looking at large cap stocks, I’m going to be able to pick that better than what the market can essentially do. And then in terms of market timing, I can essentially see the future in a lot of ways. So the condition is I must determine when and under what conditions to both buy and sell. So the two methods that really people use to do active investing is technical analysis, which is really an attempt to determine kind of the demand side of the supply-demand equation of a particular security. So this typically relies on timing; it’s a lot of charts. You study past pricing, sales volumes, future trends. And you’re not necessarily concerned about hey, what’s Ford’s next line of cars? Or what’s the leadership at this company? It’s really about patterns. So that’s one way to look at it. The other way is the fundamental analysis where you’re looking at both kind of that macro and micro data. So you’re looking at interest rate increases, monetary policy, but then also specific to that industry or that company, productivity and profitability and earning potential. So that’s the active investor. The passive investor says, thanks but no thanks. I believe that the price of the stock market is essentially efficient, and then when I read that story in the New York Times about the cannabis industry or whatever or bitcoin, it’s been priced into the market long, long ago. So I’m not getting a stock tip or anything like that, I’m basically — I know that that is perfectly efficient. So the passive investor basically says, you’re unlikely to outperform the market on a consistent basis. And generally, that well-diversified portfolio that I just explained that has low cost is the better way to go, that you’re not going to — in the long-term — outperform the market. And the stats show that about nine in 10 actively managed funds underperform the passive funds. So inverse is true is typically, actively managed funds are more expensive. And that’s one thing that a lot of investors aren’t really aware of is what is it, how much money is actually going to be evaporating from their accounts because of expense ratio? And typically, the more you pay for the investment, the worse it is for the investor. So you would think if I’m buying a luxury car and paying more, I get better quality. So I would expect that. It’s not true with investments. Typically, the cheaper ones are the better way to go.
Tim Ulbrich: So for those interested in learning more on this topic, a few that come to mind, resources and books. We talk about obviously in “Seven Figure” as well, but “Simple Wealth, Inevitable Wealth” by Nick Murray is a great read. “Laws of Wealth” by Daniel Crosby is fantastic. And then “Index Revolution.”
Tim Baker: “Index Revolution” is such a simple —
Tim Ulbrich: Charles Ellis, is that who wrote that?
Tim Baker: Charles Ellis.
Tim Ulbrich: Yeah.
Tim Baker: Yeah.
Tim Ulbrich: OK. So we’ll link to those in the show notes. But I think a great topic, and obviously when this topic comes up, probably the most famous quote on this is Warren Buffet, who is the active investor of all active investors, you know, really quoting that as he thinks about the future for his family, his spouse, in terms of advice, obviously what he had to say was probably most people are best off putting it in an index fund and letting it ride.
Tim Baker: Yeah, and he’s one of the people that on Planet Earth — and there’s probably, you know, a very small, like maybe half dozen that can kind of see what’s going on with the markets — part of it, and I think these guys admit it because they have access to investments. Like they just buy companies.
Tim Ulbrich: A little more purchasing power than we have.
Tim Baker: Right. So by and large — and I think that’s one, if you’re talking to people and really advisors who say, hey, I can beat the market, go the other way because nine times out of 10, even moreso than that, we have no idea where the market’s going to go. It’s better set an allocation, keep expenses low and kind of the singles and doubles approach.
Tim Ulbrich: Awesome. So Ryan asks via LinkedIn, “Have you guys thought about HSA accounts? Risks and benefits and how they fit into a long-term strategy?” We did in Episode 019, we broke down, you and I, HSA accounts and then also again in Episode 073, Tim Church and I talked at great length about the prioritization of the HSA, what are the contribution amounts, what’s a high deductible health plan. So for those that are itching, especially around — well, we’re post-enrollment now — but around that time, it’s a good time to be talking HSAs. But we had a follow-up question from Brynn on HSAs. “Do HSA accounts need to be deposited to throughout the year? Or are those OK to max out the contribution limits anytime during the year?”
Tim Baker: Yeah, I don’t think it really matters. I think it’s the same thing with like an IRA. Like some people will say, hey, I want to max out $5,500 immediately. Same thing with the 401k. I guess technically, you could front-load $18,500 in the first quarter of the year. With the HSA, if you $6,900 to put into it and you know that you’re going to have family medical expenses, I would have it really act as a pass-through if that’s the purpose of the account is to fund that and then use it if you are using it for medical expenses. Now I think what we’re trying to do in my household is more of using that as a self-IRA and really cash-flowing the health expenses and let the HSA go. So again, I think that’s a little bit of next-level in terms of having that bucket of money for that purpose. But yeah, HSA is a powerful — and I think one of the really good things about the HSA is that you could make $1 million and still get a deduction for that, which with the deductible IRA, most pharmacists, unless you’re a resident, you’re going to make too much to be able to enjoy the deduction.
Tim Ulbrich: Joseph via LinkedIn asked, “How do you feel about investing apps like Robinhood and Acorn?”
Tim Baker: Yeah, you know, we get this question so much that I really — I probably need to sit down and actually review all of these different solutions and come up with kind of an opinion on them. So I know a lot of advisors — and you kind of see this in the pharmacy world too, it’s like as technology creeps in, there’s almost like a defensive pushback like oh, I’ll never be replaced by a robot. I’m more of the mindset to embrace the technology and utilize it for good. So I think some of these ideas with rounding off purchases and slowly building wealth over time, I actually like that concept. Because from a behavioral perspective, we’re more likely to save that way than if Tim, if I was a financial planner and I said, “Alright, Tim, can we put $100 more per month into your IRA?” If you’re less of a feel, less of an emotional pull, I’m all in. So I think to Joseph, I think I owe you and a lot of the other people that asked me that question to kind of do a deep dive and look at these and see. I do know that a lot of these solutions believe in kind of low-cost investing. They’re not necessarily putting you in expensive funds. But I think an extensive look is probably something that we should have on the docket for 2019.
Tim Ulbrich: Alright. Via the Facebook group, Krishna asks, “Can we do 401k, IRA and Roth IRA all three? What are the limits in each? Which other options to turn to for tax savings purpose?” So again, in Episode 073, Tim Church talked a lot about the total contribution limits, you broke that down, preaching a little bit earlier, so we covered that. But the question of all three, the answer is yes with an asterisk, right? Depending on some of the taxable, the income limits and what not that we’ve talked about. What other options besides those do you turn to for tax-saving purposes? So if somebody’s listening that’s saying, “OK. I’ve got me covered in a 401k, got me covered in a Roth IRA. I’m looking to do more.” HSA…
Tim Baker: HSA would be the big one. Yeah, absolutely. And I think if the HSA is not on the table — and that typically is where you look at the taxable account, which you don’t necessarily get a tax benefit unless you’re doing some tax (inaudible), which we’ll maybe talk about here and that type of thing. But yeah, those are the major books that you want to focus on and really exhaust before you get into some of the other vehicles. And I think that’s one of maybe the drawbacks for like Robinhood and Acorns is I’m not sure if they’re necessarily IRAs or they’re taxable accounts. And typically, I feel more comfortable, unless it’s more of a near-term goal like a wedding or a trip or something like that, I would want clients to focus more on the retirement buckets before they would go into the taxable buckets.
Tim Ulbrich: Yeah, and obviously if kids are in the picture, taking advantage of 529s and the tax advantages over there as well. So Cory via email asks, “What’s your thought on robo-investors, specifically Betterment?” Now obviously in 075, we talked about DIY v. Robo and Hire a Planner, so if you haven’t yet heard that, go check it out so you get some more background on robos. He says, “I’m a federal employee, and so my retirement investments go into a TSP,” which we talked about in Episode 073. “However, I’m looking at options for taxable investments beyond what I currently have with an advisor. The fees are making me consider other options. I know that index fund investing with Vanguard or Fidelity offer attractive low fees but leave me open to issues with taxes on dividends unless I manually do my own tax loss harvesting, which I am reading and learning about but don’t feel comfortable taking on my own. Betterment does this for me at a higher fee that index investing on my own but significantly less than advisors. So is something like Betterment good enough for taxable investments for those that want lower fees but still a more hands-off approach? Thank you, I love catching up on your podcast. I’m seven years post-graduation, finally getting a better grasp on finances than I’ve ever had.”
Tim Baker: That makes me feel good.
Tim Ulbrich: Yeah. So Cory, thanks for the thoughtful question, appreciate the feedback. And I think these are the ones that get us fired up.
Tim Baker: Oh yeah.
Tim Ulbrich: So before going into the question maybe about pros and cons of a robo and building off what we talked about in 075, break this down on tax loss harvesting quick. I think this is kind of a next-level question from what we’ve talked about before.
Tim Baker: Yeah, essentially so when we depart from all of the retirement accounts, 401k’s, IRAs, in those accounts, your investments essentially grow tax-free. So the government basically leaves you alone from a tax perspective and any gains you might get inside of those accounts. On the taxable account, which is basically a brokerage or just an investment account that you have that is funded with after-tax dollars, it doesn’t grow tax free. And when you realize gains, you actually pay taxes on it. So what tax loss harvesting is is essentially you’re looking at any gains that you make throughout the year. So if I buy Tesla stock at x and then I sell it at x plus a 20% profit, I’m going to pay capital gains on that amount of money. What tax loss harvesting done is basically it looks at some of the less profitable, even loser stocks and positions in your portfolio, and you can actually sell those to offset your taxable gains. So you’re essentially trying to break even, in a sense, from a tax perspective. So this is a strategy that robo investors like Betterment can do automatically, and sometimes they do. And even a lot of financial advisors have tools that can do these things similarly. If you’re on your own, though, with a lot of these tools, you essentially have to do it manually. So at the end of the year, you might say, hey, I have a gain, so I don’t want to pay this amount of tax on it. So where can I sell an investment at a loss to offset those gains. And typically, you can basically offset whatever your gains are, and you can actually lower your income by about $3,000 per year, your ordinary income, if you have enough of a loss. So it’s kind of next-level. Betterment, I think boasts that you could potentially save .7-2.5%. Like that’s the range that you can ultimately do. I think those are a little bit exaggerated. To go back to the question, I think it’s really a matter of you get what you pay for, in a sense. Obviously if you’re doing low-cost investing on your own, obviously you have to do a lot of the legwork.
Tim Ulbrich: Yeah.
Tim Baker: Tim, you kind of talked about with your DIY approach when you were buying and selling houses, or selling house. It’s a time-suck. The Betterment approach is maybe that where they can do it automatically, but you’re going to pay 50 basis points on that. So you pay for that. And then an advisor could be where they’re charging you a fee and maybe an AUM fee. But you get a little bit more of the human element. So it kind of depends on, I mean, if I’m Cory, if this is something that you want to DIY, and your taxable account is not huge at this point — I’m not sure where you’re at — maybe you try to figure out the tax loss harvesting for yourself and take a crack at it. But you might get to a point where you have a million other things to do with life and you just would rather just slot it into a Betterment. But yeah, it’s definitely a strategy that I think if you can do consistently over time, you can essentially protect some of your gains because we talk about taxes and inflation are the big headwinds that are blowing in your face as you’re trying to build wealth over time.
Tim Ulbrich: Yeah, and I think this builds nicely off of what we talked about in 075 and really, have been talking about since Day 1 is emphasizing the point, which is important here when we’re doing a whole month on investing, that investing is one part of a very comprehensive financial plan, right? So if you’re doing the DIY robo route, making sure that you’ve got those other pieces accounted for and you’re not looking in one avenue, in a silo, only one bucket, and you’re really looking at the entire financial plan and picture as you’re moving forward. Alright, last question comes from Mo in L.A. via email. She asks, “If I’m a 1099 employee, and I’ve been contributing to a SEP IRA and decided I want to take advantage of a back-door Roth, what steps would I need to take to move my money to make it work?” I think that while Mo is asking this question of being a 1099 and a SEP IRA, which we talked about in 073, maybe to broaden this out to the community at large is the mechanics of a back-door Roth IRA. Now, we’ve defined what it is. But for those that say, OK, I don’t meet the income limits for a Roth IRA, so I know I need to do a back-door Roth, what is the next step they take?
Tim Baker: So typically, the breakdown is like anybody can contribute to a traditional IRA, but not everyone necessarily gets the deduction. For a Roth IRA, not everyone can actually contribute to a Roth IRA. So once you make a certain amount of money, those doors close to the Roth IRA. So typically, what the mechanics of is you can actually contribute to a traditional IRA and then essentially recategorize or do a back-door Roth IRA. So you basically move the money from the traditional to the Roth in an instant. And it’s a legal way to basically fund the Roth IRA. So that’s really the mechanics of it. Now, a SEP IRA, which we’ve outlined in previous episodes, is really the IRA for that Self-Employed Person. So for someone like me who I don’t have a TSP, I don’t have a 401k, I basically am — and really the traditional and the Roth IRA are not enough for me to be saving for retirement. So you can only put $5,500 per year in that. The SEP IRA is basically an investment account for the self-employed where you can put a lot more money in. It’s like $55,000 per year into that versus the $5,500 that you can put into the Roth and the traditional IRA.
Tim Ulbrich: So good question. We took a lot this week, and here we are, finally, end of November. We’ve hashed out investing. I think this is a series we’re going to really look back at and say, for those that want to dig in deeper into investing, go back to November 2018 where we covered a lot on this topic. So we’re pumped as a team to be wrapping up 2018. We’ve got lots of exciting content, new content, new ideas, things are coming to 2019. So we hope that you’ll continue on the journey with us. We hope that you’ll join us in the YFP Facebook group. And before we wrap up today’s episode, I want to again take a moment to thank our sponsor, PolicyGenius.
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Tim Ulbrich: And one last thing if you could do us a favor. If you like what you heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmacist.com, where you’ll find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path towards achieving financial freedom. Have a great rest of your week.
On episode 75 of the Your Financial Pharmacist podcast, Tim Ulbrich, found of YFP, and Tim Baker, YFP team member and owner of Script Financial, continue YFP’s month-long series on investing by talking about the pros and cons of a DIY approach to investing compared to utilizing a robo advisor or hiring a financial planner.
Summary
On this episode, Tim Ulbrich and Tim Baker dive into a discussion of three strategies of investing: DIY, robo and hiring a financial planner. The DIY (do it yourself) route of investing means that you, instead of your employer or planner, will be in charge of all aspects of your retirement or investment. You’ll determine how much to defer into retirement accounts, what to invest in, make adjustments, and figure out to how to distribute funds at retirement, among other tasks. This route is becoming more popular most likely due to the fact that there are resources available and many advisors require their clients to have a lot of money to work with them. Pros of the DIY strategy are that there is a potential savings (if you are doing it well, etc.) and a feeling of empowerment. Cons are that there is a lack of accountability, that someone isn’t there checking or bringing awareness to potential financial behavioral biases you may have, and if you aren’t well-versed in the information, you could end up paying more.
Using an advisor is a strategy that lies between the DIY and financial planner routes. With this strategy, technology is used which allows you to simply click a link, answer a few questions, and fund taxable accounts. The pros of this strategy are that you don’t have to go through thousands of funds, the funds are automatically rebalanced over time, and the cost lands between .25-.5% on what’s invested. Cons are that there is no human interaction and that this only focuses on one part of your financial plan.
Hiring a planner means working with someone to act as the middle point between you and your investments. Pros to this strategy are the human aspect, the potential of having a comprehensive financial plan, the ability to create a diversified portfolio, and having someone act as a safeguard between you and your investments. Cons of hiring a financial planner are that the industry is structured so many planners are incentivized to grow your assets, may have a conflict of interest due to making more money off of your investments, and that a planner may not help you with credit card or student loan debt.
Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 075, excited to be here alongside Tim Baker as we continue our month-long series on investing. We’re nearing the end. We’ve got next week coming up, we’re going to do an investing Q&A. But first and foremost, happy Thanksgiving, Tim Baker, to you and to the YFP community. So excited to be here.
Tim Baker: Yeah, happy Thanksgiving, Tim, to you and yours. And excited to get this episode going.
Tim Ulbrich: Yeah, we hope everyone’s having a great day, enjoying with family. We hope that you’re not nerding out on personal finance podcasts while you should be spending quality time with family. But if you are listening, please know that we appreciate it and that we’re certainly grateful for the community that has developed here over the past year. So we’ve been going along this month on investing. We’ve covered a lot of different topics and information, everything from behavioral aspects to investing, prioritization of investing, what to look for in your different investment accounts, the fees and so forth. And next week, we’re going to wrap it up with an investing Q&A. But here, we’re talking about the strategy of investing. Is this something you do yourself? Is this something you look at engaging with a robo advisor? We’ll talk about what that means. Or is this something you look at hiring a financial planner? Maybe for many people listening, there may be a different answer depending on the status of what you’re working on and what your preference is. So we’re going to reference some previous episodes throughout this episode, so let me throw them out here in advance. Episodes 015, 016 and 017, we talked at length, Tim Baker and I did, about what to look for in a financial planner, the benefits, different types of planners that are out there. In 054, we talked about why fee-only financial planning matters. And in 055, we talked about why you should care about how a financial planner charges. All of that feeds into the conversation here about DIY, robo or hiring a financial planner. So in terms of the structure and format of what we’re going to do, with each of these three buckets, we’re going to talk about what we’re referring to in a DIY approach, in a robo approach, in a financial planner approach. We’ll talk about the pros and potential pitfalls of each of those approaches. So Tim Baker, DIY. When we say DIY as it relates to investing, what exactly are we talking about? Whether listeners are thinking about maybe their 401k or maybe their 403b at their work environment, in the TSP, or they’re thinking about an IRA that’s outside of their work?
Tim Baker: Yeah, so the DIY, the Do It Yourself approach when it comes to investing, when we’re discussing things like the 401k, the 403b, the TSP, this is a little bit set up on a T-ball stand for you because the employer is essentially putting it in front of you and saying, hey, now that you work for us, we have contracted through an organization like a Vanguard or a Fidelity to basically have this investment account for you. So we’re going to cut you a deal, as long as you put money into it, we’ll match it. And we’re going to help you grow your retirement. So you can DIY that. And essentially, it’s a sandbox approach because you’re going to put in front of you a series of 10, 15, 20 — depending on the plan — investments that say, hey, for large cap, for U.S. large cap, you’re going to have four or five funds to pick from. From international, you might have two or three funds to pick from. From a bond, you might have some, it could be target funds. And if you’re hearing me talk about this and you’re saying, ‘What the heck is this guy talking about?’ then maybe having some help and not DIY-ing that — won’t be for you. Because the plan is defined, you’ll have basically a sandbox to work in. And essentially, what you’ll do is you’ll determine how much to defer into your retirement accounts. We’re talking your 401k, your Roth 401k, your 403b, what to actually invest it in — so a lot of people sometimes, they miss that step. So they think that once they put the money in there, it’s automatically invested. And some plans will be like that. But some plans won’t.
Tim Ulbrich: And they find out it’s just sitting there in a market fund.
Tim Baker: Right. I’ve seen that happen quite a bit. So you basically figure out how much you want to defer, what you’re going to invest it in, and over time, you have to kind of make those adjustments and do the rebalancing and things like that. And then when you go to retire, then you basically say, ‘Self, how do I distribute this in the most tax-efficient manner as possible?’ Whereas Tim, I don’t know about your dad, but my dad — well, my parents, really, they worked for the same company for 40 years, and the companies did that for them. And the pension manager would do that for them, basically would manage all those steps. So now, it’s kind of on us to figure that out. So that’s kind of the retirement side. If we’re talking outside the retirement, and we’re looking at IRAs, Individual Retirement Accounts, could be 529s, could be taxable accounts, that’s really where we’re going out into the market, essentially, and we’re looking at TD America, Vanguard, Fidelity, we’re going onto their website because we’ve heard of these companies, and we’re saying, ‘I want to open up an account on my own and basically do some investing on my own.’ So this is where you would open up a taxable account, open up a Roth IRA, and then the process is very similar except it’s just outside of the realm of what your employer is. So you’re opening up that account, you’re funding money from your paycheck. In then in that world, you’re essentially looking at a vast ocean, thousands and thousands of stocks and bonds and mutual funds and exchange traded funds, all the different things that could fit in these accounts. And you’re doing it in a way that hopefully is consistent with your beliefs about investing, if you have any, your risk tolerance, how you want to maximize or minimize, really, expenses and that type of thing. So I can tell from personal experience just the first time I ever opened up a Roth, I was at West Point. And I wanted to just dip my toe in the market. And I wanted to feel the feeling of basically buying a stock in a company.
Tim Ulbrich: Been there.
Tim Baker: And I think I bought like one share of Johnson & Johnson, and like after the transaction grew — and it’s kind of not very exciting — it was kind of exciting to see it, but I bought one share, which is the most inefficient way to do it because one share at that time was probably like $45. But then I paid like $10 —
Tim Ulbrich: The fee, yeah.
Tim Baker: Just to do the trade-in. But it was cool because at that time, I was like, well, technically, I’m part owner of this company, a .0 — add so many zeroes — 1% of Johnson & Johnson, so I would get documents that say, ‘Hey, these are when the board meetings are,’ but I really didn’t know what I was doing. And quite frankly — I know, Tim, we talked about this before — I probably had no business doing that, opening up an account like that because I didn’t really have a proper emergency fund. In the Army, a student is a little bit different, but there were so many other things that foundationally, I should have done before I even got to that point, but that’s kind of in a nutshell what the DIY approach is.
Tim Ulbrich: Yeah, and I think it’s — for many of our listeners, they’re probably thinking about, OK, most of my investing — maybe not all — but most of my investing’s happening with my employer-sponsored plan, so 401k, 403b. Of course that’s not everyone listening, many people have Roth IRAs or have taxable accounts that are out there, but what I’ve seen, Tim, is depending on the employer, how complex that is or is not can be all over the place. So for example, I work for the state. And they intentionally simplify options, you know, you’ve got two options in large cap, two options in international, they’re all index funds. Fees are pretty low. And I think they’re really trying to minimize some of the behavioral components that are there. But it’s still up to me, if I were doing a DIY approach and saying, OK, this is my asset allocation, this much stock, this much bonds, this much cash or cash equivalent or REETs or whatever. And then within there, what types of stocks I want to be investing in and then am I going to rebalance or not. Now, for other people — like a target fund I’m thinking of specifically — if somebody were to choose a target fund to say, OK, I’m going to retired in the year 2075, and that’s going to then set my asset allocation. The rebalancing is kind of happening along the way.
Tim Baker: It’s automatic.
Tim Ulbrich: Yeah.
Tim Baker: I would say from a target fund perspective, if you literally listen to what I just said about different types of funds like bond and international, emerging markets, small cap, large cap, and you’re like, ‘I have no idea,’ then go target fund. You probably will pay some type of premium for that service of it being rebalanced and becoming basically more aggressive to more conservative over time. But more often than not, I would rather you just pay the premium than have it sit in cash or be way too aggressive than you need be, depending on where you’re at in your life. But oftentimes, when I work with clients — and this is the opposite end of the spectrum, which is not DIY, it’s working with an advisor — I crack that nut, and I say, “Hey, client, you have 15-20 different options out there. And you’re in a target fund right now by default. I think we can do a little bit better given your situation and save on expense and things and break it out that way.” I think one of the things that you talk about (inaudible) and I’ve read a few books about the more choice that we are given, the more it causes that paralysis by analysis. And they say even like things like auto-enrolls. So we’ve talked about auto-enroll. There’s a lot of people that before auto-enroll really became a thing would work for a company for five, six, seven years, a decade, and never opt into their benefit of a 401k and the match there. Now, and this could be something the Obama administration put in, is that they’re incentivizing companies to basically auto-enroll employees. And then you essentially opt out of it if you want. And they’ve done a lot of studies in this with like Sweden and Finland, you have to opt out to not be an organ donor. And two countries that are very similar in a lot of ways, the opt-in, the percentage of people that were actually donating their organs was very low versus the opt-out. So a lot of this plays in. And we could do a whole topic, a whole episode, on behavioral finance and all the different biases that are out there. And I think that’s one of the things that maybe working with an advisor does. But it can be really confusing when you do it on DIY. It’s not impossible, obviously. But I think ultimately, my opinion — again, I’m biased because I do this for a living — is that I think it’s always good to have an objective look at your finances and say, hey, does this make sense? Is what I’m doing OK because I heard Uncle Tommy say this or my neighbor down the street said that, and I really want to know like sanity check this.
Tim Ulbrich: So obviously, as we think about the DIY approach, I think it’s fair to say that it’s becoming more popular — maybe not more popular but why is it popular in some regards. Accessing information is more readily available than it’s ever been before.
Tim Baker: Right.
Tim Ulbrich: Resources are out there. Just today, we had somebody ask in the YFP Facebook group, you know, I’ve heard of back door Roth IRAs, but what do I actually do mechanically. And we were able to quickly reference an article, get her a stepwise approach. So that information is there, readily available. I think that’s one of the reasons that it’s quite popular. What else do you think in terms of why people are going kind of that route of more of a DIY?
Tim Baker: I think it’s a little bit of an indictment of kind of my professional brethren. You know, there’s a lot of advisors out there that will say, “Hey, love to help you. But you have to have a half a million dollars before I can actually do work with you.” And the reason they do that is because they’ll charge based on assets, investable assets, which basically mean the assets they control directly, not what’s in your retirement account. So they say, “Hey, love to help you, but I can’t because I won’t essentially be paid enough.” So you have those minimum assets under management, AUM, requirements that basically for a lot of young population, just excludes them in general. I think one of the things that — and I was a little naive, no, I was a lot of naive to that is when I was looking at the profession of personal finance, kind of the whole 1% Occupy Wall Street was going on. So I think there is a distrust of large banking institutions and really financial advisors in general. And I think in a lot of ways, it’s well deserved. What a lot of people don’t know is that the majority, the overwhelming majority of financial advisors can legally put their own interests ahead of their clients, which when I kind of figured that out — and I was in that model when I discovered that the fee-based where you can earn commission fees, that blew me away. And it shouldn’t be that way. And I’m not saying that means 95% of the professionals out there are corrupted. But to me, is it should always be about the client, always be about what is in the best interests of the client, not necessarily mine. So I think that that perception is prevailing in a lot of ways. And that’s why I’m kind of fortunate when you talk about the work that we’re doing with you and Jess, it legitimizes, I think, what I’m trying to do. And I think what the fee-only world is trying to do is really say, there are services for young people that you’re not excluded. And by the way, I want to be on your team. And I want to get you to those goals that we talked about that whether it’s orca whales (?) or being able to retire at a certain time or whatever that is, that stuff jacks me up. And really, it’s the mechanisms of what the investments are and are properly insured that are just that supporting detail that I more or less have a playbook in my mind, and we just kind of plug and play depending on your situation.
Tim Ulbrich: Yeah, and I think I can say as somebody who went the DIY route for 10 years, you know, after graduation and obviously in working with you and Jess and I, I think too it’s fair to say for many listening, there’s just that overwhelming transition that happens where you’ve got new career, you’ve got tons of student loan debt, you feel like you’re trying to develop budgets and take care of all these other things. And part of it I think is just that feeling of being overwhelmed and my budget’s tight, I’m trying to figure out these things, and I may see additional fees or things and not necessarily be able to articulate the benefits associated with those.
Tim Baker: Right.
Tim Ulbrich: And I think it’s important that we just claim right off the bat what you just articulated nicely. Anytime we’re talking here about working with a planner versus not, you have to look at that under the assumption that it’s somebody who is good, who is acting ethically, who is acting, in our opinion, within a fiduciary standard because at the end of the day — we’ll get to some of the pros and cons of working with a planner — if you’re paying to work with a planner and you’re getting crappy advice, and you’re paying more in fees and things, now we’ve just put ourself up a creek and you might as well have gone the DIY route.
Tim Baker: Yeah, and I would say this — and I usually say this when I speak is I think one of the differences between financial planning, financial advisors and the profession of pharmacy is that the profession of pharmacy is actually a profession. You can take a test and be a financial advisor and give advice. You can do exactly what I do. The barrier to entry is very, very low, which means that you have — and you can see this maybe in other professions, not to call any out, but maybe like real estate and things like that where you take a test and you can sell houses.
Tim Ulbrich: Yeah.
Tim Baker: Sorry to all the real estate agents out there. But when you have such low barriers of entry, that basically muddies the water for a lot of hopefully professionals. And what I point to is someone that has the CFP mark, the Certified Financial Planning marks, and that are kind of following standards of ethics and all that kind of stuff. So I think that’s another reason why there’s lots of advisors out there that don’t necessarily know either what they’re doing or the other thing could be ignorance. So again, like when I was in the broker dealer world, I just didn’t know what I didn’t know. I thought I was awesome because I wasn’t selling proprietary products for maybe some of the bigger banks. So I’m like, oh, we can pick whatever products that we want from anywhere, whatever best suits you. But then I found out that there are other advisors out there that they’re not compensated based on product sales. It’s basically — the product and the advice is separated. And you know this in pharmacy, like anytime you mix the sale of product with advice, there’s conflict of interest. And you might see it with doctors and how they prescribe medications, those types of things. So to me, the model is broken from Jump Street that really, the consumer or client needs to be put first and everything else will fall into place. But I think that would, again, lead to why DIY is a popular — you know, just the savings cost and really, there are people that are thirsty. We’ve seen that from YFP. There’s people that are thirsty to learn. And it’s just something that is a huge void in our education system. We teach how to bake cakes and make ash trays in school, but we don’t teach them how to balance a checkbook or what credit card debt looks like or what student debt looks like.
Tim Ulbrich: Absolutely.
Tim Baker: So there’s a big void there, and I think people are — sometimes, we learn through pain and what we’ve gone through. And I think we can fill up a whole book of what we’ve personally done. And sometimes, it’s wisdom where we’re actually sitting down, writing through, reading “Seven Figure Pharmacist,” looking at all of the stuff that we have. You could learn a wealth of stuff on NerdWallet and Investopedia. So really, I think that’s a play as well.
Tim Ulrich: You know, one of the things I think is interesting as you were talking is — without getting too political here — when all the movement was going toward the fiduciary standard, I think it brought the public awareness and attention up a little bit that there’s not — most advisors are not acting in a fiduciary standard. And now that that really hasn’t moved forward, that may even, in some regards, lead people to think, well, now I know more about what fiduciary means, and I see that a majority of people aren’t that. That standard’s not progressing, so maybe a DIY route is where I’m going to go.
Tim Baker: Yeah, and really what Tim’s talking about here is in the last administration, basically the Department of Labor was essentially trying to push forward this standard, this fiduciary standard that said that basically the only accounts that they could touch under the Department of Labor were those basically issued by the employers. So they were saying any retirement account, 401k’s, 403b’s, and even I think IRAs, in this sense, have to be basically managed by fiduciaries that have the client’s best interests in mind. When the new administration came in, that legislation that was kind of being pushed through was squashed. So it did bring up I think some awareness that what is a fiduciary? And why aren’t all advisors fiduciaries? And there was a big push from the broker dealer world that says, hey, if we put this standard in place, then it’s going to shut out a lot of advice to kind of middle market and smaller — it’s going to shut out advice from that, which is categorically false. But it’s really around the protection of the income streams that insurance and other commissionable products generate. So I think we’ll eventually get there. It’s funny because we — I’m at different conferences, and Australia, you know, I’ve talked to advisors there that are like way ahead of us. They can’t believe that we don’t have a fiduciary standard across the board. Even their insurance products are similar. So I think we’ll eventually get there, but it could be a generation away just because of the lobbying.
Tim Ulbrich: So I think the pros of the DIY approach are obvious: potential cost savings with an asterisk — we’ll come back to that. Of course, it’s assuming that you’re doing it well and you’re controlling fees and you’re making the right decisions and so forth, you’re not being overtaken by some of the behavioral problems that can come up. Obviously, I think there’s a pro of empowerment and learning and being involved when you’ve got to figure it out, what does rebalancing mean? What does asset allocation mean? What do these funds and accounts means? So there’s a forced hand in learning. In terms of potential pitfalls, let me read you a quote from one of my favorite books, “Simple Wealth, Inevitable Wealth” by Nick Murray and get your reaction on this. He says that, “The twin premises of all do-it-yourself appeals are that most investors are smart enough, rational enough and disciplined enough always to select and maintain portfolios that are best suited to their long-term goals and that most advisors are venal and are stupid or at the very least, cost much more than they’re worth. The former premise is a fundamental misreading of basic human nature. The latter is just a self-serving mean-spirited lie.” Strong language, right? I mean, what are your thoughts?
Tim Baker: Strong language in a lot of ways. First, I had to actually look at what venal meant. So which, for you advisors out there, because I use the word fungible and gotten called on that. So venal means “showing or motivated by susceptibility to bribery.” So I think basically to summarize the quote, it’s we are perfect investors all the time. We know exactly what we need to do. We’re not emotional when it comes to this. And that advisors are stupid and basically fickle to wherever the money flows. I think that there’s probably truth and lies in both parts of that. What behavioral finance tells us and what’s becoming more and more is that a lot of our thoughts about finance is that people will — and it’s based on conventional economics — is that people will behave rationally, predictably and that emotions don’t influence people when they’re making economic choices, which is completely false.
Tim Ulbrich: We all know that. We’ve been thinking about it, right?
Tim Baker: We can outline a variety of biases, whether it’s anchoring or mental accounting or overconfidence, gambler’s fallacy, and we could maybe do a whole episode just on that. But frankly, as humans — and I do this for a living — and even sometimes for me, and especially when I’m looking at my own, we suck at it. Right now, we’re kind of in a market downturn. And I preach the long-term, I preach that over the course of the long haul, the market will take care of you. And that is a certainty. And I always joke outside of the zombie apocalypse or the Poles switching, the market will return 7-10%. It’s done it for 100 years. There’s bumps and bruises along the way, but when you’re in that moment, what I say in investing is that you should do the opposite of how you feel. So when 2008-2009 came around and we kind of are feeling a little bit of that now, you want to take your proverbial investment ball and go home. You want to get out of the market, you want to sit on the sidelines and stay in cash.
Tim Ulbrich: It should be game on, right?
Tim Baker: Right. And really, it should be opposite. If you are sitting on cash and the market is down, you should be chucking cash into your investments because essentially, it’s the one area of our financial life where we’re like, ah, I can’t believe that things are on sale and I want to get out of it. And then we kind of talked a little bit about the second part about advisors being venal and stupid. And again, I think part of that is earned in a lot of ways. But I would say by and large, I definitely operate that I think people are inherently good. But that doesn’t necessarily mean they’re good at their jobs or that they’re going to guide you the right way with regard to investing. And that’s why I think questions about that when you are potentially talking to a financial advisor is important, you know? And I think if people — one of the questions I ask prospective clients is if you had to make a list of all the things that you want your financial planner to have, what would that be? And the first one’s like, I want them to be trustworthy and I want them to communicate and I have access. But part of it is it could be an investment philosophy. If they tell me, I want someone to pick me the hot stocks, disqualified. I’m not your guy. I never will be your guy because I think the smartest thing I’ve ever said about investing in the stock market is that I don’t know where the stock market’s going to go. Nobody does. So again, I think that you shouldn’t be hiring a financial advisor to try to beat the market. By and large, they can’t do it. It should really be about managing the expectation, the behaviors, and specifically around this topic of investing.
Tim Ulbrich: I think one of the biggest pitfalls I see here — potential pitfalls — of the DIY approach is that lack of accountability, that risk of operating on an island. I know as I look back now on doing it myself, you may not feel it in the moment, but when there’s not somebody there to keep you in check and to call out the behavioral biases that we all are prone to, one I know for me and I’ve referred to before on the podcast is I knew that I shouldn’t be rebalancing more than I need to. I knew that once I set up my asset allocation based on risk tolerance, I should hold true. But you know, you log into your account, you see what’s going on, you start looking at things, and you say, well, maybe not so much of this or that, and you start messing around. And that’s why you hear the different studies saying the average return of the market is this, but the average person gets x, which is much less, because of our tendency to make those tweaks along the way. So I think accountability. I think the other thing too is that if you don’t have the right knowledge and so forth that you may end up paying more than the fees that are associated with a robo-planner, right? So we’ll link in the show notes, we wrote an article on the impact of fees and how fees can be a $1 million+ mistake alone if you’re not accounting for fees. And I know you helped me with a 403b account. I mean, we discovered fees north of — what? 1.5% I think?
Tim Baker: Yeah. And to kind of break this down, like one of the main suspects here is what’s called the expense ratio. So the funds that you are invested in, you know, mutual funds, exchange traded funds — not necessarily stocks — but the funds, there’s a manager that sits on top of that account and basically is buying and trading. And they pay themselves and they pay for office space and analysts and information. So basically, expense ratio is siphoning off money to keep the business profitable, in a sense. And if you have $100,000 in an investment and you have a 1% expense ratio, essentially you have $1,000 that is just evaporating every year from — and it’s not a line item anywhere, it’s just basically accounted for in the performance. And it doesn’t have to be that way because you can build a very investment portfolio for a tenth or even a twentieth of that. And my mantra’s always been, if I’m not getting the performance or it’s not safer for the same amount of performance, why am I paying 10 times, 20 times more? And that’s why we’re big proponents of some of the funds out there like Vanguard and Fidelity, they just rolled out a 0% expense ratio, and State Street and some of these ones that are very efficient for clients because again, you know, I think we’ve talked about this in a past episode is that the best indicator of performance is not star system ratings for Morningstar, it’s how you can drive expense down and keep as many hands in your investment — as many hands out of your investment pockets as — there’s platform fees and trading costs and expense ratios. Those are all things that — I mean, we have enough problems with the taxes and inflation that we need to be really protecting our gains, and a lot of that’s really keeping our expenses low when it comes to the investing part of the financial plan.
Tim Ulbrich: Yeah, if we’re going to hustle to put away money each and every month, like we’ve got to most out of it, right? And I think I love that’s what your mantra is keep those fees low. Obviously looking for performance as well, but I think of the statements I receive, and it has the tendency to say, well, I’m going to look at the one-year, three-year, five-year, 10-year performance. But I’m not really going to calculate what’s this 1% in total fees cost me? Or this 2%.
Tim Baker: Yeah. Well even that, like even advisors fall into this. They’ll say, hey, like I want to put my clients in 4- or 5-rated, and I only look at that. But that’s not the way to do it because typically, it’s a reversion to the mean. So what were high performing in 5-star systems, usually the script is flipped — pun intended — and those high performing, we’re buying them high and then they basically go low in terms of performance. So again, it’s just one that’s kind of the availability bias or what’s recently happened is we play on that. And it typically is the wrong move.
Tim Ulbrich: So that’s the DIY bucket. Let’s jump into the robo bucket. And you know, obvious pros and potential pitfalls. But here, we’re talking about somebody that maybe just heard this whole conversation about asset allocation and rebalancing and choosing investments and so forth and says, it would be nice to have a little bit of help around this investing piece there. And that’s really where robos come in. And obviously, there’s been I think — not a resurgence, a surgence of robo-advising, obviously, as they become more popular. I think they’ve been marketed a lot more than they were worth three or five years ago. So just briefly, what is a robo-advisor? Before we talk about the pros and cons.
Tim Baker: Yeah, so I would categorize a robo-advisor would basically sit in between DIY approach and working with a financial advisor. So typically, when you go the DIY route — and maybe we’ll put this link in the show notes, but NerdWallet has an article that says, “Best Robo-Advisors 2018 topics.” And the typical players in this are WealthFront, Betterment and those types. And essentially, what they do is they’re market disruptors in a sense that — and I remember working at my last firm, it took 38 pages to open up a Roth IRA. And essentially, what they do is you go to their website and you say, hey, if you want to open up — these are typically the kind of self-directed accounts. They’d be IRAs, Roth IRAs, taxable accounts. If you want to open up one of these, click this link, answer a few questions, and they automatically slot — and then fund it, so connect to your bank account or fund it from a different source. And you’re in a model.
Tim Ulbrich: Automatic selection there.
Tim Baker: Yeah, everything. So it’s really a method to bring technology and efficiency in a profession that needs it. So if you’re thinking, hey, I don’t want to wade through thousands and thousands of stocks and bonds and mutual funds and ETFs, and I want something that if I ask a few questions, they’ll automatically slot and rebalance over time — some of these rebalance. They’re robo, so they look at algorithms and they could rebalance daily, weekly, and you really just want to leave it alone. Then this would be typically something that you would do. Now, again, it’s going to cost you a fee to do that. So the typical ones, you’re looking anywhere from 25-50 basis points, so .25% on what you have invested to .5%. If we measure that against most advisors are probably 1%, north of 1%, just to kind of give you some perspective. But typically, you don’t have any type of human interaction. It’s go through this questionnaire, fund it, and then those dollars are invested on your behalf per an algorithm that is rebalancing over time. So again, like I’ve said this before is — and you kind of see this sometimes in pharmacy too where you’ll say, hey, I’ll never be replaced. The technology will never replace me. But robots are actually more efficient basically rebalancing than I would ever be because I’m not sitting by my computer every day. Just like you could make a case that robots are probably going to be more efficient filling scripts because of just the advances in technology. I think what robots will never be better at than me is that kind of one-on-one personal looking at the breadth of the financial picture. And I think the same is true when we’re talking about adherence and working with patients and all that kind of stuff. So they’re very synonymous in a lot of ways. But yeah, so I think the robo, I think it’s a good thing in terms of moving the needle in the market.
Tim Ulbrich: So you obviously mentioned the pro of convenience and access disrupted what was a very cumbersome, comprehensive process. I mean now, if you log onto one of those platforms you mentioned, it’s quick, it’s easy, asks you some question, you fund the account that you’re working on, and it sets up the asset allocation for you. And boom, you’re ready to go. So lower fees than a planner. So you mentioned, obviously, we’re assuming 0 or 1%ish. So here, we’re maybe .25-.5% so you can get a feel for that. I think the con you mentioned is a really good one. The lack of human element, engagement. And I think along that line, the thing I think about as the central pitfall here is that it’s focused on one part of the financial plan. You’ve been preaching since Day 1, and many of the financial planners that are out there are focused on one part of a financial plan. But what we’ve been preaching, especially for most of our audience, is that a financial plan runs all the way from debt to death. So we’re thinking about student loans, we’re thinking about budgeting and goal-setting and the right insurance. We’re thinking about end-of-life planning and home buying and kids’ college, all of these things. And when you’re looking at your month-to-month budget and your goals and what you’re trying to do, investing is one part, albeit a very important part, but it’s one part of your financial plan. And Betterment isn’t going to jump out and say, “Hey, by the way, are you thinking about your student loans and this or that?”
Tim Baker: Right.
Tim Ulbrich: And I was thinking back to just our relationship over the last year of you working with Jess and I, we’re a year in. And we’ve done very little discussion yet — we’re going to get there more — but very little discussions on investing because we’ve been spending all this time on for us figuring out what’s our why and what’s our purpose, which we published in episodes 031 and 032, maybe 032 and 033. We’ll get that right in the show notes. We’ve been talking about goal-setting, we’ve set up sinking funds and budgets and making sure we have a good foundation and insurance. And now, we’re working on end-of-life estate planning. And so I think the biggest risk I see here is that — are you filling in all the holes? And are you prioritizing goals the right way if you’re only focused on that one part of the plan?
Tim Baker: Yeah, and this is something — full disclosure — that we have been offering, Script Financial, that we’re testing out. And essentially what I want to do is be able to for someone that doesn’t want to work with me directly, they can tap into a lot of the models and portfolios that I use for clients and it’s just a little bit of less service but less cost as well. And I think if you’re not in that, then you’re going to become extinct. So I think — and we’ll put a link to that in the show notes as well. If you are wanting to do more in the investment world, open an IRA or a taxable account, make sure you’re doing all the other things we’re preaching about and have those in place in terms of foundational. But then, you know, if you’re looking at just the wealth of funds out there and you have no idea where to start, we can definitely do that as well.
Tim Ulbrich: So two out of three buckets we’ve covered. We talked DIY, we talked robo, and now let’s move into hiring a financial planner. And as I mentioned in the beginning of the show, we have previous content on this that we’re going to talk about and build on a little bit. But make sure you check out episodes 015-017 that we talk through, episode 054 about what it means to be fee-only and episode 055 about why you should care how a planner charges. And before we get into the details here, I want to reference our site, YourFinancialPharmacist.com/financial-planner. Again, YourFinancialPharmacist.com/financial-planner. We’ve got lots of content in there, we’ve got a free guide about what we think you should look for in a financial planner, who may benefit most from one. And then we’ve got an extensive list of questions that we think you should be asking to make sure you’ve got somebody who’s really acting in your best interest as you’re going along the way. So whether that’s with us or somebody else, we want you to make sure that you have the right person that’s in your corner. So Tim Baker, as I was looking at some data on this, there’s a 2016 Northwestern Mutual study that only 21% of Americans hire a financial planner to assist them, despite more than 70% — and that 70% number coming from a Harris poll — indicating that they’re interested in receiving guidance. So we have a majority that says, I want it and I want guidance, but only about a fifth that are actually engaging with a planner. I mean, maybe we’ve already hit on some of this already earlier in the show, but what’s behind that?
Tim Baker: Yeah, I mean, and it could be a lot of the things that we’re talking about is sometimes I hear a lot with prospective clients is I didn’t even really know that there were people out there that focus more on younger professionals because they look at their parents’ planner and it’s kind of where their planner is patting them on the head and saying, hey, when you have some money, sonny, I’ll help you. Or I hear like a lot of these paternalistic, where it’s like “Do as I say,” you know, it’s not necessarily collaborative, which I like. But yeah, that’s shocking is that again, I think there was people, young Americans that want it but that it’s not hitting. And I think, again, I think that’s why — you know, I’m a member of the XY Planning Network, and I think when I joined the network — so it’s a group of fee-only fiduciaries, CFPs, that really want to bring financial planning to Gen X, Gen Y demographic that’s been by and large ignored. And I joined at the end of 2015, there was 200 members maybe. And there’s 700 with us now. I mean, that’s unbelievable growth. So I think it’s just there’s a void that I think is starting to be filled. And I’m encouraged by I think what I’m seeing in the industry. But I’m also discouraged by the fact that there are a lot of people out there that need help and have no idea where to go, whether it’s account minimums or — and sometimes, it’s like well my parents never had an advisor. Sometimes with money, we kind of repeat — you know, I have a lot of pharmacists say, “I’m the first person to go to college. Further, I’m the first person to get an advanced degree. The amount of money I’m making now is more than both of my parents combined.” And what often happens is that a lot of what they’ve learned about money comes from parents, and I’ve said that time and time again is what my parents taught me about money, essentially don’t have credit card debt, buy a house. And beyond that, it was wing it. Figure it out. And I think in that regard, we just don’t have good mechanisms in place. And I think I’ll call out some of the pharmacy schools and associations, I want more education around that because when you’re walking out with a potential mortgage-worth of debt, we better be damn sure that we kind of know how to approach that. And right now, I think we miss that. So when I asked a question, $160,000 of debt at a 6.5% interest rate, what’s that monthly payment? And then there’s crickets. And then they found out the payment is $1,800+, it’s like gees, that’s a lot of money.
Tim Ulbrich: I couldn’t agree more. And I think as Tim Baker gets fired up about needing more in the PharmD, I think we’re going to have to put the explicit rating on this episode. The little “E” next to the I.
Tim Baker: Yeah, oh man, I think we’re going to lose our family-friendly status.
Tim Ulbrich: So the obvious pros — we’re not going to rehash these because we’ve talked through these in the DIY and the robo is that of course, you’ve got the human aspect. You’ve got the scope of if done well, it’s comprehensive, right? So I used the example of the debt to death. You’re looking at all aspects. It’s not limited on one aspect like investing. You’re looking at your whole plan. One of the things I think is interesting, though, Tim, is there’s this continued myth that if I hire a financial planner, my outcome is going to be better because they’re going to help me choose the right stocks. And therefore, I’m going to outperform the market. And we, I think from our perspective, debunk that myth. And when we were working on the book, we were looking at research published that shows between about 1.8% and 3% better returns on average per year for those that are hiring a planner versus those that don’t. Now, I think people look at those numbers and think, oh, that’s because of them helping me choose the right investment. I think what we’re trying to make a case of, though, is if you’re saying no, it’s not because of that, then where is that positive return coming from? Tim Baker: I think it’s really a matter of — and this could even be by accident in some ways, even in my past life in the broker dealer world is — you sit in between, from an investment perspective, you sit in between your client and their money. Most investment accounts, when the advisor is managing that for their client, there’s not two sets of hands in that. The client basically says, hey, I want you, the advisor to do that. So when the sky is falling, and the client calls — and I’ve had this here recently where the client says, hey, I really think that we should sell, typically, I do a timeout and let’s talk about it. Let’s revisit what we talked about in the investment. And although like I have the butterflies in my stomach too because my portfolio is affected, and I’m invested the same exact way that my clients are. I have to remind myself just like I have to remind the client that again, over the course of time, we adhere to, stick to our guns and adhere to the investment policy statement, the allocation that we put forth that is very diversified and low cost. It will take care of us. So I think because we don’t have the ability to get in and trade and that we’re kind of standing in between, it’s almost like a safeguard on hasty behavior. It’s kind of like what I tell clients that are just having a really bad time, just spending money on impulse or not being able to save money is anything that’s over $100, you have to have a 24-48 hour cooling off period. And if you are thinking about it in 24 or 48 hours, then maybe buy it. If you’re not, then that’s a good choice. So in the same way is this too shall pass when it comes to investments, there are brighter days ahead. And we’ve enjoyed a great, bold market, a great, hot market, and we’re going to have corrections. But by and large, sometimes it’s just the investor standing in between them and their accounts.
Tim Ulbrich: And I think you use the example of the advisor there sitting in between the investor and their accounts, I think it also goes beyond just the investment component. So as you’re working with clients and you’re asking them things about what are your hopes, dreams and goals, obviously one of those, you’re going to increase your net worth, you’re going to retire successfully, all of those things. But also if someone were to say, I really want to take some time off, 10 years into my career and do this. Or I want to make sure I’m spending more time with my family or at some point, I want to go part-time, I want to start my own business, or I want to get into real estate. Somebody who is really walking that path with you can turn back to you and say, hey, remember when we talked about this? Are we working towards doing that?
Tim Baker: Right.
Tim Ulbrich: And I think that gets to some of the cons because when you look at the industry, as you mentioned earlier, a lot of the industry is still structured in a way that incentivizes only the growth of the assets because if you’re being paid in an Assets Under Management model, you’re not incentivized to look at me in the face and say, hey, Tim, remember when you and Jess talked about Sam going to see the orca whales. Like you’d be better off saying, Tim, go open up the IRA so I can get my 1%.
Tim Baker: Right, or even more quantifiable than just saying orca whales, which is very important, is credit card debt.
Tim Ulbrich: Yeah.
Tim Baker: Or even student loan debt. I remember that question, and we answered that — I don’t know what episode it was, in one of the Ask Tim & Tim’s, and the advisor was basically saying to prolong the debt payments for the house and invest the difference. And to me, I look at that as like that is the advisor putting their interests ahead of their own. But like again, I’m seeing this more and more with new graduates, and this is something that I’m trying to crack the nut on with the offering that we have with students and residents in terms of financial planning is I’m seeing a lot of credit card debt. So if I walk into a financial advisor, typically because there’s an assumption of wealth and typically because they charge based on Assets Under Management, they don’t care to even know how to advise you on cash flowing, budgeting, debt management.
Tim Ulbrich: Do you have a will?
Tim Baker: Yeah, do you have a will? Those types of things.
Tim Ulbrich: Yeah.
Tim Baker: And I think maybe even the will is a little bit more because they want to protect the assets from the estate.
Tim Ulbrich: Yeah, that’s true.
Tim Baker: So we’re talking about the next generation of wealth transfer and the next few years is going to be incredible, but if I’m an advisor, then I’m paid more money if you put money into an IRA versus paying down credit card debt. And again, I think again, the planners, they want to be able to help their clients I think by and large. But they’re just not incentivized to do so. And I think that’s a problem.
Tim Ulbrich: And so as we talk about the cons here, I think they’re obvious. And we’ve highlighted some of them so far is that we’ve made a point of emphasis saying if you’re going to be working with a financial planner, there’s a lot of work that needs to be done to make sure that you’re working with the right planner that has your interests in mind, you’re asking the right questions about how they’re charging, fiduciary standards, do they have the right credentials? And it’s not any one of the answers to those questions is going to give you the obvious yes, this person is the person I want to be looking to work with. And one of the resources I would point our listeners to is one of my favorite books I read, “Unshakeable,” by Tony Robbins or maybe Tony Robbins’ ghostwriting team, you know, I’m not sure. But either way, he does a great job of outlining what we’ve been talking about here of the — I think he quoted maybe somewhere around 2-3% actually remain in that fiduciary category. But when you look at the wide variety of planners that are out there, the credentials that it takes to become a planner, the scope of services, how they charge, all the things that we talk about on our financial planner page at YFP, I think it can become very overwhelming to think, why am I paying for what I’m paying with these services, right? And what’s the value that I’m going to be getting from these services.
Tim Baker: Yeah, I think one thing to mention is I hear some prospective clients say, yeah, I heard you on the podcast, I’m thinking about working with you, but I’m also thinking about working with my parents’ financial planner. And one of the questions that I implore them to ask is what do they think about student loans? Because if student loans are a huge thing, again, 95% of advisors have no idea —
Tim Ulbrich: And they weren’t a big things for our parents, probably.
Tim Baker: Right, exactly. And they haven’t been trained up. So like they’ll say, oh, they just amortize our retirement. Or I heard one prospective client said that their advisor said, oh, these are no big deal. And you know, it makes my blood boil, in a sense, that we can do so much better. And the market is changing with how our economy is changing and what our financial picture is looking like. Like again, a lot of the stuff that we spend money on and that debts that our parents didn’t have, so we have to adapt accordingly, and it can be about training advisors on stock options and all that stuff that it’s still in the curriculum, but it doesn’t fit at all.
Tim Ulbrich: So just like pretty much anything else, all three of these buckets have pros and cons, right?
Tim Baker: Sure.
Tim Ulbrich: And we have people I know who have just commented in the Facebook group and reached out to us via email, we have people that are in all three of these buckets and are dominating. So I think the take-home point here is really, do a self-evaluation of where are you at and as you’re looking at investing as one part of the financial plan, which of these do you feel like really resonates most with you? Now, for those of you that are in interested in, hey, I really think I would benefit from a financial planner, I want to work with YFP and this, again, YourFinancialPharmacist.com/financial-planner. From there, you can get lots of information on what to look for, you can schedule a call with Tim Baker, learn more about him, see if that’s a good fit or not. And so I’d encourage you to check that out, YourFinancialPharmacist.com/financial-planner. Tim Baker, it’s been fun.
Tim Baker: Yeah, good stuff.
Tim Ulbrich: Look forward to wrapping this up next week. We’re going to do the Investing Q&A month of December. And again, to our community, happy Thanksgiving. We’re certainly grateful and thankful for you and the support that you’re provided. Have a great holiday and a great rest of your week.
On Episode 74 of the Your Financial Pharmacist podcast, Tim Church, Your Financial Pharmacist Team Member, and Tim Baker, owner of Script Financial and YFP Team Member, discuss how to evaluate your 401k plan and share information to help you understand some of the fees associated with it.
Summary
On this episode of the Your Financial Pharmacist podcast, Tim Church and Tim Baker discuss 401k employee sponsored plans. It can be overwhelming for new graduates or someone changing jobs to orient themselves with presented 401k options as most people have 20-30 investment options to choose from. All 401k plans aren’t created equal and it’s important to look at all fees that are being charged, even ones that aren’t seen, to determine which plan best suits you. If you need assistance analyzing possible plan options, Bright Scope is an excellent resource to help you find information.
Within a 401k plan, the rules of contribution and distribution are set by the IRS, however each organization has its own set of guidelines for the employee match and possible vesting requirements. For 2018, an employee can put $18,500 into their 401k and you and your employer can contribute $55,000 combined. Tim Baker discusses the difference between an employer match and vesting. A company encourages you to put money into your retirement account and also receives a tax reduction for the money they contribute. Employer matches vary from company to company, but it’s important to take advantage of them because the company is essentially giving you free money. Vesting helps mitigate turnover in a company and refers to how much ownership you have in a 401k. Companies may either offer graded or cliffed vesting.
If you are going to be leaving a job or if you have a new job that has a different 401k plan or provider, Tim Baker explains that there are four possible options to take: do nothing (let the 401k sit), liquidate the fund (cash it out), transfer to a new plan (move old retirement plan to a new one), or roll it over to an IRA. Typically, the best option is to roll it over to an IRA.
Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 073 of the Your Financial Pharmacist podcast. Excited to be here alongside, in-person, with Tim Church to talk about prioritizing your investing for the future. Tim Church, how we doing?
Tim Church: Doing great, Tim. Glad to have you down here. How’s the weather feel?
Tim Ulbrich: It’s unbelievable. So here we are, mid- to end of October, came from northeast Ohio, below freezing weather, and they had to de-ice the plane before I got here. Came, landed, walked out, and I was overdressed, too warm for the day, saw the palm trees, so excited to be here. And Andrea has been an incredible.
Tim Church: Well, thanks. That’s basically why I’ve been down here the past seven years if you haven’t figured that out yet.
Tim Ulbrich: Yeah, for those of you that don’t know, Tim grew up in the Snow Belt and has made the wise decision of coming down south, where it’s a little bit warmer. So I get it now. I see what you’re doing here every day. So here we are, we’re talking about investing in and prioritizing in terms of the means in which people are investing. I think this is a long overdue topic. We acknowledge we haven’t done a ton on the topic of investing on this podcast, a little bit here or there. We did Investing 101 back at the beginning of the podcast, but that’s what this month-long series is all about. And probably one of the most important questions, most frequent questions we get is, so with all these options available, where should I actually be putting my money? And in what order? Especially for those that are coming out as new practitioners. So long, long overdue. Would you agree?
Tim Church: Yeah, definitely. I think so. And I think there’s a lot of great questions and things that come up with investing. And especially as you guys talked about in the Dave Ramsey episode, what comes first — investing versus paying off student loans and other debts. But I think this topic that we’re talking about just in terms of, OK, you’ve got these retirement investment options available. How do you prioritize and how do you say, OK, this is the first one I’m going to go after. And then after I do that, I’m going to go to the next one. And there’s a lot of questions that come up with that.
Tim Ulbrich: Absolutely. And I know as a new practitioner, new grad, I struggled with that myself, not only where does this fit within the other context of other goals, but also should I be maxing out my employer account? Everyone says Roth IRAs, putting money into those. I get emails about these brokerage accounts, what should I be doing and in what order? So we’re going to talk about that and give you our opinion on that topic. But I think it’s first important to start with what are the key principles of retirement savings? And as you and I were talking about this episode, we talked a little bit about inflation, taxes, and the power of investing early and often. So give us a little bit more information around those principles of investing.
Tim Church: Alright. So if you look at inflation over the years, over several decades, it’s typically 2-3% per year, which most savings accounts are not paying that, right?
Tim Ulbrich: Absolutely.
Tim Church: And so when you look at that, you have to say, OK, what are the other options that are available to me that I can use to not only get a better return to beat inflation, but the other consideration is how do you do that with paying the minimal amount of taxes that you can so you’re keeping most of that money that’s growing?
Tim Ulbrich: Yeah, and I think just to add to that, the one advantage that young pharmacists have is that you’re coming out with a great income, typically — many graduates are coming out in their mid- to late 20s, you’ve got lots of years ahead of you in terms of investing a significant percentage and portion of your income and allowing that time for compound growth. So I like to think of inflation as kind of this gnawing thing that is just always coming after you. And I think it’s important to do that. And I read a couple books several years ago that if you really look at the impact that inflation can have on your finances, it’s something we don’t think a lot about, almost like fees on investment vehicles and other things. So inflation, taxes, and starting early and often. Now, Tim, it’s important that we talk about for everybody listening to this podcast, their personal situation is going to be different. And here, we’re going to talk specifically — almost in a silo of investing, right? And we know that those listening, some are looking at $100,000-200,000 in debt, other people are out of debt, personal life situations that are very different, all types of things. And so here, we’re really looking at if somebody has disposable income and they’re looking to invest that for retirement, in what order are they going to do that, right? So when I say if somebody has disposable income, what are we referring to there?
Tim Church: Basically, you’re talking about money that you have after you’re paying your expenses every month. So anything that you have to pay for your bills, how much it costs to live, what is that additional amount of money that you have that could be going towards investment? Many people, like you said, are flooded in debt, and so you could be listening to this episode, and saying, ‘What disposable income do I have? I’m just trying to survive. I’m trying to make it.’ But that’s really where we’re getting at is let’s just assume you’re going into this episode that you have money to invest to put in retirement accounts. Now, if that’s who you are listening to this episode and saying, I don’t have any money to put in investments because of the bills and things I have, well, it’s a pretty simple equation. That in order to increase your disposable income, you’ve got to increase your earnings, get a side hustle, work more hours, or you’ve got to decrease your expenses. And so that’s where really budgeting comes into play.
Tim Ulbrich: Absolutely, yeah. And I think that idea of it’s a simple equation — you either increase your earnings or you decrease your expenses. And just a shout out to the work you’ve been doing with the side hustle series, giving people ideas. We’ve got more content coming there. And just before we jump into the buckets of investing, I think it’s important that we are not — and we’ve had this conversation multiple times on the previous episodes — but we’re not going to have a conversation about should I be investing or should I be paying off my debt? And as I mentioned before, one of my concerns with an episode like this where we talk about investing or even the month-long series in a silo is that this is one part of a comprehensive financial plan. And you’ve got to look at the whole picture. So if you want more information on our thoughts about investing while in debt and how does that fit in with emergency funds and other life goals, head on over to episodes 068, where Tim Baker and I tackle that, where we reviewed the pros and cons of the Dave Ramsey plan. And I’m sure that’s evoked a lot of emotional reactions because it usually does.
Tim Church: Yeah, that was a great episode. And I think you guys did a great job talking through some of the controversy, but also some of the positive things that are in that plan and some of the behavioral aspects of it. And so when we’re talking about these major buckets, things that you can invest in for retirement, one of the things that came to mind, Tim Baker, he recently did an investing webinar. And he showed this image of actual buckets, and he was naming the buckets and putting one in. And I don’t know if when you were a kid, Tim — do you ever remember that show, Bozo the Clown? Do you ever remember that?
Tim Ulbrich: Yeah, yes.
Tim Church: And in that show, at the end of the episode — I think it was at the end — they actually were throwing ping pong balls into buckets. And they progressively — but there was a specific order that you had to put them in. And for some reason, he really evoked that memory when he was showing that figure. But it’s cool because it’s really, that’s what we’re talking about here. We’re talking about, OK, what’s the first bucket that you’re going to put your money toward? And then how do you go to the next level and what do you do?
Tim Ulbrich: And I think the visuals he used as well with the buckets in that presentation, it was a good reminder that these are vehicles and not the investments themselves. That’s an important point. We’ll talk more throughout this month. But when we talk about 401k’s, 403b’s, IRAs, etc., those are essentially the tax advantage shield in which you’re investing. But within that, you’re going to be choosing the individual investments, whether that’s stocks, bonds or mutual funds, etc. So let’s jump into these buckets. So probably for the vast majority of our listeners, they’re going to be presented by their employer with an option of a 401k, a 403b and what’s referred to as a TSP, which is a VA employee, right, that’s you.
Tim Church: Right, that’s the Thrift Savings Plan.
Tim Ulbrich: The Thrift Savings Plan. So we’re going to group these together because I think we throw around these words like we assume everyone understands exactly the implications of them. So let’s review quickly — a 401k, a 403b, and a Thrift Savings Plan, these are employer-sponsored retirement plans. So obviously, in order to get this benefit, you’re working for somebody. They’re going to offer this. And at what level they’re offering this benefit in terms of a match and what they can contribute is all over the place. And I think one of the things that we’ll talk in future episodes is as you’re looking at different jobs and comparing benefits and things, it’s a key thing to be looking at what is the benefit that you have? And I know the VA, that’s a pretty lucrative benefit on your TSP, is that correct?
Tim Church: Yeah, through the TSP — a couple different reasons. No. 1, they do offer a match up to 5%. But one of the other things is that they have very low fees in the funds that they have available. And I know that, Tim Baker always talks about that when you’re looking at different options within your 401k, is that you have to pay attention to those fees because even if you’re not seeing that change in your accounts, like over time, it can really eat at the earnings that you have.
Tim Ulbrich: Absolutely. And so let’s talk first — we’ve got 401k’s, 403b’s or TSPs, let’s talk about the traditional variety first because what has complicated this whole equation is that — you know, I remember when I came out of school, we were looking at primarily a traditional 401k or a Roth IRA. And now, we’ve got hybrids of these vehicles such as a Roth 401k or a Roth 403b, which I think has made this very complicated and probably make it even difficult to talk about it on the podcast in something like this. It’s good for a visual. So when we talk about a traditional 401k or 403b, essentially what we’re referring to there is that you are deferring the payment of taxes to the future. So those are a deductible in terms of income taxes today. You are not paying taxes on the contributions today. But when you go to withdraw those funds, no earlier than the age of 59.5 without penalty — and there’s a required minimum distribution at the age at which you’re beginning to have to force to take out that money — the maximum amount that you can put in as an employee into these accounts in $18,500 in the year of 2018. We’ve seen that climb each year by $500 or so. Now, there is an additional amount that you can put in after the age of 50. And that is $6,000, which essentially is a catch-up provision that allows you, if you’re behind in savings, to be able to save more beyond that $18,500. Now, what this does not include, which is a really critical, important piece here, is that $18,500 does not include the portion in which your employer would provide in the form of a match. Now, if you’re not familiar or haven’t heard of that term, match before, as Tim gave the example with the VA, it’s a 5% match. Essentially, 5% of his salary that he contributes, the VA will contribute dollar-for-dollar. And this is all over the place with employers. Some will do a 3% match, some will do a 6% match, some will do a dollar-for-dollar, some will do 50 cents on the dollar. But essentially as you’ll see when we get into the priority of investing, the match is free money. And that’s really the critical piece here. So why is this number important? Because what we’re referring to is that you obviously are growing money tax-free for a period of time. But ultimately, when it comes to being pulled out, you’re going to be paying taxes on that money. But if you make $100,000 — just out of simplicity — $100,000 per year, and you contribute $15,000 into your 401l, essentially you are going to be paying income taxes on $85,000. So it’s reducing your taxable income today. That money is growing all along, and you’re not going to pay taxes until the point you distribute it. And obviously depending on the income tax bracket you’re in and what the income tax bracket rates are at the time, you’re then going to be slapped with an income tax bill in the future.
Tim Church: Yeah, and I think that’s a good point to bring up is that when you’re looking at those account balances, somewhat really of an illusion when you’re looking at that bottom line if all of your contributions are traditional because it’s going to get taxed eventually, it’s just at what level is going to depend on where you are at the time when you’re making those withdrawals. Versus the Roth version — so many employers now offer the Roth version, and that’s even for the Thrift Savings Plan, where basically, you’re going to make contributions after-tax. So you’ve already been taxed on your income, and you’re going to allow those contributions to grow tax-free. So when I say tax-free, it basically is at the time at which you’re eligible to make the withdrawals, you’re not going to be taxed on that money. Now, that’s a whole separate animal in terms of determining what is best for you. Should you do traditional contributions? Should you do Roth contributions? And there’s a lot of different factors that can play into that, such as what your projected tax bracket’s going to be at the time of retirement or eligibility. And that could be a couple different things there. Does the government change the tax brackets? But then also, what is your projected income going to be? And things could obviously change with your job, so it’s really sort of difficult to predict everything. But there are some simulations out there online where you can kind of go through that.
Tim Ulbrich: And I think your point earlier about considering the tax implications is so critical to retirement planning because we often — and we’ve talked before on the podcast about a nest egg, how much you need at the point of retirement. Well, that number, if a majority of that’s in a traditional 401k, for somebody else that’s maybe saved a lot in a Roth IRA, which I’m going to talk about here in a minute, how that’s going to play out when you’re in retirement is very different in terms of the total amount that you have and how it’s going to be taxed. So I say that because I think the tax implications are a key planning piece as you’re thinking about exactly how much do I need at the point of retirement, and what’s going to be taxed? And what’s not going to be taxed when you get to the point of withdrawal? So again, 401k, 403b, TSP, max contributions in 2018 are $18,500 for the majority of people that will be listening to this podcast. And that number I think will be important because you often hear people say generally, to meet your retirement goals, you’re probably looking at somewhere around maybe 15-20% of your income that needs to be saved. So if you figure out the numbers, a pharmacist making $120,000, obviously you’re starting to get that point with the 401k, 403b, but there’s other vehicles that we’re going to talk through right now. And let’s go to that next one, which is an IRA. So Tim Church, IRA, Individual Retirement Arrangement, this one has different figures, different numbers, but also has a traditional form of it as well as a Roth form of it. So talk us through that one.
Tim Church: Correct. So this is something that anybody with an earned income is eligible for. They can contribute up to the max, which as of 2018 is $5,500. And there’s an extra $1,000 if you’re 50 or olders, so $6,500 if you’re 50 or older. But anyone who is earning an income can contribute to this. And what’s important is this is something outside of your employer. So this is something that you set up on your own, either through a brokerage account — but the other thing here too is besides what you’re able to contribute, if you’re a married and you have a non-working spouse, they can also contribute up to that limit. So technically, if you’re less than age 50, your household if you’re working and you have a non-working spouse, you can contribute up to $11,000 per year.
Tim Ulbrich: Yeah, and I think that’s an important provision. I know for Jess and I, so Jess is at home with the boys, she’s not working. But to your point, a non-working spouse, so for us, when we talk about a Roth IRA, we both contribute that $5,500 per year to be able to make that contribution. So this has both a traditional version as well as a Roth version. And again, I think that’s where it gets confusing when people hear Roth 401k, Roth IRA. So traditional IRA looks very much — obviously the numbers are different, the $5,500 per year — but looks very much tax-wise like a 401k or 403b in that you are — if you meet the income qualifications — you are deferring the payment of taxes to a later point in time. You know, many pharmacists don’t qualify in terms of the income limits for a traditional IRA.
Tim Church: Right. And if you look at the IRS has some different rules depending on whether you are covered by a 401k or whether you’re not covered by a 401k. But if you are, the phase-out if you’re single is $73,000. And for being married filing jointly, it’s $121,000. So if you make above those limits, you actually can’t deduct the traditional IRA contributions. And so that kind of leads into well then why would I ever do that, right?
Tim Ulbrich: Absolutely, yeah. And I think that we’ll talk in a minute about the back-door Roth IRA, and we’re going to actually in our upcoming Q&A episode even talk a little bit more about it. But when we talk about a Roth IRA, and I think why Roth IRA’s have all the rage these days, rightfully so, is that you are paying taxes today, that money is growing, but you are never paying taxes on that money again in the future. So if I were to contribute up to the max, $5,500 per year in a Roth IRA, and Jess did the same, that’s money that is being contributed that we’ve already paid our taxes on. So got my paycheck, paid taxes, then I make the contribution into the Roth IRA. I invest that money, it grows at some percentage every year, hopefully that compounds, let’s say that turns into a half million dollars, I’m at the age of 70, I start to withdraw that money, I’m no longer paying taxes on that money because I already paid taxes on the money before I put it into the account. Now, this gets into the whole debate about, well, would I be better off putting money in a Roth IRA or a 401k, and that gets back to the point that Tim Church made in terms of the tax brackets and what’s going to happen in the future, and largely, I think most people would agree we probably don’t know at this point in time. Now, this also has income limits to directly contribute. So for those that are single, the phase-out of contributions at $135,000. For those that are married filing jointly, there’s a phase-out that’s at $199,000. And so this is where you’ll hear people and you’ll hear pharmacists say, ‘Well, I really like that idea of tax-free growth, I pay taxes now, I’m not going to pay taxes in the future. But I exceed that income limit,’ and insert the back-door Roth IRA. Now, we could have a whole separate episode probably about the back-door Roth IRA. There’s some great tutorials, resources online. I know the White Coat Investor — just shout out to what he’s done — he’s got some great tools and resources about how people can go through that process. But essentially, what you’re doing in a back-door Roth IRA is you’re contributing to a traditional IRA, and then you’re converting that to a Roth component. And so we’re going to come back to that in our Investing Q&A. But all that to say if you’re somebody that exceeds the income limits of a Roth IRA, that does not mean you cannot take advantage of the benefits of a Roth IRA because of that back-door components.
Tim Church: Right. And I think the key is to keep in mind that it really is about the timeframe at which you make that conversion and whether there’s any gains on the money when you make the contributions to a traditional IRA. So if there’s any gains in between that conversion, you’re going to pay taxes on it. The other thing is too is that if you’ve already had past traditional IRAs, and you didn’t convert them, there can be some tax implications with that as well.
Tim Ulbrich: You know, the other thing I love about Roths, which I don’t think is talked about enough is that they do not have the forced required minimum distribution that come with the 401k or 403b. So if somebody’s out there thinking, you know what, maybe I’m going to be working until I’m 75 or 80 or maybe I have other sources of wealth, real estate investing, businesses, whatever, and you think you may not need that money at the required minimum distribution age in the early 70s that you’d be forced to take in a 401k or 403b, to me, that’s one of the great advantages of a Roth IRA, that you continue to let that money grow, and you don’t have to take it out. Alright, we’ve got another big bucket here, Tim, in terms of the HSA or the Health Savings Accounts, which we talked about in Episode 019 in details for those that want to go back and look at those. But give us the down-low on HSAs. I know you have this benefit through the VA, but this has the lethal triple-tax benefits, which are talked about often. So why are HSAs so powerful?
Tim Church: Well, exactly just like you said. It has the triple tax benefit. But yeah, this is one of the cool things that I started for my wife and I for this year for 2018 because I didn’t really know much about it before and what the implications were. But just going through as we talked about through YFP, I mean, it really has a lot of power. And the name itself is really a misnomer because you look at that and you say, Health Savings Account, so it’s just a regular savings account that I can use to pay health expenses, right? Well, not exactly. It can actually be an investment vehicle. It’s really an investment account in disguise. It really depends on your intentions or how you’re going to use it. And for some of these accounts, you have to have a certain amount before you can unlock those investment options. So for example, for me, is I had to have $2,000 in the account before I was allowed to contribute anything towards an actual investment.
Tim Ulbrich: Does that vary by who offers the accounts?
Tim Church: Yeah, I think it does. I don’t believe that that is an IRS stipulation. I think it does depend on the bank that is servicing the HSA.
Tim Ulbrich: I thought I saw that on the Facebook group, people were talking about, well, ‘with my employer, that number is different,’ so yeah.
Tim Church: Right. So like we were talking about is, how you’re going to manage this account really depends on that intention. So you could be using this account to strictly pay for medical expenses, and the benefit of doing that is you’d be paying for them pre-tax, which is not a bad thing. I mean, that’s a great way if you have anticipated medical expenses and you want to be able to pay for them with some tax efficiency, then that’s great. But you can also look at this from the perspective as I’m going to use my HSA as an investment vehicle. So you’re going to say, I’m going to pay for all of my medical expenses out-of-pocket, and I’m just going to invest the rest, and I’m going to treat it like an IRA or I’m going to treat it like my 401k in that my goal is to beat inflation to actually get some compound growth.
Tim Ulbrich: And is the thought here if you’re going to pay for your medical expenses out-of-pocket now and really let that grow, it sounds like it’s got the benefits of a Roth IRA plus you’re not paying taxes now. It’s got that, you know, the highs of the 401k, 403b and also the highs of the IRA. But at some point, are you forced to use those on medical expenses?
Tim Church: No, so it’s really kind of interesting about the account. So just to jump into that triple tax benefit. So the first one is that it will lower your adjusted gross income. So you can — any contributions you’re making to the account are tax-deductible.
Tim Ulbrich: Like a 401k and 403b.
Tim Church: Correct — if they’re traditional, correct.
Tim Ulbrich: Yep.
Tim Church: And then that account, any contribution that you put in are going to grow tax-free. Now, the withdrawals are tax-free as long as you can prove that they’re being used to pay for a qualified medical expense because otherwise, you’re going to pay a 20% tax if you take the money out before age 65 for a non-qualified expense. Now, if it’s after age 65, to my knowledge, there’s no additional penalty, there’s no additional tax. You basically, it’s like a regular retirement account. Now, here’s the caveat. So — and this is one thing that I didn’t know until I really got into it is that let’s say you contribute to an HSA over 20-30 years. And those accounts are growing, you’ve been investing them aggressively, and you’ve got some great growth on them. And let’s say you’re 60. Can you pull out some of that growth that you’ve had, some of that money that’s in there, but without paying taxes on it? And you can because the caveat is that if you keep track of all of your medical expenses you paid over that time that you’ve been contributing and can prove that you’re essentially reimbursing yourself, you’re not going to have to pay those taxes. But the key is really, you have to keep a good record of those receipts. What I’ve been doing is basically putting anything I have into the cloud, into Google Drive, and doing that for every year so I know exactly what I’ve paid and what I can technically claim as being a reimbursable expense.
Tim Ulbrich: Sounds like you need to develop like an HSA tracking expense app.
Tim Church: Yeah, there’s probably something out there.
Tim Ulbrich: Maybe it’s the next business project. But so unfortunately, not everybody has these available. But for those that do — and we’ll get into this prioritization — you often hear people putting these at the level of, OK, take your match, and then you think about an HSA. We’ll come back to that, but the reason that is and why they are so highly regarded in terms of priority investing is because of the tax benefits that you were just talking about. But not everybody qualifies. I know I haven’t with the employers I’ve worked with. In the state benefits, we didn’t have what was considered a high-deductible health plan. So to qualify, you have to be enrolled in a high-deductible health plan. What basically is a high-deductible health plan? Well, this year, for an individual, it’s having a plan with a deductible of at least $1,350. And for a family, that deductible is at least $2,700. Now, I think what we’ve seen with health insurance benefits pushing some of the costs back into the consumer and obviously increasing deductibles, we’ve seen more people being eligible for these. And I think it’s a great time to talk about this because of the time period around open enrollment. So if you’re somebody saying, do I have a high-deductible health plan? Do I not? Does my employer offer an HSA or not? Now is the time to look to see where this may fit in the context of your prioritization of investing.
Tim Church: And I would say that the two major reasons that my wife and I, we decided to switch from a traditional PPO health plan to a high-deductible health plan, really for the opportunity to contribute to the HSA but also the other benefit is that high-deductible health plans typically have lower premiums. So with the old plan, I was paying a lot more each month, but I wasn’t using any of the insurance that I was paying for. So if you’re relatively healthy, I think it’s a great option. So if stuff comes up, you might be paying some money out-of-pocket, but again, you wouldn’t have had that option otherwise to even contribute to an HSA. And you have to really look in the context of what your premiums are.
Tim Ulbrich: That’s a great point. And I think what you just said too speaks to the power of the emergency fund and having an emergency fund because if you can afford to take on that risk of, you know, maybe I’m healthy now, something comes up unexpectedly, I get slapped with a huge payment. Then ultimately, you’re ready to take that on, and you can afford it without feeling that risk of that. So what we didn’t talk about here with HSAs is the max contribution amount. So we talked about it with 401k’s and 403b’s or the TSPs, we’re looking at $18,500. We talked about with the IRAs, $5,500. What about the HSAs?
Tim Church: So as of 2018, if you’re single, it’s $3,450. And then if you’re self plus one or family, it’s $6,900. And an additional $1,000 if you’re 55 or older for catch-up. And this — just like the other accounts — this typically changes every year, every couple years.
Tim Ulbrich: So what I like, if you start to string these together between a 401k, a 403b, a Roth IRA or a traditional IRA, if you qualify as well as if you have access to an HSA, you can start to get to a point where you’re saving a significant percentage of your salary, probably more than many listening, especially in the contest of other goals. But nonetheless, you have the option to be saving a significant portion of your salary that has tax advantages. And I think that’s key because one of the last things that we want to talk about here is the taxable or brokerage accounts. And so with the taxable brokerage accounts, why I said that previous point I think is important is that I see a lot of new graduates getting ads and promotions for some of these apps and tools and things that are out there. But they’re investing outside of the tax-advantaged accounts. And so I think as we talk about taxable or brokerage account, where we see this fit in is once you’ve exhausted all your other tax-favored retirement plans, this probably is the final option that you’re looking at because of the loss of tax-shield capital gains taxes that you have to pay, etc. So good news here is if you get to the point where you max out everything and you’re looking for options, there’s lots of options out there in which you can invest. But don’t get too far ahead of yourself if you’re not taking advantage of the match or other tax advantages that we’ve talked about previously. So last one quickly before we talk about prioritization of these buckets would be the SEP IRA. And I think this is timely because of your side hustle series. And so maybe we have people out there that own their own business, are starting their own business, want to, and to me, when I see information about a SEP IRA, that makes me want to start some businesses because you’ve got some really good advantages with retirement options. So what is a SEP IRA? And what flexibility and freedom does it give you in terms of retirement?
Tim Church: So a SEP IRA stands for a Simplified Employee Pension. And basically, if you’re self-employed, you own your business, you have this opportunity, this benefit available to you. And this could be in addition to a 401k that you have available. So this could be something that you’re doing on the side, an additional business you own. But one of the advantages is that there’s a lot more money you could potentially contribute versus what’s available with a 401k or IRA. I mean, it’s a huge difference. But obviously, you have to be making that much money up to that certain point to be able to. So right now, what the guidelines are, is that you can contribute up to the lesser amount of either 25% of your compensation or $55,000. But when I see those kind of numbers — like you’re shaking your head here, Tim — that just gets people fired up, I think, to say, hey, what if I was able to bring in an additional amount of income that I’m no longer capped out at this 401k, this IRA max that’s there.
Tim Ulbrich: Yeah, reason No. 403 to start a side hustle, right? I mean, when you see those numbers, and it gets me fired up even for the work that we’re doing that to your point, it’s dependent on compensation, obviously, you mentioned the lesser of those numbers. But in addition to other retirement vehicles, you can obviously make some great headway if you’re in a position to do that. OK, let’s jump in now. We’ve set the stage, we’ve spent a decent amount of time talking about the buckets, which is important because before we can talk about prioritization, we have to know what we’re talking about. What is a 401k? What is a 403b? What is a Roth? Now, a couple disclaimers here that I think we have to talk about because we’re probably going to take some flack regardless, which is OK. But not everyone is going to agree with the prioritization that we’re talking about. Not necessarily that there is one right way in terms of order of investing. Now, we’re going to give a framework on that that we think many listening will follow, but to my point earlier, everybody has different personal situations in terms of income earned, in terms of other financial priorities, in terms of other goals, when you want to retire, all types of variables that may come into play in terms of how you actually execute this.
Tim Church: Yeah, and I think like there’s a lot of people out there that are really into real estate, and they look at that as even taking priority over some of these retirement accounts because either they’re all-in or they’re confident that they’re going to get good returns there. And I think that’s great. I think for some people, that is an awesome option. But I think here, like you said, we’re talking in the context of, OK, let’s focusing in on these retirement accounts and just really try to figure out, well, what is the best order?
Tim Ulbrich: Yeah, and I think the other situation I think about, Tim, is those that are on fire about the FIRE moment, the Financial Independence Retire Early, waiting until 59.5 to access your accounts may not be the goal they’re after. And so you know, obviously again, this to me really speaks to the power of sitting down with somebody like Tim Baker and financial planning and talking about what are your goals and then putting out a map to be able to achieve those. The last thing I have to say here as a disclaimer before we jump into the prioritization — if Tim Baker was here, he would make me say this — is what we are saying is not financial advice, right? So we don’t know of the thousands of you listening, we don’t know what your own personal situation is. So we’re looking, again, down the lane of investing. If you have disposable income to invest, this is the priority we think you should consider. But we’re not saying, run out and do this tonight. You’ve got to think about the context of the plan. OK, No. 1 — I think everyone agrees with this. I mean, maybe there’s a person or two out there, maybe? I don’t know.
Tim Church: I haven’t seen — so what I was looking at to see what else is on the Internet and some of the other bloggers, I think this is one thing almost everybody I think actually agrees on.
Tim Ulbrich: For how much disagreement there is.
Tim Church: Right.
Tim Ulbrich: So No. 1, as you may have guessed it, is the employer match, right? No surprises here, most people agree on this. You are getting free money from your employer. If you don’t take it, you’re leaving it on the table. And so we even believe, we talked about this in the Dave Ramsey episode, Episode 068, the match has to be a priority in your financial plan, even in the context, I think, of student loan debt — maybe a different conversation depending on personal situations, but you have to take that money. Now, for you, you mentioned that 5% match. So let’s just use a hypothetical. Somebody’s making $100,000, they put in 5%, they get 5%, that’s $10,000 of tax-deductible retirement savings that are going to grow over time. You’re putting in 5, your employer’s putting in 5. And again, as I mentioned earlier, you’ll see this in different situations in terms of the percentage of salary match. It may be 5%, 6%, 3%, no percent, dollar-for-dollar, $.50-per-dollar. And so it’s all over the place.
Tim Church: Or what you get. What have you gotten at schools? You’ve gotten like 14%?
Tim Ulbrich: Well, I’m unemployed right now.
Tim Church: Oh, OK.
Tim Ulbrich: But you know, yeah. So you know, I’m lucky to work in the state teachers’ retirement system, which we actually are forced to put in. I remember when I was in the grinding out of paying off debt, it was painful. But we are forced to put in 14%, and there’s some fees and things that shakes out to that they match around 10%. So it’s kind of a forced combined contribution of about 24% total, which is really nice. But the downside is I actually don’t get any Social Security, so I won’t receive that Social Security benefit in the future if it’s there. But we’ll see. So No. 1, employer match. Now, No. 2 is HSAs or Health Savings Accounts. Take the employer match, and I think what often, people do right after the employer match is they just go up and maybe max out their 401k. I think what you’re making a point here is maybe after that match, move into the HSA if you have it available.
Tim Church: Yeah, and I think — but even going back to is that a bad option of putting more money in your 401k? So I think like in the context, which is interesting here is that really, even if you’re switching up the order on some of these, like really, it’s still not a bad decision. The decision to actually put money into the accounts to grow is a good thing. But I do think, you know, the HSA with that triple tax benefit, it’s hard to argue against that, right?
Tim Ulbrich: Absolutely.
Tim Church: I mean, it’s such a powerful tool. I think Dr. James Daly of the White Coat Investor, he calls it the Stealth IRA, which is pretty cool.
Tim Ulbrich: I love it.
Tim Church: Because it’s basically like you’re getting the opportunity to contribute to another IRA if that’s your intention behind it. But it can really be a powerful way to get some additional retirement savings.
Tim Ulbrich: I do have HSA envy. I don’t have access to an HSA, so unfortunately, yes, great match, but I wish I had that HSA option. So No. 1, we said employer match. No 2, HSA triple tax benefit makes a whole lot of sense.
Tim Church: If available, right? Because not everybody’s going to have that.
Tim Ulbrich: Right. High-deductible health plan, you may or may not have it. Now, No. 3 here, we’re getting into the IRA. And really what we’re getting at is the Roth IRA component. And obviously, for those that don’t meet those income qualifications, they would have to do a back-door Roth IRA. But what we really want to take advantage here is the tax-free savings that are going to happen over time. You’re paying taxes today, you put the money in, it grows tax-free, you go to pull it out, you’re not paying taxes anymore. So even though this doesn’t have the same maximum as the 401k, 403b’s, you’re not going to be able to have these be equally weighted, pre- and post-tax, right? $18,500, $5,500. To me, I see this as the way that you’re balancing out getting to the point of retirement, you’ve got some free and post-tax savings. So if I’m maxing a Roth IRA at $5,500 per year or back-door Roth IRA to get there, and then I’m putting in $18,500 in a 401k or 403b, of course I’m going to have more in accounts that are going to get taxed than I am in accounts that are not going to get taxed. But I’m balancing those out a little bit.
Tim Church: It also depends too if you have a Roth 401k, then also that could be after-tax contributions, so it’s possible you could have both. You could do the Roth IRA and a Roth 401k and basically putting everything in after taxes and then letting your accounts grow tax-free. I think going back to what we talked about is that since most pharmacists are not going to get the deduction if they contribute to a traditional IRA, it sort of makes sense to always go to the back-door Roth. Well, I think one of the interesting questions — and this has come up before — is why would I not just go up higher on my 401k versus contributing to an IRA? And really, you know, the way I look at that is either one is still a great option in terms of the contributions. The difference, really, is that with the IRA, this is outside of your employer, which means a lot more options.
Tim Ulbrich: Yeah. And that’s why you hear — we won’t get into it here — but that’s why you hear when you switch employers, there’s value in rolling that over into an IRA where you can unlock those options. And one of the things I’ve seen with Tim Baker’s help is the variety of what people have available to them in an employer-sponsored 401k or 403b, both options and fees, good or bad, is all over the place. Some have very limited options, very high fees, and maybe their employer doesn’t even really recognize or acknowledge the value. Others are maybe working with a Fidelity, Vanguard, whomever, have tons of options, can get low-fee accounts. So this really is an individualized decision.
Tim Church: I totally agree because when I look at the Thrift Savings Plan, one of the benefits of a Thrift Savings Plan, like we talked about earlier, is there’s such low fees on that. And so with a situation like that, I mean, you could make the argument that either one is going to be fine. But if I’ve got really low-fee options that are getting great growth, then I may go and try to max out my 401k or increase prior to going to the IRA.
Tim Ulbrich: And I think your point is a good one. At the end of the day, we’re splitting hairs, right? If you’re having this debate, there’s lots of opinions, lots of nuances, but at the end of the day, you’re doing a good job, you’re being intentional, you’re saving for the future. I tend to favor the prioritization of really maxing out the Roth component before I go back to max out the traditional 401k because of what I mentioned earlier and having that balance of pre- and post-tax, but again, people have different answers on that based on what they think is going to happen in terms of the tax component. So just going back in order here — your employer match, HSA, IRA component, we talked specifically about the Roth component of an IRA or a Roth 401k, right? And then going back to your traditional 401k, maxing that out to the $18,500. Now, if you get to this point, and you’ve taken an employer match, you’ve maxed out an HSA if you have it, you’ve maxed out the IRA, and you’ve maxed out your 401k, you’re crushing it.
Tim Church: Yeah, I mean, that’s pretty awesome. I mean, I’m not quite there yet. But it really is encouraging to see those numbers as a goal, really, to say, hey that’s where I want to be.
Tim Ulbrich: When you put those numbers together, we’re talking about $18,500, another few thousand, another $5,000 — you’re saving a significant percentage of your salary, looking at several million dollars with compound growth over 30-40 years. Now, after we max out the 401k or the 403b or the TSP, then obviously, if people have access to a SEP IRA, they’re going to take advantage of that. Now, after Step 5 here…
Tim Church: Right, that would depend if they have some kind of additional income or potentially they don’t work as a W2 employee, and their main business or their main job is as an employer or a small business. So that actually could be somewhat reversed depending on the situation and depending on what kind of job you have.
Tim Ulbrich: What you have available, yes. I think what we’re doing here is — before we get to the last one, which we’re calling them brokerage accounts, which as I made the point earlier, these don’t have the same tax advantages that all these others do. So what we’re advocating for is really maxing out the opportunities you have to save in tax-advantaged vehicles and then ultimately if you’re still looking to save more, personally I’d probably advocate for maybe some real estate investing, some business stuff, other things before even brokerage accounts. But you’ve got lots of options available.
Tim Church: You’ve got lots of options. And the other thing too is as long as you’re not continually trading fees and different things like that, I mean, capital gains tax is actually still tax efficient versus some other things that are out there that you’re going to get taxed ordinary income. Tim Ulbrich: Absolutely. Fun stuff. We covered a lot here, packed full of information. I think this is one we’re going to hopefully go back and say, ‘Hey, you got questions about the different investing buckets, prioritization, go back to Episode 073, we’ve got some great information.’ And this is a reminder, for those of you that haven’t yet done so, if you could leave us a review in iTunes, if you like what you heard, or whatever podcast player that you’re listening to, we would greatly appreciate it. Also, if you haven’t yet done so, make sure to head on over to YourFinancialPharmacist.com, where we’ve got lots of resources, guides, calculators, that are intended to help you as the pharmacy professional on your path towards achieving financial freedom. Tim Church, this has been fun and looking forward to coming back and finishing up the series.
Tim Church: It’s been great, Tim.
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On Episode 73 of the Your Financial Pharmacist podcast, Tim Ulbrich, founder of Your Financial Pharmacist, and Tim Church, YFP Team Member, continue a month-long series on investing by talking through the various retirement/investing options available, key principles for retirement savings, and how to prioritize investing. The figure below summarizes the episode and lists the 2019 annual contribution limits for the most common retirement accounts.
Summary
On this episode, Tim and Tim discuss the priority of investing in retirement and other accounts. Tim Church mentions savings accounts aren’t able to pay the amount that inflation rises each year (2-3%), so it’s important to think about other options on how to beat inflation while paying a minimal amount of taxes. This episode focuses on using disposable income to save for retirement.
Most listeners will be presented with the options of 401(k), 403(b), or TSP (Thrift Savings Plan) and will be offered matches that vary employer to employer. There are a number of different retirement options available. Traditional varieties, Roth, IRA, backdoor Roth IRA, HSA, and SEP-IRA are all potential options for investment. Details are given for each of these options, including how much you are able to contribute as an employer each year and the age in which you can withdraw funds.
When it comes to the priority of investing, YFP suggests that you first use the employer match as it’s free money and should be the priority in your financial plan. Then, use the HSA if it’s offered to you as it carries a triple tax benefit and is a powerful tool for investing. Roth IRA and Roth 401(k) can then be contributed to as they offer tax free savings over time. You’ll pay the taxes today, allowing your money to grow tax free. After that, max out your traditional 401(k) and then a SEP- IRA. If you’ve maxed out the contributions to everything previously mentioned, you can then consider investing in brokerage accounts.
It’s important to note that this is not a financial plan, everyone’s situation is different and therefore different options may work better for you than what is mentioned, and not everyone will agree with what we have suggested.
Episode Transcript
Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 073 of the Your Financial Pharmacist podcast. Excited to be here alongside, in-person, with Tim Church to talk about prioritizing your investing for the future. Tim Church, how we doing?
Tim Church: Doing great, Tim. Glad to have you down here. How’s the weather feel?
Tim Ulbrich: It’s unbelievable. So here we are, mid- to end of October, came from northeast Ohio, below freezing weather, and they had to de-ice the plane before I got here. Came, landed, walked out, and I was overdressed, too warm for the day, saw the palm trees, so excited to be here. And Andrea has been an incredible.
Tim Church: Well, thanks. That’s basically why I’ve been down here the past seven years if you haven’t figured that out yet.
Tim Ulbrich: Yeah, for those of you that don’t know, Tim grew up in the Snow Belt and has made the wise decision of coming down south, where it’s a little bit warmer. So I get it now. I see what you’re doing here every day. So here we are, we’re talking about investing in and prioritizing in terms of the means in which people are investing. I think this is a long overdue topic. We acknowledge we haven’t done a ton on the topic of investing on this podcast, a little bit here or there. We did Investing 101 back at the beginning of the podcast, but that’s what this month-long series is all about. And probably one of the most important questions, most frequent questions we get is, so with all these options available, where should I actually be putting my money? And in what order? Especially for those that are coming out as new practitioners. So long, long overdue. Would you agree?
Tim Church: Yeah, definitely. I think so. And I think there’s a lot of great questions and things that come up with investing. And especially as you guys talked about in the Dave Ramsey episode, what comes first — investing versus paying off student loans and other debts. But I think this topic that we’re talking about just in terms of, OK, you’ve got these retirement investment options available. How do you prioritize and how do you say, OK, this is the first one I’m going to go after. And then after I do that, I’m going to go to the next one. And there’s a lot of questions that come up with that.
Tim Ulbrich: Absolutely. And I know as a new practitioner, new grad, I struggled with that myself, not only where does this fit within the other context of other goals, but also should I be maxing out my employer account? Everyone says Roth IRAs, putting money into those. I get emails about these brokerage accounts, what should I be doing and in what order? So we’re going to talk about that and give you our opinion on that topic. But I think it’s first important to start with what are the key principles of retirement savings? And as you and I were talking about this episode, we talked a little bit about inflation, taxes, and the power of investing early and often. So give us a little bit more information around those principles of investing.
Tim Church: Alright. So if you look at inflation over the years, over several decades, it’s typically 2-3% per year, which most savings accounts are not paying that, right?
Tim Ulbrich: Absolutely.
Tim Church: And so when you look at that, you have to say, OK, what are the other options that are available to me that I can use to not only get a better return to beat inflation, but the other consideration is how do you do that with paying the minimal amount of taxes that you can so you’re keeping most of that money that’s growing?
Tim Ulbrich: Yeah, and I think just to add to that, the one advantage that young pharmacists have is that you’re coming out with a great income, typically — many graduates are coming out in their mid- to late 20s, you’ve got lots of years ahead of you in terms of investing a significant percentage and portion of your income and allowing that time for compound growth. So I like to think of inflation as kind of this gnawing thing that is just always coming after you. And I think it’s important to do that. And I read a couple books several years ago that if you really look at the impact that inflation can have on your finances, it’s something we don’t think a lot about, almost like fees on investment vehicles and other things. So inflation, taxes, and starting early and often. Now, Tim, it’s important that we talk about for everybody listening to this podcast, their personal situation is going to be different. And here, we’re going to talk specifically — almost in a silo of investing, right? And we know that those listening, some are looking at $100,000-200,000 in debt, other people are out of debt, personal life situations that are very different, all types of things. And so here, we’re really looking at if somebody has disposable income and they’re looking to invest that for retirement, in what order are they going to do that, right? So when I say if somebody has disposable income, what are we referring to there?
Tim Church: Basically, you’re talking about money that you have after you’re paying your expenses every month. So anything that you have to pay for your bills, how much it costs to live, what is that additional amount of money that you have that could be going towards investment? Many people, like you said, are flooded in debt, and so you could be listening to this episode, and saying, ‘What disposable income do I have? I’m just trying to survive. I’m trying to make it.’ But that’s really where we’re getting at is let’s just assume you’re going into this episode that you have money to invest to put in retirement accounts. Now, if that’s who you are listening to this episode and saying, I don’t have any money to put in investments because of the bills and things I have, well, it’s a pretty simple equation. That in order to increase your disposable income, you’ve got to increase your earnings, get a side hustle, work more hours, or you’ve got to decrease your expenses. And so that’s where really budgeting comes into play.
Tim Ulbrich: Absolutely, yeah. And I think that idea of it’s a simple equation — you either increase your earnings or you decrease your expenses. And just a shout out to the work you’ve been doing with the side hustle series, giving people ideas. We’ve got more content coming there. And just before we jump into the buckets of investing, I think it’s important that we are not — and we’ve had this conversation multiple times on the previous episodes — but we’re not going to have a conversation about should I be investing or should I be paying off my debt? And as I mentioned before, one of my concerns with an episode like this where we talk about investing or even the month-long series in a silo is that this is one part of a comprehensive financial plan. And you’ve got to look at the whole picture. So if you want more information on our thoughts about investing while in debt and how does that fit in with emergency funds and other life goals, head on over to episodes 068, where Tim Baker and I tackle that, where we reviewed the pros and cons of the Dave Ramsey plan. And I’m sure that’s evoked a lot of emotional reactions because it usually does.
Tim Church: Yeah, that was a great episode. And I think you guys did a great job talking through some of the controversy, but also some of the positive things that are in that plan and some of the behavioral aspects of it. And so when we’re talking about these major buckets, things that you can invest in for retirement, one of the things that came to mind, Tim Baker, he recently did an investing webinar. And he showed this image of actual buckets, and he was naming the buckets and putting one in. And I don’t know if when you were a kid, Tim — do you ever remember that show, Bozo the Clown? Do you ever remember that?
Tim Ulbrich: Yeah, yes.
Tim Church: And in that show, at the end of the episode — I think it was at the end — they actually were throwing ping pong balls into buckets. And they progressively — but there was a specific order that you had to put them in. And for some reason, he really evoked that memory when he was showing that figure. But it’s cool because it’s really, that’s what we’re talking about here. We’re talking about, OK, what’s the first bucket that you’re going to put your money toward? And then how do you go to the next level and what do you do?
Tim Ulbrich: And I think the visuals he used as well with the buckets in that presentation, it was a good reminder that these are vehicles and not the investments themselves. That’s an important point. We’ll talk more throughout this month. But when we talk about 401k’s, 403b’s, IRAs, etc., those are essentially the tax advantage shield in which you’re investing. But within that, you’re going to be choosing the individual investments, whether that’s stocks, bonds or mutual funds, etc. So let’s jump into these buckets. So probably for the vast majority of our listeners, they’re going to be presented by their employer with an option of a 401k, a 403b and what’s referred to as a TSP, which is a VA employee, right, that’s you.
Tim Church: Right, that’s the Thrift Savings Plan.
Tim Ulbrich: The Thrift Savings Plan. So we’re going to group these together because I think we throw around these words like we assume everyone understands exactly the implications of them. So let’s review quickly — a 401k, a 403b, and a Thrift Savings Plan, these are employer-sponsored retirement plans. So obviously, in order to get this benefit, you’re working for somebody. They’re going to offer this. And at what level they’re offering this benefit in terms of a match and what they can contribute is all over the place. And I think one of the things that we’ll talk in future episodes is as you’re looking at different jobs and comparing benefits and things, it’s a key thing to be looking at what is the benefit that you have? And I know the VA, that’s a pretty lucrative benefit on your TSP, is that correct?
Tim Church: Yeah, through the TSP — a couple different reasons. No. 1, they do offer a match up to 5%. But one of the other things is that they have very low fees in the funds that they have available. And I know that, Tim Baker always talks about that when you’re looking at different options within your 401k, is that you have to pay attention to those fees because even if you’re not seeing that change in your accounts, like over time, it can really eat at the earnings that you have.
Tim Ulbrich: Absolutely. And so let’s talk first — we’ve got 401k’s, 403b’s or TSPs, let’s talk about the traditional variety first because what has complicated this whole equation is that — you know, I remember when I came out of school, we were looking at primarily a traditional 401k or a Roth IRA. And now, we’ve got hybrids of these vehicles such as a Roth 401k or a Roth 403b, which I think has made this very complicated and probably make it even difficult to talk about it on the podcast in something like this. It’s good for a visual. So when we talk about a traditional 401k or 403b, essentially what we’re referring to there is that you are deferring the payment of taxes to the future. So those are a deductible in terms of income taxes today. You are not paying taxes on the contributions today. But when you go to withdraw those funds, no earlier than the age of 59.5 without penalty — and there’s a required minimum distribution at the age at which you’re beginning to have to force to take out that money — the maximum amount that you can put in as an employee into these accounts in $18,500 in the year of 2018. We’ve seen that climb each year by $500 or so. Now, there is an additional amount that you can put in after the age of 50. And that is $6,000, which essentially is a catch-up provision that allows you, if you’re behind in savings, to be able to save more beyond that $18,500. Now, what this does not include, which is a really critical, important piece here, is that $18,500 does not include the portion in which your employer would provide in the form of a match. Now, if you’re not familiar or haven’t heard of that term, match before, as Tim gave the example with the VA, it’s a 5% match. Essentially, 5% of his salary that he contributes, the VA will contribute dollar-for-dollar. And this is all over the place with employers. Some will do a 3% match, some will do a 6% match, some will do a dollar-for-dollar, some will do 50 cents on the dollar. But essentially as you’ll see when we get into the priority of investing, the match is free money. And that’s really the critical piece here. So why is this number important? Because what we’re referring to is that you obviously are growing money tax-free for a period of time. But ultimately, when it comes to being pulled out, you’re going to be paying taxes on that money. But if you make $100,000 — just out of simplicity — $100,000 per year, and you contribute $15,000 into your 401l, essentially you are going to be paying income taxes on $85,000. So it’s reducing your taxable income today. That money is growing all along, and you’re not going to pay taxes until the point you distribute it. And obviously depending on the income tax bracket you’re in and what the income tax bracket rates are at the time, you’re then going to be slapped with an income tax bill in the future.
Tim Church: Yeah, and I think that’s a good point to bring up is that when you’re looking at those account balances, somewhat really of an illusion when you’re looking at that bottom line if all of your contributions are traditional because it’s going to get taxed eventually, it’s just at what level is going to depend on where you are at the time when you’re making those withdrawals. Versus the Roth version — so many employers now offer the Roth version, and that’s even for the Thrift Savings Plan, where basically, you’re going to make contributions after-tax. So you’ve already been taxed on your income, and you’re going to allow those contributions to grow tax-free. So when I say tax-free, it basically is at the time at which you’re eligible to make the withdrawals, you’re not going to be taxed on that money. Now, that’s a whole separate animal in terms of determining what is best for you. Should you do traditional contributions? Should you do Roth contributions? And there’s a lot of different factors that can play into that, such as what your projected tax bracket’s going to be at the time of retirement or eligibility. And that could be a couple different things there. Does the government change the tax brackets? But then also, what is your projected income going to be? And things could obviously change with your job, so it’s really sort of difficult to predict everything. But there are some simulations out there online where you can kind of go through that.
Tim Ulbrich: And I think your point earlier about considering the tax implications is so critical to retirement planning because we often — and we’ve talked before on the podcast about a nest egg, how much you need at the point of retirement. Well, that number, if a majority of that’s in a traditional 401k, for somebody else that’s maybe saved a lot in a Roth IRA, which I’m going to talk about here in a minute, how that’s going to play out when you’re in retirement is very different in terms of the total amount that you have and how it’s going to be taxed. So I say that because I think the tax implications are a key planning piece as you’re thinking about exactly how much do I need at the point of retirement, and what’s going to be taxed? And what’s not going to be taxed when you get to the point of withdrawal? So again, 401k, 403b, TSP, max contributions in 2018 are $18,500 for the majority of people that will be listening to this podcast. And that number I think will be important because you often hear people say generally, to meet your retirement goals, you’re probably looking at somewhere around maybe 15-20% of your income that needs to be saved. So if you figure out the numbers, a pharmacist making $120,000, obviously you’re starting to get that point with the 401k, 403b, but there’s other vehicles that we’re going to talk through right now. And let’s go to that next one, which is an IRA. So Tim Church, IRA, Individual Retirement Arrangement, this one has different figures, different numbers, but also has a traditional form of it as well as a Roth form of it. So talk us through that one.
Tim Church: Correct. So this is something that anybody with an earned income is eligible for. They can contribute up to the max, which as of 2018 is $5,500. And there’s an extra $1,000 if you’re 50 or olders, so $6,500 if you’re 50 or older. But anyone who is earning an income can contribute to this. And what’s important is this is something outside of your employer. So this is something that you set up on your own, either through a brokerage account — but the other thing here too is besides what you’re able to contribute, if you’re a married and you have a non-working spouse, they can also contribute up to that limit. So technically, if you’re less than age 50, your household if you’re working and you have a non-working spouse, you can contribute up to $11,000 per year.
Tim Ulbrich: Yeah, and I think that’s an important provision. I know for Jess and I, so Jess is at home with the boys, she’s not working. But to your point, a non-working spouse, so for us, when we talk about a Roth IRA, we both contribute that $5,500 per year to be able to make that contribution. So this has both a traditional version as well as a Roth version. And again, I think that’s where it gets confusing when people hear Roth 401k, Roth IRA. So traditional IRA looks very much — obviously the numbers are different, the $5,500 per year — but looks very much tax-wise like a 401k or 403b in that you are — if you meet the income qualifications — you are deferring the payment of taxes to a later point in time. You know, many pharmacists don’t qualify in terms of the income limits for a traditional IRA.
Tim Church: Right. And if you look at the IRS has some different rules depending on whether you are covered by a 401k or whether you’re not covered by a 401k. But if you are, the phase-out if you’re single is $73,000. And for being married filing jointly, it’s $121,000. So if you make above those limits, you actually can’t deduct the traditional IRA contributions. And so that kind of leads into well then why would I ever do that, right?
Tim Ulbrich: Absolutely, yeah. And I think that we’ll talk in a minute about the back-door Roth IRA, and we’re going to actually in our upcoming Q&A episode even talk a little bit more about it. But when we talk about a Roth IRA, and I think why Roth IRA’s have all the rage these days, rightfully so, is that you are paying taxes today, that money is growing, but you are never paying taxes on that money again in the future. So if I were to contribute up to the max, $5,500 per year in a Roth IRA, and Jess did the same, that’s money that is being contributed that we’ve already paid our taxes on. So got my paycheck, paid taxes, then I make the contribution into the Roth IRA. I invest that money, it grows at some percentage every year, hopefully that compounds, let’s say that turns into a half million dollars, I’m at the age of 70, I start to withdraw that money, I’m no longer paying taxes on that money because I already paid taxes on the money before I put it into the account. Now, this gets into the whole debate about, well, would I be better off putting money in a Roth IRA or a 401k, and that gets back to the point that Tim Church made in terms of the tax brackets and what’s going to happen in the future, and largely, I think most people would agree we probably don’t know at this point in time. Now, this also has income limits to directly contribute. So for those that are single, the phase-out of contributions at $135,000. For those that are married filing jointly, there’s a phase-out that’s at $199,000. And so this is where you’ll hear people and you’ll hear pharmacists say, ‘Well, I really like that idea of tax-free growth, I pay taxes now, I’m not going to pay taxes in the future. But I exceed that income limit,’ and insert the back-door Roth IRA. Now, we could have a whole separate episode probably about the back-door Roth IRA. There’s some great tutorials, resources online. I know the White Coat Investor — just shout out to what he’s done — he’s got some great tools and resources about how people can go through that process. But essentially, what you’re doing in a back-door Roth IRA is you’re contributing to a traditional IRA, and then you’re converting that to a Roth component. And so we’re going to come back to that in our Investing Q&A. But all that to say if you’re somebody that exceeds the income limits of a Roth IRA, that does not mean you cannot take advantage of the benefits of a Roth IRA because of that back-door components.
Tim Church: Right. And I think the key is to keep in mind that it really is about the timeframe at which you make that conversion and whether there’s any gains on the money when you make the contributions to a traditional IRA. So if there’s any gains in between that conversion, you’re going to pay taxes on it. The other thing is too is that if you’ve already had past traditional IRAs, and you didn’t convert them, there can be some tax implications with that as well.
Tim Ulbrich: You know, the other thing I love about Roths, which I don’t think is talked about enough is that they do not have the forced required minimum distribution that come with the 401k or 403b. So if somebody’s out there thinking, you know what, maybe I’m going to be working until I’m 75 or 80 or maybe I have other sources of wealth, real estate investing, businesses, whatever, and you think you may not need that money at the required minimum distribution age in the early 70s that you’d be forced to take in a 401k or 403b, to me, that’s one of the great advantages of a Roth IRA, that you continue to let that money grow, and you don’t have to take it out. Alright, we’ve got another big bucket here, Tim, in terms of the HSA or the Health Savings Accounts, which we talked about in Episode 019 in details for those that want to go back and look at those. But give us the down-low on HSAs. I know you have this benefit through the VA, but this has the lethal triple-tax benefits, which are talked about often. So why are HSAs so powerful?
Tim Church: Well, exactly just like you said. It has the triple tax benefit. But yeah, this is one of the cool things that I started for my wife and I for this year for 2018 because I didn’t really know much about it before and what the implications were. But just going through as we talked about through YFP, I mean, it really has a lot of power. And the name itself is really a misnomer because you look at that and you say, Health Savings Account, so it’s just a regular savings account that I can use to pay health expenses, right? Well, not exactly. It can actually be an investment vehicle. It’s really an investment account in disguise. It really depends on your intentions or how you’re going to use it. And for some of these accounts, you have to have a certain amount before you can unlock those investment options. So for example, for me, is I had to have $2,000 in the account before I was allowed to contribute anything towards an actual investment.
Tim Ulbrich: Does that vary by who offers the accounts?
Tim Church: Yeah, I think it does. I don’t believe that that is an IRS stipulation. I think it does depend on the bank that is servicing the HSA.
Tim Ulbrich: I thought I saw that on the Facebook group, people were talking about, well, ‘with my employer, that number is different,’ so yeah.
Tim Church: Right. So like we were talking about is, how you’re going to manage this account really depends on that intention. So you could be using this account to strictly pay for medical expenses, and the benefit of doing that is you’d be paying for them pre-tax, which is not a bad thing. I mean, that’s a great way if you have anticipated medical expenses and you want to be able to pay for them with some tax efficiency, then that’s great. But you can also look at this from the perspective as I’m going to use my HSA as an investment vehicle. So you’re going to say, I’m going to pay for all of my medical expenses out-of-pocket, and I’m just going to invest the rest, and I’m going to treat it like an IRA or I’m going to treat it like my 401k in that my goal is to beat inflation to actually get some compound growth.
Tim Ulbrich: And is the thought here if you’re going to pay for your medical expenses out-of-pocket now and really let that grow, it sounds like it’s got the benefits of a Roth IRA plus you’re not paying taxes now. It’s got that, you know, the highs of the 401k, 403b and also the highs of the IRA. But at some point, are you forced to use those on medical expenses?
Tim Church: No, so it’s really kind of interesting about the account. So just to jump into that triple tax benefit. So the first one is that it will lower your adjusted gross income. So you can — any contributions you’re making to the account are tax-deductible.
Tim Ulbrich: Like a 401k and 403b.
Tim Church: Correct — if they’re traditional, correct.
Tim Ulbrich: Yep.
Tim Church: And then that account, any contribution that you put in are going to grow tax-free. Now, the withdrawals are tax-free as long as you can prove that they’re being used to pay for a qualified medical expense because otherwise, you’re going to pay a 20% tax if you take the money out before age 65 for a non-qualified expense. Now, if it’s after age 65, to my knowledge, there’s no additional penalty, there’s no additional tax. You basically, it’s like a regular retirement account. Now, here’s the caveat. So — and this is one thing that I didn’t know until I really got into it is that let’s say you contribute to an HSA over 20-30 years. And those accounts are growing, you’ve been investing them aggressively, and you’ve got some great growth on them. And let’s say you’re 60. Can you pull out some of that growth that you’ve had, some of that money that’s in there, but without paying taxes on it? And you can because the caveat is that if you keep track of all of your medical expenses you paid over that time that you’ve been contributing and can prove that you’re essentially reimbursing yourself, you’re not going to have to pay those taxes. But the key is really, you have to keep a good record of those receipts. What I’ve been doing is basically putting anything I have into the cloud, into Google Drive, and doing that for every year so I know exactly what I’ve paid and what I can technically claim as being a reimbursable expense.
Tim Ulbrich: Sounds like you need to develop like an HSA tracking expense app.
Tim Church: Yeah, there’s probably something out there.
Tim Ulbrich: Maybe it’s the next business project. But so unfortunately, not everybody has these available. But for those that do — and we’ll get into this prioritization — you often hear people putting these at the level of, OK, take your match, and then you think about an HSA. We’ll come back to that, but the reason that is and why they are so highly regarded in terms of priority investing is because of the tax benefits that you were just talking about. But not everybody qualifies. I know I haven’t with the employers I’ve worked with. In the state benefits, we didn’t have what was considered a high-deductible health plan. So to qualify, you have to be enrolled in a high-deductible health plan. What basically is a high-deductible health plan? Well, this year, for an individual, it’s having a plan with a deductible of at least $1,350. And for a family, that deductible is at least $2,700. Now, I think what we’ve seen with health insurance benefits pushing some of the costs back into the consumer and obviously increasing deductibles, we’ve seen more people being eligible for these. And I think it’s a great time to talk about this because of the time period around open enrollment. So if you’re somebody saying, do I have a high-deductible health plan? Do I not? Does my employer offer an HSA or not? Now is the time to look to see where this may fit in the context of your prioritization of investing.
Tim Church: And I would say that the two major reasons that my wife and I, we decided to switch from a traditional PPO health plan to a high-deductible health plan, really for the opportunity to contribute to the HSA but also the other benefit is that high-deductible health plans typically have lower premiums. So with the old plan, I was paying a lot more each month, but I wasn’t using any of the insurance that I was paying for. So if you’re relatively healthy, I think it’s a great option. So if stuff comes up, you might be paying some money out-of-pocket, but again, you wouldn’t have had that option otherwise to even contribute to an HSA. And you have to really look in the context of what your premiums are.
Tim Ulbrich: That’s a great point. And I think what you just said too speaks to the power of the emergency fund and having an emergency fund because if you can afford to take on that risk of, you know, maybe I’m healthy now, something comes up unexpectedly, I get slapped with a huge payment. Then ultimately, you’re ready to take that on, and you can afford it without feeling that risk of that. So what we didn’t talk about here with HSAs is the max contribution amount. So we talked about it with 401k’s and 403b’s or the TSPs, we’re looking at $18,500. We talked about with the IRAs, $5,500. What about the HSAs?
Tim Church: So as of 2018, if you’re single, it’s $3,450. And then if you’re self plus one or family, it’s $6,900. And an additional $1,000 if you’re 55 or older for catch-up. And this — just like the other accounts — this typically changes every year, every couple years.
Tim Ulbrich: So what I like, if you start to string these together between a 401k, a 403b, a Roth IRA or a traditional IRA, if you qualify as well as if you have access to an HSA, you can start to get to a point where you’re saving a significant percentage of your salary, probably more than many listening, especially in the contest of other goals. But nonetheless, you have the option to be saving a significant portion of your salary that has tax advantages. And I think that’s key because one of the last things that we want to talk about here is the taxable or brokerage accounts. And so with the taxable brokerage accounts, why I said that previous point I think is important is that I see a lot of new graduates getting ads and promotions for some of these apps and tools and things that are out there. But they’re investing outside of the tax-advantaged accounts. And so I think as we talk about taxable or brokerage account, where we see this fit in is once you’ve exhausted all your other tax-favored retirement plans, this probably is the final option that you’re looking at because of the loss of tax-shield capital gains taxes that you have to pay, etc. So good news here is if you get to the point where you max out everything and you’re looking for options, there’s lots of options out there in which you can invest. But don’t get too far ahead of yourself if you’re not taking advantage of the match or other tax advantages that we’ve talked about previously. So last one quickly before we talk about prioritization of these buckets would be the SEP IRA. And I think this is timely because of your side hustle series. And so maybe we have people out there that own their own business, are starting their own business, want to, and to me, when I see information about a SEP IRA, that makes me want to start some businesses because you’ve got some really good advantages with retirement options. So what is a SEP IRA? And what flexibility and freedom does it give you in terms of retirement?
Tim Church: So a SEP IRA stands for a Simplified Employee Pension. And basically, if you’re self-employed, you own your business, you have this opportunity, this benefit available to you. And this could be in addition to a 401k that you have available. So this could be something that you’re doing on the side, an additional business you own. But one of the advantages is that there’s a lot more money you could potentially contribute versus what’s available with a 401k or IRA. I mean, it’s a huge difference. But obviously, you have to be making that much money up to that certain point to be able to. So right now, what the guidelines are, is that you can contribute up to the lesser amount of either 25% of your compensation or $55,000. But when I see those kind of numbers — like you’re shaking your head here, Tim — that just gets people fired up, I think, to say, hey, what if I was able to bring in an additional amount of income that I’m no longer capped out at this 401k, this IRA max that’s there.
Tim Ulbrich: Yeah, reason No. 403 to start a side hustle, right? I mean, when you see those numbers, and it gets me fired up even for the work that we’re doing that to your point, it’s dependent on compensation, obviously, you mentioned the lesser of those numbers. But in addition to other retirement vehicles, you can obviously make some great headway if you’re in a position to do that. OK, let’s jump in now. We’ve set the stage, we’ve spent a decent amount of time talking about the buckets, which is important because before we can talk about prioritization, we have to know what we’re talking about. What is a 401k? What is a 403b? What is a Roth? Now, a couple disclaimers here that I think we have to talk about because we’re probably going to take some flack regardless, which is OK. But not everyone is going to agree with the prioritization that we’re talking about. Not necessarily that there is one right way in terms of order of investing. Now, we’re going to give a framework on that that we think many listening will follow, but to my point earlier, everybody has different personal situations in terms of income earned, in terms of other financial priorities, in terms of other goals, when you want to retire, all types of variables that may come into play in terms of how you actually execute this.
Tim Church: Yeah, and I think like there’s a lot of people out there that are really into real estate, and they look at that as even taking priority over some of these retirement accounts because either they’re all-in or they’re confident that they’re going to get good returns there. And I think that’s great. I think for some people, that is an awesome option. But I think here, like you said, we’re talking in the context of, OK, let’s focusing in on these retirement accounts and just really try to figure out, well, what is the best order?
Tim Ulbrich: Yeah, and I think the other situation I think about, Tim, is those that are on fire about the FIRE moment, the Financial Independence Retire Early, waiting until 59.5 to access your accounts may not be the goal they’re after. And so you know, obviously again, this to me really speaks to the power of sitting down with somebody like Tim Baker and financial planning and talking about what are your goals and then putting out a map to be able to achieve those. The last thing I have to say here as a disclaimer before we jump into the prioritization — if Tim Baker was here, he would make me say this — is what we are saying is not financial advice, right? So we don’t know of the thousands of you listening, we don’t know what your own personal situation is. So we’re looking, again, down the lane of investing. If you have disposable income to invest, this is the priority we think you should consider. But we’re not saying, run out and do this tonight. You’ve got to think about the context of the plan. OK, No. 1 — I think everyone agrees with this. I mean, maybe there’s a person or two out there, maybe? I don’t know.
Tim Church: I haven’t seen — so what I was looking at to see what else is on the Internet and some of the other bloggers, I think this is one thing almost everybody I think actually agrees on.
Tim Ulbrich: For how much disagreement there is.
Tim Church: Right.
Tim Ulbrich: So No. 1, as you may have guessed it, is the employer match, right? No surprises here, most people agree on this. You are getting free money from your employer. If you don’t take it, you’re leaving it on the table. And so we even believe, we talked about this in the Dave Ramsey episode, Episode 068, the match has to be a priority in your financial plan, even in the context, I think, of student loan debt — maybe a different conversation depending on personal situations, but you have to take that money. Now, for you, you mentioned that 5% match. So let’s just use a hypothetical. Somebody’s making $100,000, they put in 5%, they get 5%, that’s $10,000 of tax-deductible retirement savings that are going to grow over time. You’re putting in 5, your employer’s putting in 5. And again, as I mentioned earlier, you’ll see this in different situations in terms of the percentage of salary match. It may be 5%, 6%, 3%, no percent, dollar-for-dollar, $.50-per-dollar. And so it’s all over the place.
Tim Church: Or what you get. What have you gotten at schools? You’ve gotten like 14%?
Tim Ulbrich: Well, I’m unemployed right now.
Tim Church: Oh, OK.
Tim Ulbrich: But you know, yeah. So you know, I’m lucky to work in the state teachers’ retirement system, which we actually are forced to put in. I remember when I was in the grinding out of paying off debt, it was painful. But we are forced to put in 14%, and there’s some fees and things that shakes out to that they match around 10%. So it’s kind of a forced combined contribution of about 24% total, which is really nice. But the downside is I actually don’t get any Social Security, so I won’t receive that Social Security benefit in the future if it’s there. But we’ll see. So No. 1, employer match. Now, No. 2 is HSAs or Health Savings Accounts. Take the employer match, and I think what often, people do right after the employer match is they just go up and maybe max out their 401k. I think what you’re making a point here is maybe after that match, move into the HSA if you have it available.
Tim Church: Yeah, and I think — but even going back to is that a bad option of putting more money in your 401k? So I think like in the context, which is interesting here is that really, even if you’re switching up the order on some of these, like really, it’s still not a bad decision. The decision to actually put money into the accounts to grow is a good thing. But I do think, you know, the HSA with that triple tax benefit, it’s hard to argue against that, right?
Tim Ulbrich: Absolutely.
Tim Church: I mean, it’s such a powerful tool. I think Dr. James Daly of the White Coat Investor, he calls it the Stealth IRA, which is pretty cool.
Tim Ulbrich: I love it.
Tim Church: Because it’s basically like you’re getting the opportunity to contribute to another IRA if that’s your intention behind it. But it can really be a powerful way to get some additional retirement savings.
Tim Ulbrich: I do have HSA envy. I don’t have access to an HSA, so unfortunately, yes, great match, but I wish I had that HSA option. So No. 1, we said employer match. No 2, HSA triple tax benefit makes a whole lot of sense.
Tim Church: If available, right? Because not everybody’s going to have that.
Tim Ulbrich: Right. High-deductible health plan, you may or may not have it. Now, No. 3 here, we’re getting into the IRA. And really what we’re getting at is the Roth IRA component. And obviously, for those that don’t meet those income qualifications, they would have to do a back-door Roth IRA. But what we really want to take advantage here is the tax-free savings that are going to happen over time. You’re paying taxes today, you put the money in, it grows tax-free, you go to pull it out, you’re not paying taxes anymore. So even though this doesn’t have the same maximum as the 401k, 403b’s, you’re not going to be able to have these be equally weighted, pre- and post-tax, right? $18,500, $5,500. To me, I see this as the way that you’re balancing out getting to the point of retirement, you’ve got some free and post-tax savings. So if I’m maxing a Roth IRA at $5,500 per year or back-door Roth IRA to get there, and then I’m putting in $18,500 in a 401k or 403b, of course I’m going to have more in accounts that are going to get taxed than I am in accounts that are not going to get taxed. But I’m balancing those out a little bit.
Tim Church: It also depends too if you have a Roth 401k, then also that could be after-tax contributions, so it’s possible you could have both. You could do the Roth IRA and a Roth 401k and basically putting everything in after taxes and then letting your accounts grow tax-free. I think going back to what we talked about is that since most pharmacists are not going to get the deduction if they contribute to a traditional IRA, it sort of makes sense to always go to the back-door Roth. Well, I think one of the interesting questions — and this has come up before — is why would I not just go up higher on my 401k versus contributing to an IRA? And really, you know, the way I look at that is either one is still a great option in terms of the contributions. The difference, really, is that with the IRA, this is outside of your employer, which means a lot more options.
Tim Ulbrich: Yeah. And that’s why you hear — we won’t get into it here — but that’s why you hear when you switch employers, there’s value in rolling that over into an IRA where you can unlock those options. And one of the things I’ve seen with Tim Baker’s help is the variety of what people have available to them in an employer-sponsored 401k or 403b, both options and fees, good or bad, is all over the place. Some have very limited options, very high fees, and maybe their employer doesn’t even really recognize or acknowledge the value. Others are maybe working with a Fidelity, Vanguard, whomever, have tons of options, can get low-fee accounts. So this really is an individualized decision.
Tim Church: I totally agree because when I look at the Thrift Savings Plan, one of the benefits of a Thrift Savings Plan, like we talked about earlier, is there’s such low fees on that. And so with a situation like that, I mean, you could make the argument that either one is going to be fine. But if I’ve got really low-fee options that are getting great growth, then I may go and try to max out my 401k or increase prior to going to the IRA.
Tim Ulbrich: And I think your point is a good one. At the end of the day, we’re splitting hairs, right? If you’re having this debate, there’s lots of opinions, lots of nuances, but at the end of the day, you’re doing a good job, you’re being intentional, you’re saving for the future. I tend to favor the prioritization of really maxing out the Roth component before I go back to max out the traditional 401k because of what I mentioned earlier and having that balance of pre- and post-tax, but again, people have different answers on that based on what they think is going to happen in terms of the tax component. So just going back in order here — your employer match, HSA, IRA component, we talked specifically about the Roth component of an IRA or a Roth 401k, right? And then going back to your traditional 401k, maxing that out to the $18,500. Now, if you get to this point, and you’ve taken an employer match, you’ve maxed out an HSA if you have it, you’ve maxed out the IRA, and you’ve maxed out your 401k, you’re crushing it.
Tim Church: Yeah, I mean, that’s pretty awesome. I mean, I’m not quite there yet. But it really is encouraging to see those numbers as a goal, really, to say, hey that’s where I want to be.
Tim Ulbrich: When you put those numbers together, we’re talking about $18,500, another few thousand, another $5,000 — you’re saving a significant percentage of your salary, looking at several million dollars with compound growth over 30-40 years. Now, after we max out the 401k or the 403b or the TSP, then obviously, if people have access to a SEP IRA, they’re going to take advantage of that. Now, after Step 5 here…
Tim Church: Right, that would depend if they have some kind of additional income or potentially they don’t work as a W2 employee, and their main business or their main job is as an employer or a small business. So that actually could be somewhat reversed depending on the situation and depending on what kind of job you have.
Tim Ulbrich: What you have available, yes. I think what we’re doing here is — before we get to the last one, which we’re calling them brokerage accounts, which as I made the point earlier, these don’t have the same tax advantages that all these others do. So what we’re advocating for is really maxing out the opportunities you have to save in tax-advantaged vehicles and then ultimately if you’re still looking to save more, personally I’d probably advocate for maybe some real estate investing, some business stuff, other things before even brokerage accounts. But you’ve got lots of options available.
Tim Church: You’ve got lots of options. And the other thing too is as long as you’re not continually trading fees and different things like that, I mean, capital gains tax is actually still tax efficient versus some other things that are out there that you’re going to get taxed ordinary income. Tim Ulbrich: Absolutely. Fun stuff. We covered a lot here, packed full of information. I think this is one we’re going to hopefully go back and say, ‘Hey, you got questions about the different investing buckets, prioritization, go back to Episode 073, we’ve got some great information.’ And this is a reminder, for those of you that haven’t yet done so, if you could leave us a review in iTunes, if you like what you heard, or whatever podcast player that you’re listening to, we would greatly appreciate it. Also, if you haven’t yet done so, make sure to head on over to YourFinancialPharmacist.com, where we’ve got lots of resources, guides, calculators, that are intended to help you as the pharmacy professional on your path towards achieving financial freedom. Tim Church, this has been fun and looking forward to coming back and finishing up the series.
Tim Church: It’s been great, Tim.
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On Episode 72 of the Your Financial Pharmacist Podcast, Tim Church, YFP Team Member, and Tim Baker, YFP Team Member and Founder of Script Financial, discuss how behavioral bias can impact investing decisions and why they are so important to have on your radar.
Summary
Tim and Tim talk through 6 major behavioral and financial biases that have an impact on making investment decisions.
Overconfidence bias refers to our subjective belief in our skills. Our ability to invest is typically greater than the actual objective reasoning behind it leading us to think that we have control in the stock market. An example of this can be seen in the 2006 study by James Montier, Behaving Badly, in which 74% of fund managers believed they delivered an above average job performance and the remaining 26% believed they delivered an average job performance. This shows an irrational high level of confidence. It’s also important to note that timing the market is impossible as you don’t know where the market is going to go.
Confirmation or Hindsight bias shows that people pay more attention to information that supports preconceived ideas about a subject and they ignore or rationalize a way to the rest. The hindsight bias shows that passed events were predictable and completely obvious.
Loss aversion is where people value the gains and losses differently. Losses have more of an emotional impact on us and we act irrationally to avoid loss and it’s one of the biggest reasons people don’t invest.
Herd mentality means an individual conforms to the behavior of a larger group and is typically based on emotion. An example of this can be seen with Bitcoin or the .com crisis. It also happens inside mutual funds due to the actions of share owners.
Hyperbolic discounting, or present bias, shows that we have a tendency to prefer rewards today that may be smaller or similar and give up on something greater in the future. This bias is the main reason why people don’t contribute enough to their retirement funds and discount the future reward.
Overreaction bias is when new information is reflected instantly and investors overreact and create larger than appropriate affect on the stock market.
Tim Church: What’s up, everybody? And welcome to Episode 072. I’m here with Tim Baker and excited to dive into today’s topic. Tim, this is something you and I have talked about many times and really appreciate the impact it has on our financial decisions. Behavioral bias related to investing has been studied a lot under the umbrella of behavioral finance. And Tim, why is this something that people really should know about?
Tim Baker: Yeah, Tim, I think it really can be summed up in three words. People are irrational. So we often think that a lot of our economic theory is based on the premise that we act as participants, as humans, as rational beings when it comes to the money and really economic theory. But oftentimes, the opposite is true. And really, some of the biases we’re going to talk about today illustrate that point, and hopefully we can get some examples out there to kind of paint the picture. But yeah, I think this is one of the things, one of the topics that really fascinates me because obviously I can see myself in a lot of these things, and I can see my clients in a lot of these biases. And you kind of shake your head, well, why do we do that? Why do we behave this way when the probabilities really aren’t different? Or whatever the case is. And I think it’s really — we have to shine a light on it to make ourselves better when it comes to not just investing, but just behavioral finance in general.
Tim Church: Yeah, I think what’s interesting is that you and I have talked about that even though we’re aware of these biases going on and how they influence our decisions, that still, we’re able to make the same mistakes based on how they play out. And so that’s what’s really tough is that even though you know about them, they still can happen. But I do think it plays so much into our day-to-day decision-making and really can have a huge impact not only today but just on your long-term outlook of your financial plan, your financial health in general. So we’re going to go through a couple of these biases and kind of talk about what they are and really kind of to focus on how they impact investment decisions. Now, they can impact other parts of the financial plan, but really, we want to focus on in terms of investments, how that happens. So let’s start out with the first one, overconfidence. So as pharmacists, we’re pretty confident because of the training and things that we have and how we make our clinical decisions. And most pharmacists that I’ve met in my career, they’re very confident in how they practice and what they do. And a lot of times that we see this actually tip into investment and personal finance — and it kind of goes back that just because you’re confident and you’re knowledgeable in one area doesn’t always mean that that’s going to be the case for finances. But Tim, talk a little bit about how overconfidence impacts investment decisions.
Tim Baker: Yeah, so overconfidence I think fits under the miscalibration bias. So you know, basically, the overconfidence bias states that subjective belief in our skills and our ability to, say, invest is typically greater than the actual objective reason behind that. So sometimes, we view that we have this illusion of control when it comes to investment. And I see this sometimes with clients today where with the markets really doing well — and I actually had a client recently reach out to me, saying, ‘Hey, I’ve been licking my wounds from the recent downturn in the market.’ And I think he’s probably suffering from a little overconfidence that you can have this illusion of control that you can control, really, the uncontrollable. And the uncontrollable really is the stock market. There are so many things that go into where the price of the market or of individual security goes that you as the investor play little role in that. But it’s interesting to kind of outline this study that was done in 2006. It’s called — a landmark study called “Behaving Badly.” And the researcher, James Montier — I believe is how he pronounces his name — basically surveyed a bunch of professional fund managers. These are the individuals that sit on top of the mutual funds and basically buy and sell investments out of that fund. And when he surveyed 300 of these professionals, he found that 74% of them believe that they had delivered above average job performance. And really, the remain 26% believed that they were at least average. So essentially, that means that 100% of those 300 surveyed believes that they are either average or above average when it comes to basically managing their mutual fund. And of course, we all know that in statistics, that can’t be the case. We have a bell curve that basically has distribution of where everyone falls. But the discrepancies really stress that many of these fund managers displayed an irrationally high level of confidence. And I would, when I saw this, when I was at West Point and even some employers since that, we had a grade essentially on a forced distribution that you’re always going to have people that are exceptional, average and then below average. So it’s the same that holds true is that for many investors, especially in this type of market, Tim, that we say, hey, I’m really killing it here. I’m doing a great job with my portfolio, I have this idea of the hot-hand falacy where I can’t lose. And you know, over time, it can be very humbling if you are in this space of being overconfident with your investments. And really, it’s an illusion of that you can actually control where the market goes because, really, you can’t.
Tim Church: So a lot of this with this bias, Tim, would — basically timing the market would fall under this bias. Is that correct?
Tim Baker: Yeah, absolutely. So there will be some people that — and I’ll give you an example, Tim. Like I had a lot of people after the last election say, hey, where do you think the market’s going to go? And I’m like, to me, my gut was that the market was going to go down for whatever reason. And I would have been wrong. So if I was trying to time it then, I would have been severely off. So again, I think what I know, I think the truism that I know about investment is that I don’t know where the market’s going to go. And I think any advisor, really investor, that tells you otherwise is lying to himself or herself. So you know, it’s the timing — you might get it right once or twice, you might read that story in the Wall Street Journal and make that investment, and it turns out right for you, but I think over time, what studies have shown is that you can’t time the market. And I think getting it right on an occasion or two leads to that overconfidence. And it’s the same thing with the fundamental analysis. You might analyze a stock and say, hey, I think this is a great buy opportunity and you buy it, and you’re right. And I think it kind of balloons your confidence a little bit. But I think more often than not, the house wins, in a sense — that the market is going to do what the market does. And really, your ability to assess and market time are going to be a distant second.
Tim Church: So basically, to heed the advice of Matthew McConaughey in “The Wolf of Wall Street,” right?
Tim Baker: Yeah, we don’t know if you’re Warren Buffett or Jimmy Buffett, if the stock is going to go up, down, left, right or in circles. So yeah, it’s true. I think it’s one of the things that I think people sometimes come to advisors on this and say, hey, beat the market. But more often than not, that’s not what an advisor should be doing or can do. So yeah, I think maybe one of the secrets of the financial planning industry is that that really shouldn’t be the reason why you are hiring someone.
Tim Church: So the second bias that we want to talk about is confirmation bias and also hindsight bias also kind of plays into that. So talk a little bit about what that one is.
Tim Baker: Yeah, so as humans, what we do is we often introduce bias when we process information, when we process events. So you know, if we break down confirmation bias, it’s typically that people pay more attention to information that supports preconceived ideas about a subject, and they basically ignore or rationalize away the rest. So one of the confirmation biases, Tim, that we probably have as a community is that we believe that passive indexing is the proper way to build an asset allocation that is low-cost and typically that’s best for the investor. Now, if I’m reading studies or I’m reading information that confirms my thesis, my belief, then I highlight those, and those carry a lot more weight as I’m reading. And then when I’m reading maybe in the same session, I’m reading something that says, “Active investment is the way to go, and you get what you pay for in terms of the investment, so you pay a little bit higher in terms of the expense ratios.” So when I read that, my bias is to kind of like, I don’t think so, I basically rationalize that away. Or I’m ignoring it and say, thanks but no thanks. So I’m not buying that. So what confirmation bias is it kind of closes my mind in the sense that I’m discounting away the counterpoint to the information. And then sometimes, that can be dangerous. So the other bias that we look at hindsight bias, and this typically occurs when people believe after the fact that past events were predictable or completely obvious. And in fact, the event couldn’t be predicted reasonably. So many events seem obvious in hindsight. So I kind of look at this as like the Monday morning quarterback where something happens and you’re like, of course that happened. These are all the things that basically led to that event. But in the moment, really, we couldn’t have predicted that. So one thing when it comes to the investing and the stock market, it’s really the subprime mortgage prices and how all of the lending standards and kind of loose actions of the bank really led to the collapse of that part of the investment world and then obviously led to the Great Recession. Tim Church: Yeah, and that sounds very similar to overconfidence because it kind of goes back to thinking that we were really able to predict that. Even though we didn’t say it at the time, but we really felt like yeah, we knew that. So one of my favorite behavioral biases is loss aversion. And that kind of falls under this umbrella of something called prospect theory, but it’s basically where people value gains and losses differently. And really, losses have more of an emotional impact, and so we’re less likely — we do whatever we can to avoid losses. And even though we could lose some amount or gain the same amount, we would rather gain than lose, basically.
Tim Baker: Yeah, and basically, Tim, what we’re saying here is that we act irrationally just to avoid loss. So that’s essentially — and I love the quote from — if you guys have ever seen “Rounders” out there, Matthew Damon’s character, who’s a poker player, he basically says that few players recall big pots that they have won, strange as it seems. But every player can remember with remarkable accuracy the outstanding tough beats of his career. So what this means is that we, the bad beats or the losses that we take with our investments, we feel that much more than, hey, the market has been en fuego that past seven or eight years. So the example is, would you rather receive $50? So I have $50 in my pocket, and I’m good to go. Or would you rather receive $100 and then lose $50 for some reason or the other? In both instances, the net gain is $50, so I’m still walking away in both of those situations with $50, but I’m like, ah, well I had $50 more, and now I don’t have it, and that kind of stinks. And that’s kind of what we’re talking about in a very granual way. I think the status quo bias, Tim, that you talk about sometimes is really not leaving your perch, kind of where you are, because of the fact that there is choice overload or there’s the fear of maybe the unknown or fear of if I make a move, I could lose. And this is typically where you are leaving retirement savings and that default asset allocation or default contribution — we talk about the 401k inertia that I know I need to get the match, which is at 5%. But I really don’t want to do any more than that because I’m comfortable with the status quo, and I don’t really want anything to change. So the loss aversion theory, which is kind of sometimes called prospect theory, is fundamental to us as humans. And it’s not just with just investment or money. It’s just how we will shell ourselves and protect ourselves from losses, even if it’s irrational or if the probabilities tell us otherwise.
Tim Church: Yeah, and I think that this is one of the biggest reasons why people will say, I’m not investing in the stock market. I’m not going to go in and lose all of my money because of things that have occurred previously. But mainly, it’s that I don’t want to lose money, so a lot of people will justify and say, I’m going to keep it in a savings account or something that is barely probably not even beating inflation. And so that right there can play a huge impact just in that decision itself.
Tim Baker: Yeah, exactly right. And often to the detriment of just your overall financial picture.
Tim Church: So the next one we want to talk about is herd mentality. And this is an interesting one because it basically goes with the old adage that if everybody’s going to jump off a bridge, you know, would you do it? You probably heard that as a kid, right?
Tim Baker: Yeah, exactly. Yeah, well, it’s like everyone else is doing it. And that’s the question you get back. Yeah, yeah. I don’t want to hear that, though. Yeah, really, what we’re talking about here Tim is again, for the individual to kind of conform to the behavior of a larger group. And it’s typically based on emotional — it’s largely emotional rather than on a rational basis. So this could be where you hear — and I always bring it up — you hear people always talking about, bitcoin or cannabis or whatever it is. And you do that because that’s what the greater, that’s what your friends are doing, that’s what your colleagues are doing it. And as an individual, you probably would not make that same choice. But it’s a little bit of the FOMO, Fear of Missing Out, that sometimes drives this. So we saw this in the subprime mortgage crisis where people were just buying real estate, they were mortgaging their house, putting second mortgages on their house, they were putting as much into the mortgage because their neighbor did this. Or same thing with the .com crisis where everyone, if it had a .com after it, people were following each other and saying, we’ll put $100,000 into cats.com or whatever it was. So actually people taking money out of their retirement to buy stocks in this. So typically, this is where you kind of want to hit the pause button and say, does this really make sense? Am I conforming to the social pressures? Is this where it’s strength in numbers? And sometimes the contrarian view, in a lot of ways, is a better view. And this often happens with inside mutual funds. So like when you have a mutual fund manager that is managing billions of dollars of stocks and bonds inside that mutual fund, sometimes he or she is subject to that herd mentality, not because of him or her, like of their behavioral bias, but because of the herd mentality of the shareowners that he’s basically trying to manage their money for. So if people are exiting from that mutual fund and they’re basically redeeming their shares, he has to essentially cash out of his investments or her investments to make sure he gets the cash for that mutual fund person that’s exiting. So the herd mentality can be rampant up and down the investment world. And it’s just important to know if you’re caught up in that. And then again, it’s kind of why we believe that index funds that basically diversify the market where you have exposure across the market is the best way to go because you get less caught up in this herd mentality.
Tim Church: Right. And if you’re going for that buy-and-hold strategy for the most part, then you’re just basically going to ignore a lot of this news when people, masses, are changing their positions or holdings on something like that.
Tim Baker: Right, exactly right. And again, sometimes with — oftentimes with investing, less is more. So a lot of times, inaction is much better than overaction and constantly — and this is something that Ulbrich and I talk about is sometimes he talks about he just wants to meddle more, meddle in the investments. And typically, that’s not the best way. And often, that’s because you’re reacting to some of what other people are doing or the news or something like that.
Tim Church: So one of the things that always comes up in personal finance, and really, you coudl sum a lot of this up, is how you determine how much you spend today versus how much you spend tomorrow for savings, for retirement, and in your investment. And when we talk about this bias of hyperbolic discounting, also referred to sometimes as present bias, that you have this tendency to prefer rewards today that may be smaller or similar and giving up something that could be much greater down the road. And really, this is sort of the main reason why people don’t contribute enough to their retirement or possibly even anything because they want to spend and get that pleasure today because the perception is that the pleasure and emotional satisfaction of that today is going to be greater than what they could have later on. So how do you see sort of this play out, Tim, with some of your clients but just in general with investing?
Tim Baker: Yeah. I think hyperbolic discounting is typically, when I say, hey, Tim, if you’re my client, we have to make sure that we’re taking care of the Tim Church today but also the Tim Church of 30-40 years in the future. So and I feel like if you’re not feeling that push and pull between those two ideas, then you’re probably doing it wrong. So typically, with hyperbolic discount is given two similar rewards, people prefer the one that comes sooner rather than later, right? It makes sense. Time value of money teaches us that as well. And we typically discount that future reward by factoring in the delay in getting it. So it would be that, hey, Tim, if I offered you $100 today versus $300 next year or $600 in four years, those are all things your mind automatically calculates that and says, well, I really could use the $100 today and I don’t really want to wait for that $300. So that’s kind of what’s going on. I see often that when we combine this with loss aversion that we talked about previously, this can easily lead to that 401k inertia that we talked about. So there was a study that employers who were automatically enrolled in a default retirement contribution at 3%, after two years, 61% of those employees didn’t change from that 3% contribution, despite the fact that their employer matched those contributions up to 6%. And a little of this probably plays into the status quo bias as well that we talked about. So I think that it’s hard for us to — I often talk about this with prospective clients and even clients. It’s like, I hear you, Tim. I know I have to save for my retirement. I know I have to do these things, but I’m really under the gun with this credit card debt or with this student loan debt. And these are the pains — that’s a future Tim problem. Like I’m really trying to focus on what’s in my face. So the hyperbolic discounting, this bias is really what is in play when we’re having that struggle against, OK, how do I make sure what I need to do today and really for the future?
Tim Church: Yeah. I think you just have to figure out what that percentage to what you’re going to spend today, but also make sure you’re on track. And so I think having goals and milestones that you’re trying to hit, especially for investing, your net worth, those are really good to have so you can always keep that at the forefront of your mind. But also being able to enjoy some of the money that you can spend today and have available.
Tim Baker: Yeah, and I will say, like, if we’re doing that more consistently — and I think some of this, we saw this with Tim Ulbrich and Jess Ulbrich where TIm is definitely looking into the future, and Jess is really more like, well, let’s enjoy our family, enjoy our life. I think there’s a good push and pull between that because I think if you’re always looking into the future and you don’t do the things that you want to do, then that’s not a wealthy life either. So I think those are important things to keep in mind.
Tim Church: So what else do we have, Tim? What’s next on the behavioral bias?
Tim Baker: Tim, I think the big one that I’d like to kind of go through is the overreaction and availability bias. I think these are fascinating. And with the overreaction, in particular, because I think this will be eye-opening to some people when they’re looking at picking investments. So the overreaction bias basically means that new information is typically reflected instantly in the price of the return. But what typically happens, investors overreact, creating a larger than appropriate effect on the stock price. So as an example here Tim, would be Walgreens or Amazon or whoever releases their earnings for the quarter, and people automatically overreact, like this is either the apocalypse or we should buy. And the stock market will change accordingly. And sometimes it’s too much, and the market can be very fickle. One of the studies I thought was really interesting, it’s called the winners and losers study that was basically released in 1985 by Debaunt and Richard Thaler, who’s a well known behavioral finance guy. He’s really interesting. The study was published in the Journal of Finance, called, “Does the market overreact?” What they essentially did is they looked at the New York Stock Exchange over a three-year period, and they separate the 35 top performing stocks into a winners portfolio and the 35 lowest performing stocks into a losers portfolio, essentially tracking each portfolios of performance as compared with the appropriate index. And as it turns out, over the three-year period, the losers performed actually better. They actually beat the market index consistently. And then secondarily, the winner portfolio consistently underperformed the market. So the cumulative difference over that three years between the two portfolios was actually 25%. So what essentially happened is that the original winners portfolio became the losers, and the losers portfolio became the winners. And this typically happens because investors tend to overreact. So for the losing stocks, investors overreacted to the negative news, driving the price of the shares down. And over time, we saw that the pessimism was outsized. And then the losing stocks actually began to rebound. And the same is true in reverse with the winners and that the enthusiasm over the winners was overblown. And you kind of see this as a reversion to the mean and oftentimes, so when we talk about using things like MorningStar ratings. You’re typically, if you’re a four or five MorningStar rating, you’re more likely to be a one or two MorningStar rating. So these are just how MorningStar funds — they basically look at mutual funds and ETFs to see if they’re good or not. You’re generally looking at past performance, which is not a good indication of future performance. So that’s really what the overreaction bias. And then quickly with the availability bias is we’re really looking at where individuals tend to heavily weight decisions that are most recent. So in the real world, if I’m driving, and I get a speeding ticket, I’m more likely to drive the speed limit soon after that ticket because I’m still feeling the burns of that. And this is not necessarily rational because I’m still just as likely to get another speeding ticket or not. So that would be really availability. And we can apply this to the way that the stock goes up and down in more recent times. So those are two biases I think that are really interesting to kind of take a look at and see how they play into our own investor profile and how we look at our portfolios and that part of our financial plan.
Tim Church: So Tim, I think we talked about a lot of the core biases around investments and personal finance in general. And I think that they’re something that is so important to be aware of just because of the irrational behavior that we have. So I guess, what practical advice would you give people just to kind of sum up everything that we talked about in terms of, you know, why should you care about these? And how can it help you be better with your finances and make better decisions kind of ongoing?
Tim Baker: Yeah, I think practically speaking, I think a lot of these things can be solved with having a portfolio that is well diversified and low cost and where you don’t have to do a whole lot of meddling outside of the rebalancing of basically locking your percentages back into focus. I think practically speaking, that is typically the best way to go. I think also, if you do feel overconfident, I think that will naturally happen where you’ll probably be humbled. I think it’s happened to all of us that have dabbled in kind of individual stocks and thinking that I’m really the smartest guy here and I can be the next Warren Buffett. I think also, being aware of if you do have confirmation or hindsight bias and to be more open to outside opinion and see if it’s actually based in fact and things like that. From a loss aversion, understanding that I think in the investment world, you have to take intelligent risk to get in front of the things like tax and inflation and that the probability or our thoughts that losses feel more painful is really an irrational — it’s just how we’re built. So I think it all points back to having a passive portfolio that you don’t have to do a lot of work with. And I think also — we’re talking about investment a lot in this month — is have a second opinion. Whether that is a friend, a partner, a parent, a financial advisor that’s going to look at your particular case or your particular investments and give you objective advice. And I think that, obviously, I think that is something that I think is very valuable because sometimes, we can get in our own heads, and we don’t really see the benefit of an outside opinion. But I think that’s often the best way to make sure that you’re sound as part of your financial plan.
Tim Church: Yeah, absolutely. I think you’ve got to take the blinders off. And especially when you’re going to make some really important or key decisions is get someone else’s opinion. You know, that could be a financial planner, it could be a spouse, significant other, or friend that you trust in. But just to get away from that. And I think just to highlight what you had mentioned about your strategy around your investing. If you’re somebody that’s buying and holding, and you’re really trading or changing your funds, you’re just either increasing your contributions or trying to do some rebalancing, is that if you’re somebody that is very emotionally responsive to the news or changes in the market or things that you hear, I mean, one of the best strategies, maybe don’t put your account balance readily available. As it can ebb and flow day to day, I think sometimes, like it’s so accessible with technology, with Mint apps, that you can see what happened to my account and what happened tomorrow? And if you’re somebody that’s really, that can’t take that emotional roller coaster, that maybe you make it very difficult to even get access to that.
Tim Baker: Yeah, so much with investment is less is more. And you can apply that to a lot of different parts of your investment strategy, but just like looking at it and messing with it is probably better. The inaction is probably better than overly concentrating on that. And like I said, when there are downturns in the market, although I preach to clients that the market will take care of you over long periods of time, it’s very predictable over long periods of time, it’s not fun to be in that down market because although the losses aren’t realized, meaning that we’re not cashing out in that moment because a lot of us have many years left until retirement, you still feel that loss. You still feel that loss, and it still can be a cloud that hovers over you. So even though I preach that, I feel that. I still feel the weight of the client assets that I’m managing. But I have to just remind myself that over time, the market will take care of us. And a lot of it is less is more when it comes to your investment strategy. Tim Church: Definitely, totally agree, Tim. And I think it was a great topic to get out there are really is a great way to kick off this series we’re doing for the whole month on investing. So please check out the future episodes we’re going to do this month. We’re going to talk about how to get your 401k on track and how to analyze that, and then also some of the priority around investing, and then also some of the ways that you can do the investing either yourself or through some of the roboadvisors or hiring a financial planner. So be sure to check those out.
Sponsor: As we wrap up another episode of the podcast, I want to again take a moment to thank our sponsor of today’s show, CommonBond. CommonBond is a on a mission to provide a more transparent simple and affordable way to manage higher education expenses. There approach is no big secret…lower rates, simpler options and a world class experience…all built to support you throughout your student loan journey. Since its founding, CommonBond has funded over $2 billion in student loans and is the only student loan company to offer a true one-for-one social promise. So for every loan CommonBond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise.Right now, as a member of the YFP community you can get $500 cash when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond. And one last thing if you could do us a favor, if you like what you heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmacist.com, where you will find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path towards achieving financial freedom. Have a great rest of your week!
On Episode 71 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of YFP, and Tim Baker, YFP Team Member and Founder of Script Financial, tackle 10 listener questions that were posed in the YFP Facebook Group, covering a wide array of topics like investing, refinancing student loans after pharmacy school, taxes, and more.
Have a question you would like answered on a future episode of the show? Make sure to join the YFP Facebook Group to pose your question to the YFP community or shoot us an email at [email protected].
Summary
Tim Ulbrich and Tim Baker field 10 questions from the YFP community. The first question asks about the pros and cons of a traditional 401k versus a Roth 401k. Tim Baker explains that “Roth” means after tax (Roth 401K, Roth 403B, Roth IRA) and a traditional 401k means pre-tax. He explains that there are different participant contribution amounts to 401Ks and that you are able to have a traditional IRA and Roth IRA that you can put aggregate money in each year in separate systems. Question 2 asks, what is something you wish you would’ve started in pharmacy school based on what you know now? Tim Ulbrich says first become educated, especially around student loans, work in school to help set yourself up for a career to to form connections and skills, and, lastly, look at the amount of money you are borrowing as real money that you’ll need to pay back. Question 3 asks how to start earning interest on monetary gifts a child has received. Tim Baker responds that first you need to know the goal of the money. From there, you can put it in a high yield savings account or CD or put it in an index fund. However, a 529 is probably the best vehicle for the money to be put in, as it offers tax advantages. Question 4 asks about unconventional pharmacy jobs. Tim Ulbrich says that 45% of jobs are in community pharmacy and 30-40% are in residence training, however there are still many different avenues of unconventional pharmacy jobs to explore. The best advice is to find a mentorship, either within your college or outside, to help you see other possibilities. Question 5 asks about online banking and suggested companies other than Ally. Tim Baker says that it’s important to gauge the ease of use, customer service, and fees charged. These online bank accounts are best used for separate emergency funds or storage accounts.
Question 6 asks if there is any benefit to staying with the same home and auto insurance or switching companies for a better rate. Tim Ulbrich suggests that you should assess the price with the service you receive. Nickel and diming policy coverage over a company you are happy with should be avoided as it’s important to put value over relationship. However, if there is a significant savings, then, of course, switching makes sense. Question 7 asks what should be taken for an initial appointment with a financial advisor and what questions should be asked. Tim Baker says it’s important to ask good questions, such as how would we interact and how often, are you fee only or fiduciary, how is the fee calculated and how are you compensated? If you are going to a financial advisor strictly for guidance with student loans, be aware of how much knowledge they have. Question 8 asks if anyone has repaid their student loans through the federal government with income based options, such as IBR or PAYE, and if the better option is refinancing student loans after pharmacy school. Rim Ulbrich says that you have to assess what the best repayment option is for you. Run the numbers, look at the feelings you have toward carrying student loan debt for 20-25 years, assess your financial goals, and lay our all of your options. From there, you are able to make a decision. Question 8 asks if it’s better to file taxes married filed separately when a spouse is eligible for PSLF. Tim Baker explains that there are situations that married filed separately is the right way to go, however, it depends on the repayment plan. He suggests to do a tax projection and student loan analysis to see if you’re approaching the situation in the best way possible. Lastly, question 10 asks if someone should stick with federal loans to keep a minimum payment down or refinance to lower their interest rate. Tim Ulbrich suggests that as the interest rate market rises, refinance offers may not be as attractive. If you refinance on $100,000, a 1-2% interest rate change in refinancing may largely affect how much you are repaying. Regardless of the math, refinancing is off of the table if you are pursuing PSLF.
Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 071 of the podcast. Excited to be alongside Tim Baker as we dive into an Ask Tim & Tim episode where we take a wide array of questions, 10 from the YFP community that were posed in the YFP Facebook group. So Tim Baker, how you doing?
Tim Baker: Doing well, how about you, Tim?
Tim Ulbrich: Good. So you’re back from Iceland. Welcome back. How was the trip?
Tim Baker: Oh, it was awesome. Yeah, it was great. You know, I feel like the last few weeks has been crazy, but it was good to get away. I think I literally didn’t touch my phone for about a week. So now I’m trying to get back into the swing of things, but Iceland is an interesting place to visit for sure. Tim Ulbrich: It seems like I’ve noticed a lot of friends from college and coworkers are taking that trip, it seems like on the East Coast here. I know Cleveland has direct flights over to Iceland, I’m guessing something similar by you guys. Seems like a popular destination to begin to see that part of the world.
Tim Baker: Yeah, it’s funny because like prohibition ended like for beer, I think in like the late ‘90s — don’t quote me on that — which was interesting. But I think since then, the tourism has become the biggest staple in Iceland, moreso than fishing. But you have a combination of just like incredible scenery, like almost where you’re on a different planet. And of course, beer drinking and things like that. So yeah, it was great. It’s one of those vacations where you’re out in the country, but it’s somewhat affordable. It’s expensive when you get there in terms of like food and things. But oh man, it was great. Just good to get away and reset and, you know, I’m ready for the final quarter of the year.
Tim Ulbrich: Yeah, welcome back. We’re excited to jump into this episode. And we’re actually getting together end of this week in West Palm Beach, Florida, where Tim Church lives. We have a YFP retreat, so excited to be jumping into all things YFP. And actually, as a part of that time that we’re together — to our listeners, we’re going to be recording an episode that’s taking all questions related to investing. So if you’re listening to this episode and you have a question, all questions investing, shoot us an email at [email protected] or jump on the YFP Facebook group and pose your question and we’ll make sure to feature that on the upcoming episode where we do that Q&A session. Alright, so here’s the format. We’re going to go back and forth. We have 10 questions, great questions from the community. We’re going to read the question, we’re going to answer them between the two of us, and then we’ll jump in with some feedback that the community has provided as well. So Question 1, Tim Baker, comes from Nidhee (?), and he asks, “What are the pros and cons of a traditional 401k versus Roth? Currently, I’m trying to maximize my traditional 401k. Any suggestions would be helpful.” What do you think?
Tim Baker: Yeah, such a great question. And you’re starting to see more and more 401k’s offer a Roth component. So just kind of to break this down for listeners who are kind of a little murky about this, anytime you see “Roth” before 401k, 403b, IRA, you’re going to think after-tax. So the money that gets thrown into that account is after-tax. Now, if you see a traditional 401k, traditional IRA and traditional 403b, you’re going to think pre-tax. So the money goes into that bucket pre-tax. And typically, the opposite is true when the money comes out. So it goes in pre-tax, it usually grows tax-free, and then it comes out taxed. And then the opposite is true if it goes in after-tax, it grows tax-free, and it comes out tax-free in the after-tax world. So to get back to the question, I think the Roth component is actually a great component to the 401k because a lot of pharmacists because of their salary, they make too much to actually contribute directly to a Roth IRA. So when you sign up for your 401k or when you’re adjusting your 401k, you’re going to want to see if there is a Roth component and if that makes sense for your particular situation. In our last episode, we kind of talked about all the different levers to pull when it comes to, you know, should I pay the tax now? Should I defer the tax? What does that look like? And this is actually one that you can do. So a lot of people get confused by kind of the Roth 401k because it really, you can’t commingle those accounts. So it actually looks like you have two accounts when you’re funding this. So basically, you go in and you would see a balance for your traditional 401k. And if there’s a match, that’s where all your match dollars are going to go from your employer. But for your Roth, if you’re deciding to fund that, you know, those are basically funded with after-tax dollars. So you would go in and you would set up an allocation similar to your 401k, your traditional 401k. And essentially, the difference would be just if those dollars are taxed or not. So that’s essentially the basics there.
Tim Ulbrich: Tim, one of the questions I often get here — and I think it’s good just to clarify for our listeners because the term “Roth” gets confusing when they see it as a Roth 401k versus a Roth IRA. Does the Roth contribution towards a Roth 401k go towards or impact the total of the $5,500 that you can contribute in a Roth IRA? Or are those completely separate buckets?
Tim Baker: Yeah, to kind of draw the lines around the 401k and the IRA. So you as a participant in the 401k, you can put in $18,500 — these are 2018 numbers — per year in aggregate between a traditional 401k and a Roth 401k. In the same breath, you can also have a traditional IRA and a Roth IRA that you can put an aggregate $5,500 per year. So these are, they’re essentially separate systems. So if you put money into a Roth IRA, it doesn’t necessarily affect how much money you can put into a Roth 401k.
Tim Ulrich: Got it, thank you.
Tim Baker: So the next question for you, Tim, is a great question from the Facebook group. “My name is Steven. I recently joined the group, and I really enjoy all of your posts about business and financials. I am in my third year in pharmacy school and wanted to ask you this question. Knowing what you know now, what is something you wish you would have done or started in pharmacy school?” That’s a great question.
Tim Ulbrich: Yeah, great question, Steven. And first of all, kudos to you for being proactive as you’re in pharmacy school. I think so many in this community — and I think some even commented in the feed of the question that you posed saying, “Hey, I wish I would have been thinking about this sooner,” and I know that’s something, Tim, that I often think back of, wow, what would have happened if I would have actually dove into this topic, been a little bit more proactive instead of reactive where looked up, had a ton of debt and then tried to figure it out and felt the pain. And that was the beginning of trying to figure this out. And I think that gets to the point of my answer to Steven’s question. If I had to go back and do it all over again — and this is not a sexy answer — to me, it’s all about being educated, specifically probably around student loans for many of the students that are listening. You know, I think as I look back, I was trying to dabble in the Roth IRAs and learn some other things here or there. All the while, I had student loans that are accruing above $152,000 at 6.8% interest, I didn’t have really a solid emergency fund, and I was just doing things out of order because I didn’t have a good education and understanding of what it meant to have a solid financial base. And that even, to me, trickled into new practitioner life where I was getting ahead of myself in some areas around kids’ college saving and other things at the expense of having, again, a solid emergency fund, the right life insurance protection, making sure I had end-of-life planning documents, all the things that we’ve talked about before around having a solid financial plan. So Steven, the one thing I would do, which you’re obviously doing, is getting involved in this topic, being educated. And hopefully you can inspire your peers and your friends and your coworkers to do the same. The other thing that I would do — and I know a couple people had responded, and actually, we had a response from Steve, who is another fourth-year student. And one of the things he mentioned was definitely work in school. And I would advocate for that. And I know I had a lot of faculty members who would tell me, “Hey, don’t work in school. You’ve got to focus on your academics.” Of course you have to graduate, otherwise your degree and not having one is counterproductive. But many students who can balance these things — I’m not saying you need to work 30-40 hours a week. But obviously a little work experience is going to, you know, provide a little bit of a financial component. But probably more important, it’s going to set you up for career components, going to allow you to begin to form those connections in your network, and I think as I now see new practitioners coming into the workforce, I think it gives you those skills that you just aren’t going to get in school, right? Dealing with difficult customers and time management and coworkers and understanding all of the things beyond the books and what you’re learning in school. So Steve, if you haven’t yet too, make sure to take a look at the responses from your peers and some of the group because there was some great feedback around — you know, I really like what Vbar (?) had to say about “borrow only what you need for tuition and fees because these student loans are killers.” And we say this over and over again on the podcast that if you look at the average indebtedness of a pharmacy graduate, those numbers are often double what are the numbers for tuition and fees. And that’s because of the borrowing that’s happening for cost of living expenses. So do everything that you can, especially in the interest rate market we’re in for student loans, everything you can to minimize the costs you’re borrowing while in school.
Tim Baker: And I think just to piggyback on that, Tim, one of the things that I think I hear quite a bit is it’s almost like Monopoly money, you know, like the loans you’re taking out. So I think if you can, you know, in your mind, make it real. And I think the best way to do that is to, you know — I know that with the average debt load being $160,000, I know that a standard — that equates to a standard payment of like $1,800 and change. So if you have loans that are $320,000, then you’re looking at a $3,600 payment. So obviously listeners, if you’re P3, P4, you’re going to know more or less where you’re going to fall in that, so I think — like you said, if you can work — anything you can do to kind of make it more real. And I think once it becomes more real, then you’re more likely to actually be intentional, I think, with what you’re trying to do, whether it’s working or just being more frugal as a student. I think the sooner you do that, I think the better you will be as you enter into repayment.
Tim Ulbrich: Great advice. Great advice. Our third question comes from Rachel in the Facebook group, who says, “My husband and I just had our first child and want to start earning her interest on the monetary gifts we have received for her. Any advice and suggestions?” So Tim Baker, I’m guessing maybe there’s a question behind the question here around college savings for kids or just investing money long-term for a child. What are your thoughts? And what do you do with clients typically in this arena?
Tim Baker: Yeah, I think the question with the question would be like, well, what’s the goal? What are we thinking we want this money for? If we want something that’s a sure thing and we want to be able to access this when the child is growing up for whatever reason, then something like a high-yield savings account or a CD might be the best bet. If it’s more of a long-term goal and we don’t really have an education goal in mind, maybe it’s just sticking the money in an index fund. But more acutely, I think the 529 would probably be the best vehicle to put money into that these monetary gifts, even some of these 529s are getting pretty creative. Like I know the Maryland 529, you know, I can send out links to grandparents and aunts and uncles and say, “Hey, contribute to Olivia’s 529.” I think the big advantage there is you typically, most states will give some type of tax deduction. And even with the new tax code we talked about a little bit last episode, you know, the 529 can now be used for kind of secondary school, high school, middle school, that type of thing. So you can actually use it as a pass-through to get a state tax deduction. But then longer term, you can invest it similarly like you would your 401k, your IRA, where you’re putting money in there and as it accumulates over 15, 16, 17 years, it provides a return on the investment that you can apply towards your child’s education. So you know, there’s a lot of I guess different sides to the answer. And same thing with 401k’s and IRAs and things like that, not all of them are created equal. So you’re going to want to really pay attention to fees and the investments that are there for you. But obviously, your state is going to play a role in that. But those would be kind of the top things that I would rattle off in terms of advice and suggestions.
Tim Ulbrich: Yeah, just a couple things to add there, you know, especially knowing where we are in the year and coming up on the month of November, if Rachel, if her and her husband are thinking 529 — and I don’t know, I’m guessing this is every state in terms of the income tax deduction, I know here in Ohio I think the limit to that is $2,000. And so depending on the amount that they’re looking at doing, there may be a play there to divide some between the 2018 and some between the 2019 year rather than going above that $2,000. And I think you and Paul did an awesome job last week talking about that in the context of tax. The other thing I think about here, Rachel and to the broader community that’s listening — and Tim Baker, you helped I think Jess and I realize this, that not only the why of what the goal is, what you’re trying to do, what you’re trying to achieve, but I think for those of us that graduated with tons of student loan debt, we tend to probably be compensated a little bit too much on the other side when it comes to kids’ college because we want to avoid that, naturally, for our own kids, right? And so I’m not suggesting here that Rachel, you and your husband take your child’s money that was received for your child, but I am just bringing up the point that as you and your husband talk through this going into the future, making sure that college savings for children is done so in the appropriate context of your own financial plan. And I’ve seen a lot of new practitioners, myself included, who, again, to my point earlier, maybe don’t have those foundational items like the right insurance and emergency fund, etc. but are running off saving for kids’ college, and that’s 18+ years away. So again, just thinking about the priority and the order of things within a financial plan.
Tim Baker: Yeah. I’ve actually had some clients like stop at a certain amount of kids because their goal was to pay 100%. And I mean, obviously, it’s a personal choice. But there’s different ways you can go about funding education, it’s important to kind of talk with your partner and maybe a planner to kind of work through that. So great question by Rachel. So Tim, next question for you is — this is from Elise. “With the ever-changing pharmacy job market, I’m starting to think more about unconventional pharmacist jobs, i.e. not in hospital or retail. I think in school, we’re kind of programmed to believe that those are our only two choices, so it’s hard to even know where to begin looking for what else is out there. I’m wondering if anyone has experienced doing something other than hospital or retail that they really enjoy and is financially stable, offers good perks and benefits. Thanks.”
Tim Ulbrich: This is a great question, Elise. Thanks for taking the time to pose it. And I got fired up when I saw this question, Tim, because in my former day job at Neomed, I did a lot of career counseling, advising with our students. And I cannot tell you how often I heard from our own students, even as a P1 or a P2, even before they’ve really been getting along that path of looking for jobs, there tends to be this mindset that Elise is describing of, I’ve got one of two options, right? I’ve got retail community pharmacy, and I’ve got hospital pharmacy, which more often than not means residents to train.
Tim Baker: Right.
Tim Ulbrich: And really, if you look at the workforce data, the reason people think that is valid. If you look at the last workforce survey that was pushed, 45% of all pharmacists’ jobs are in the community pharmacy sector. Now, that can be obviously retail chains, CVS, Walgreens, etc. It could be independent pharmacies, but that’s almost half of the workforce. So that’s why I think you see — and depending on the school that graduates, you’ll see these numbers upwards of 50, 60, 70% depending on the region and the job that they have available. And then I know at Neomed, we saw 30-40% of our grads every year would go into residency training. So you put those two together, and that’s 80% or so of a graduating class. And so I think it’s easy for students and new practitioners to think these are my only two options. And for those listening that also have this question, please make sure to go check out the Facebook group and look at the answers because there’s some great examples out there that were highlighted of people that are doing different things. Somebody’s working for a hospice, pharmacy benefit manager on the side. People that are in pharmacy informatics. Nate Hedrick, who we’ve had featured on the show, the Real Estate RPH, during our September series on home buying, talks a little bit about his job working for a pharmacy benefit manager as a sales team clinical liaison. So very unique, niche position. And he actually I know did an in-patient hospital residency. So there’s many different paths and options, and I think the advice I would have to somebody asking this question is begin to find the mentorship and the people that are going to offer you this viewpoint, if you don’t feel like you can get it as a student at the college that you’re at. So are there new practitioners, are there people with an organizations, associations that you’re connected with that have these positions that are the “nontraditional” or unconventional positions that you can begin to form those relationships and networks and get them to help you along this process because the reality is we all know pharmacy’s a small world and we know that when it comes to these niche markets, it’s all about networking and building those relationships. So if you want to find something beyond the hospital, community pharmacy world, go find those practitioners who are out there. You know, you’ve talked before on this podcast, Tim, the 1,000 cups of coffee. You meet with people, have them introduce you to three more people, and keep going and going and going. And it may take 10 or 20 or 30 conversations, or it may take two, but doors will open over time. And you’ve just got to put the work and effort into doing that. The other thing I would just highlight, Elise, in response to your question, is if you haven’t done so already, check out the side hustle series that Tim Church has been doing on this podcast, episodes 069 and 063, also in episode 038, we had Alex Barker from the Happy PharmD on talking about his journey. He’s got some great context — or excuse me, he’s got some great information on the unconventional jobs that are out there. And then Tony Guerra, pharmacy leader and podcast host, we had him on in episode 053 as well, did a great job of talking about some of these other options. So Elise, thanks for your question. Alright Tim Baker, question 5 here comes from Lane inside the Facebook group. “What other banks do people use besides Ally? A Google search showed Northfield Bank offers higher APY.” And I think maybe we’ve brainwashed our audience unintentionally about Ally because you and I are Ally users, and we get giddy when we get the rate increase emails that come. I think they usually come on Friday afternoons.
Tim Baker: Yeah, and I think I missed the last one because when I was researching a bit for this question, I saw that Ally’s now at 1.9%, so I think I missed that last bump, which I’m pretty excited about.
Tim Ulbrich: So what — and maybe, so Lane is asking here what other banks do people use? But maybe there’s a better question here — not to hijack her question — is what should people be looking for when they’re choosing a bank specifically for more of that long-term savings, you know, emergency fund and whatnot.
Tim Baker: Yeah, so I think that having a bank set aside for kind of your long-time savings like emergency fund and storage account, which might be like a travel fund, a car maintenance, a home maintenance fund, I think what you’re really trying to find is something that there’s ease of use, there’s an app, there’s a website, that doesn’t charge fees, that you can move money in and out fairly easy. And for me, like when I started kind of recommending, I found that when I started working with clients, this was kind of a topic that came up over and over again. Where should I bank? And where should I put money? And again, it’s not something that most financial planners I think even think about because it’s very much investment-centric, and we’re not really thinking about budgeting and debt and things like that. But this was kind of a key question that came up over and over again, so when I did research on this topic awhile ago, those were some of the things that I was trying to figure out. OK, where is the best bank to park money and get a little bit of return and not be charged fees and all that kind of stuff. So I actually tested out Ally, Synchrony Bank, Capital One, and I think Barclays was the fourth one I looked at. And although Synchrony at the time was kind of providing a little bit more return, I just found that from a great experience across the board, Ally was far and away better in terms of opening accounts, moving money in and out of it, just the app, all that stuff. To me, I think Ally was head and shoulders, even I think above Capital One 360, which obviously is a huge bank. So again, I’m a big proponent of kind of keeping this type of banking kind of separate from your everyday kind of monthly expenses. So if you bank with BNC or Chase or something like that, I like kind of a separate entity that is going to park kind of your emergency fund and kind of those storage accounts for those particular goals. So that was just my experience in testing these out. And obviously, you know, it’s a little bit of an arms race because these companies are putting money into their apps and things like that. But at the same time, I think Ally — and even for me, I know, Tim, you and Jess are using Ally. And again, we don’t get any type of benefit from talking about Ally. I just think that they have a great solution.
Tim Ulbrich: You know, it’s funny how far we’ve come in this online banking. Do you remember when Ally came out and it was kind of like, really? Are we going to do banking online? I remember those days. And you know, great customer service and I think you can obviously find that with other banks as well, but I think looking at some of the components you mentioned is great advice.
Tim Baker: OK, so next question comes from Kara. “Home and auto insurance question. Is there any benefit to staying with the same company? We have had the same company forever, but I called MetLife to get quotes because I can get a corporate discount through my employer. For the same exact coverage, auto policies are almost half as much. Switch and save money?”
Tim Ulbrich: Yeah, this is a great question. And actually, I just went through this in the move of getting a re-quote on home and auto. And you know, obviously as Kara mentions, the number half as much, it’s hard to not say, switch. But I think you always have to consider this in the context of price versus the service that you receive. And obviously, there’s a point where you’re going to be able to save a significant amount of money. But don’t — I guess what I’m trying to say here is don’t nickel and dime policy coverage for a company that you’re happy working with that you have a quick connection if you need it and that is responsive, obviously, in the times that you need them to be responsive. And Nate Hedrick really highlighted this for me as I asked him for his input as I was shopping around on home and auto. And that was his advice back to me is, you know, look at the total cost of the policies. And if you’re talking about saving $20 or $30 and you have somebody that’s an email or a phone call away that you have a relationship with, you have to put value to that relationship. Now, obviously if you’re talking about a policy that’s half as much, unless it’s just atrocious customer service and you’re not going to be able to get that same coverage, then obviously there’s a point where switching makes sense to save some money. The other thing I always encourage people to do is make sure you look side-by-side, whether it’s a home or auto insurance policy, look side-by-side to see the coverage that you’re getting is the same because if your deductibles are changing or coverage isn’t as good, obviously that may explain the price difference. But if you loko side-by-side and say, “OK. All coverage is equal,” now you’ve got to really weigh this against what is the level of the relationships and the customer service and how much am I going to save on this? Kelsey also makes a good point. In responding to Kara, she says, “I think it depends on the company. Some will now give you money back after x amount of years you don’t have a claim. My sister is an insurance agent, and the company she had me switch to will give us back 25% of our payment if we have no claims for three years.” So obviously, that policy is built in a way that incentivizes that relationship over time. So different factors that you have to consider as you’re looking at these different companies. Alright, Tim Baker, question No. 7, Devin asks, “Hello everyone, I’m meeting with a financial advisor tomorrow, and I was wondering if there was anything I may forget to bring them that you all think would be helpful. I’m a recent graduate.” So recent graduate, going to meet with a financial advisor, what information should they be bringing? Or what questions should they be asking? What do you think?
Tim Baker: I think typically when I meet with a kind of a prospective client, I don’t have them bring anything except for questions. I know some people’s process is different. They might start kind of getting down to some of the details of kind of the work they would do and everything. But for me, I think it’s just a matter of like do I have a connection with this particular person? Do I see myself working with them for a long period of time? And in Devin’s case, it might not be a long period of time. It might be I’m just trying to get a few questions answered and then I’m going to move on. So that would be kind of the question that I would ask first is how would we interact? And how often? I think the big thing is — and again, I’m biased here — is are you fee-only? Are you a fiduciary? You know, how is your fee calculated and compensated? Can I clearly see what I’m paying you? And nine times out of 10, these will send financial advisors squirming. And I think if you see that, then it’s probably a good indication to kind of go in the other direction. You know, just a lot of financial advisors, they have minimums. So you have to have — it’s kind of like, hey, I can help you, but only if you have a quarter million dollars or something like that.
Tim Ulbrich: Right.
Tim Baker: Or I don’t have minimums, but typically when you don’t have minimums, typically that particular client is maybe ignored more so than someone who does a quarter million dollars. So I think there’s a variety of questions. I think some of my FAQs that I would give a person to ask their financial planner — and I think a big one is around like what are the conflicts of interest? Are you a fiduciary? Are you fee-only? And from my experience, the majority of financial advisors out there — and I can say this with confidence that the majority of financial advisors out there are not going to be keen on a lot of the issues that pharmacists deal with, and the big one being student loans. A lot of — one of the reasons that I decided to kind of move on from my last firm was because there wasn’t a whole lot of understanding or process around student loans, which obviously is a major pain point for pharmacists. So if Devin, if this is one of the big things that you’re going to talk with a financial planner about, ask good questions because I would suspect that a lot of people in our Facebook group, a lot of our listeners, know more about student loans than some of my counterparts, sad to say.
Tim Ulbrich: Mhm. Yeah and Devin, make sure to check out YourFinancialPharmacist.com/financial-planner if you haven’t yet done so. Again, YourFinancialPharmacist.com/financieal-planner. We built out an entire page really getting to the gist of your question. We have a free guide that answers a lot of what to look for in a financial planner. We have a list of questions that you can ask inside of that document. What are the qualifications you should be looking for, some of the things that Tim talked about there. And then also on that page, we have referenced episodes 015, 016 and 017, where Tim Baker and I talk through a lot of this as well. And on that page, for those that are interested, you can also schedule a free call with Tim Baker if you’re interested in learning more about working with a financial planner and the value that he can provide. Alright, Tim, I think we’ve got three more, right?
Tim Baker: Yeah, let’s do it. So this question is from Sabina. So the question is, “Has anyone repaid student loans through the federal government and utilized the income-based options such as PAYE or IBR, both of which list forgiveness after 20 years as an option. Any recommendations on that approach versus refinancing with private companies?”
Tim Ulbrich: Yeah, thank you, Sabina, for your question. And what really she’s asking here about is what we called in Episode 062 “the other forgiveness.” So we’ve talked a lot on the show about Public Student Loan Forgiveness, PSLF. In Episode 018, we talked about that. I think we’ve mentioned it probably in 15 other episodes, right?
Tim Baker: I think so, yeah.
Tim Ulbrich: And I’m glad we did because I posted in the group last night, there’s a lot of negative news coming out about PSLF, and I’m not going to get on the soapbox right now. News article that 99% of borrowers that applied for forgiveness didn’t get it. And while you and I think we both agree that the federal government and the loan servicers could do 1,000,000% better job than what they’ve done in terms of the PR or the press and all of this, if you really dig into the details of why people aren’t Public Student Loan Forgiveness, most of it if not all of it really isn’t a surprise. It’s either they haven’t consolidated to the right loans, they’re not in the right repayment options or they’re not working for a qualifying employer. So as I mentioned on that episode, dotting your i’s, crossing your t’s is critical. If you have questions, let us know. But what Sabina is asking is about the other forgiveness, non-PSLF forgiveness. So if you stay inside the federal student loan repayment system, and she mentioned two of the income-driven repayment plans, PAYE and IBR, after a certain period of time, 20 or 25 years, depending on the plan, there is an option for forgiveness. And the key here is you do not have to work for a qualifying employer, which is different than PSLF. However, the amount that’s forgiven is taxable, unlike PSLF, where it’s tax-free. So there’s some planning that has to be done with tax. All that we covered inside Episode 062. And so I’d reference our listeners to Episode 062, Sabina the same. And also, she’s asking about refinance. And I think the question here behind the question is what is the best repayment option for Sabina? And I know many of our listeners and followers have that question. Should I refinance? Should I stay in the standard 10-year repayment program? Should I choose one of the income-driven repayment plans? Should I go PSLF? Should I not? If I do refinance, is it five years? Seven years? Ten years? Fifteen years? And we talk a lot about choosing the best repayment option, and we’ve got a full course around that topic, specifically that I would point our listeners to as well. So Sabina, without being able to dig into the numbers, this really comes down to lots of different factors such as running the numbers on each of these options, what’s the math? What are your feelings towards having these loans around for 20+ years? What are other financial goals you’re trying to achieve? What’s your progress in those goals? And I think at the end of the day, what I’m trying to encourage you and our listeners to do is to lay out all of the options, refinance, no refinance, forgiveness, no forgiveness, PSLF, non-PSL Forgiveness — and then from there, look at all the numbers, consider some of the non-math factors, and you can move on and make that decision to ensure that you’ve got this big decision and you’ve made the best decision for your financial plan. Tim Baker, question No. 9 is from Blake, who asked, “My wife is a PA, and I’m a pharmacist. She’s eligible for PSLF, and I am not. She’s set up on an income-based repayment plan, but this will be the first year where we both have a full year of income when we go to file our taxes. We’re wondering if there is a best way to file taxes to keep her payments low to maximize the amount that’s forgiven. I didn’t know if we filed our taxes as married filing separate, would it be more beneficial than filing together?” What do you think?
Tim Baker: Yeah, it’s a great question. And it’s kind of similar to our last question. It’s kind of difficult to dig into without all of the nitty gritty details. But you know, I would say that I think that there are situations where with student loans and spousal income that married file it separately is the right way to go. And I actually have a few clients that are doing that. It also depends on what repayment plan you’re in. So if you’re in a REPAYE — and if you’re in PSLF, those are going to be the two that you are really going to want to look at is Revised Pay as You Earn and Pay as You Earn. One of them, REPAYE, it doesn’t matter how you file. It’s going to count both spousal income. Pay as You Earn, it does matter how you file, depending on if you do file married filing separately will only account for the one spousal income. So I think you have to actually sit down and maybe do a tax projection, so we talked about that last time. If you’re interested, YourFinancialPharmacist.com/tax, we’re doing tax projections right now. And maybe actually couple that with kind of a student loan consult, student loan analysis, just to see am I approaching this the most efficient way as possible. Now, it is a pain in the neck to file with your spouse to file separately for 10 years. That’s not fun. And for nine out of 10 scenarios, just strictly from a tax perspective, married filing separately offers few benefits. But if you look at it, and your benefit or your payment is hundreds of dollars a month or even equate to thousands of dollars per year, the tax benefit might not equate to that in terms of married filing jointly. So again, I think that your question, it does, Blake, it does have legs. And there are scenarios where it does make sense to actually not file jointly with your spouse, especially if you’re looking at PSLF. And it kind of just depends on some of the income and the underlying numbers with the loans themselves. Alright, Tim, last question here is question No. 10. This is from Joshua. So Joshua says, “I’m on course to pay off student loans in a relatively short period of time. I noticed that refinancing my federal loans to a private lender would decrease my interest rate, as expected. But because I’m set to pay off the loans in a small period of time, the amount saved in interest is relatively small for a pharmacist’s salary. Would it be wise to stick with the federal loans with the option of utilizing a graduated repayment option to keep my minimum payment low in case something unexpected happens that doesn’t get paid for by insurance, like having a baby, etc.?”
Tim Ulbrich: Yeah, this is a great question, Josh. And Tim Baker, I don’t know your thoughts on this, but I have a feeling we’re going to get more of this question as we see the interest rate market rise. You know, I think a year ago, we had our student loans that were hovering around, what, 6-7% fixed rate? And some of our listeners were getting refinance rates in the 3-4% and obviously some a little bit higher depending on your credit and all those types of factors, debt-to-income ratio, etc. But I think as we see the interest rate market rise, then obviously we’re going to see refinance offers become maybe still attractive but not as attractive. Would you agree with that?
Tim Baker: Yeah. Absolutely. I mean, the interest rates on here are a huge thing that’s hanging out there. I think it will always be competitive in the five-year or the seven-year, but if you’re doing like a 10-year and you’re at 6%, I think eventually that market will dry up.
Tim Ulbrich: Yeah, I mean, obviously when you’re talking about potentially refinancing $150,000-160,000 and you look at 1-2% interest rate change, that can be huge, you know.
Tim Baker: Yes.
Tim Ulbrich: And we’ve done the math before on some fairly conservative numbers, and we estimate that somebody who has the average indebtedness can definitely save around $25,000-30,000 in refinance, depending on your individual situation. So and I like the way Josh asked this question because I can tell he already did the math. And that was the first suggestion I would have for our listeners is go to YourFinancialPharmacist.com/refinance, shoutout to Tim Church, who worked hard to build out a refi calculator, so you can look exactly to see as you get quotes from different lenders exactly what is the difference? How much are you going to save? Is it worth it? And based on those savings, you can then make the decision — or projected savings — you can make the decision to switch or not. Now, I must clarify, any time we talk about refinance, you know, regardless of what the math says, if anybody’s pursuing loan forgiveness, obviously refinance should be off the table because once you refinance, you’re taking yourself out of the federal system into the private system. You’re then making yourself ineligible for a refinance — or for forgiveness, excuse me. So for those who are not pursuing forgiveness who are then doing the math on a refinance, now the question becomes what am I giving up by getting out of the federal system? And how much am I saving? And is it worth whatever I am giving up? And you’ve talked about before several times on this show that 10 years ago or so, there was some vast difference between the benefits of the federal program and the private system. And those really have gone away because as you’ve made the point, when you have such a lucrative market, those private companies have to be competitive against whatever the federal system is offering. And so I think as we now look at some of these major lenders that we have, obviously pumped on our page as well, SoFi and LendKey and Common Bond, etc., you know, they really are becoming apples to apples with the federal system, with of course the exception of the forgiveness clauses. Now, there’s a couple lenders that are still out there that do not offer a discharge on death and disability, so of course you need to look at that as a factor. And if you’re going to get a much better rate from them, you have to weigh that against the risk that you’re taking on there. But for me, it’s starting with doing the math, seeing what the savings are, and then making the decision as to whether or not you’re going to switch. And again, YourFinancialPharmacist.com/refinance, we’ll give you the information to get started. The other thing I want to add here, which is the second part of Josh’s question, is would I just be better off with a smaller minimum payment in an extended or graduated plan in case something unexpected comes up? Now, I think this goes all the way back to budgeting and financial planning and really trying to get a feel for what are you locking yourself into month-to-month. And the thing I would say here to Josh is don’t forget that you can refinance more than once. So if you’re looking at your monthly budget, and you’re saying, “Oh, I’d be really squeezed by a five-year refinance, but I feel really comfortable about a 10-year, and then I’ll reassess in 12 months or 18 months or whatever,” you can always refinance into a 10-year, and then you could reevaluate that into the future. Or you choose a lender that allows you just to make those extra payments, right? Which are all of the ones that we have listed on our website. So don’t feel like you’re locked out of that because of a refinance. You could choose a longer term period and then you could obviously make extra payments or you could reassess and re-refinance at a later point in time. Alright, Tim Baker, good stuff. This was fun to take on these 10 questions. I think we’ll be doing more of this. So again, as a reminder to our listeners, if you have a question that you would like featured on the show, shoot us an email at [email protected] or jump onto the YFP Facebook group if you’re not already there, join the 1,700 other pharmacy professionals, great conversation, great community, and certainly you ask a question, you’re going to get a lot of good feedback in addition to Tim and I — Tim, Tim and I jumping in as well. As we wrap up another episode of the podcast, I want to again take a moment to thank our sponsor of today’s show, CommonBond. CommonBond is a on a mission to provide a more transparent simple and affordable way to manage higher education expenses. There approach is no big secret…lower rates, simpler options and a world class experience…all built to support you throughout your student loan journey. Since its founding, CommonBond has funded over $2 billion in student loans and is the only student loan company to offer a true one-for-one social promise. So for every loan CommonBond funds, they also fund the education of a child in the developing world through its partnership with Pencils of Promise.Right now, as a member of the YFP community you can get $500 cash when you refinance through the link YourFinancialPharmacist.com/commonbond. Again, that’s YourFinancialPharmacist.com/commonbond. And one last thing if you could do us a favor, if you like what you heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmacist.com, where you will find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path towards achieving financial freedom. Have a great rest of your week!
On Episode 70 of the Your Financial Pharmacist Podcast, Tim Baker, YFP Team Member and owner of Script Financial, talks with special guest Paul Eikenberg. Paul works alongside Tim at Script Financial and handles all of the tax planning and preparation for Script clients. On this episode, they discuss the new changes to the tax code and tips you can use for pre-planning for tax season.
Summary
In this episode, Tim and Paul discuss changes to the tax code that will affect your tax preparation for this year. There are several changes that have been made. The 1040 form is 23 lines and has new schedules. Standard deduction amounts are changing from $12,700 (couple) and $6,350 (individual) to $24,000 and $12,000, respectively. Personal and dependent exemptions are going away, meaning that those who have itemized before will probably take the standard deduction. Other changes include the amount that’s able to be deducted for medical expenses (now 7.5%), limits for local and state income taxes, child tax credit (now $2,000/child), student loan discharge due to death or disability is not taxable in the future, and the 529 is now available for primary and secondary education in addition to college. Paul also discusses how tax brackets have changed. There are the same number of brackets, however, the rates have been lowered. Paul suggests that most people will get a tax reduction between higher standard deductions and lower tax rates.
Tim and Paul then talk about the differences between tax planning and tax preparation. Tax planning involves long term strategy matching with your personal goals. Tax preparation is more mechanical where you plug in what happened financially from last year.
Paul offers tax review services through Script Financial. In a tax review, Paul uses your tax return from last year, current paycheck stubs, and payroll statements to project what your tax bill will be, assess if you are withholding enough from your check, and walk you through different options. Paul is still offering tax review services.
About Today’s Guest
Paul Eikenberg has been involved in starting and selling 4 businesses, has worked in the IT field as a franchisee and executive, as VP of Franchise Operation for a 500 unit Franchise System and is currently is serving as Vice Chairman of the Board of APG Federal Credit $ 1.4 billion asset Federal Credit Union. He has a wealth business operations and financial experience. In addition to being a licensed Maryland Tax Preparer, he is scheduled to completed the IRS’ Enrolled Agent exams by year end.
Tim Baker: What’s up, everybody? Welcome to Episode 070 of the Your Financial Pharmacist podcast. Paul, thanks for joining me on today’s episode. How’s it going?
Paul Eikenberg: It’s great, Tim. Thanks for having me.
Tim Baker: Yeah, of course. So Paul, why don’t we take a step back before we kind of get into all of the exciting things that are tax. And we don’t spend enough time on taxes, which is a very important part of the financial plan. But before we kind of do a deep dive into discussing the different changes to the tax code and what our listeners can do to prep for the upcoming tax season, why don’t you tell us a little bit about yourself and how you came to be the tax guy at Script Financial?
Paul Eikenberg: Sure, I’ve had several careers now. I’ve owned two businesses. And most recently, I was working with a network service provider. When that job got eliminated, I decided that I’d go back to tax preparing and got my Maryland certification, and I’m working on the enrolled agent program with the IRS, which I’ll be completing in December. And was looking to work real hard for part of the year and not so hard the rest of year has been my life. So that’s when you and I sat down together and started talking about our financial plans, and I wasn’t ready to retire, but I wasn’t ready to go back to work full-tilt. So you and I came to an understanding that Script Financial needed a tax practice and that it was a good fit for me at the right time.
Tim Baker: Yeah, and I think for me, you know, I think tax is so important because it really permeates every part of the financial plan. And I think a good understanding of one’s own tax situation and how you can practically plan for your tax situation I think is super important. So like I said, I’ve really enjoyed working with you and Anne over the years, and I feel like when I think back on the first time we met, I think we talked a lot about finances, but especially with Anne, we talked a lot about just life and just experiences and things that you guys have experienced and my experience, and it was more about the human element, I think, that we connected. And it’s been a good ride so far, and I’m lucky to have you as part of the team. So yeah, thanks again for coming on the podcast today. So let’s hop right in. So Paul, last year, the new administration passed the new tax code. The Tax Cuts and Jobs Act was signed by President Trump on December 15, 2017. What has that done to the tax system from where you sit as you’re looking at preparing taxes for 2018? What are some of the big changes?
Paul Eikenberg: Oh, everybody’s still working on figuring it out. The forms, the 1040’s changing. And the IRS has released drafts of the 1040s and all their forms, but they’re still in draft form. None of it’s been finalized. But one of the big changes you’ll see is that form 1040, which was 79 lines last year, is going to be 23 lines this year, postcard-sized, which sounds great until you find out there are six new schedules to support the 1040.
Tim Baker: Right.
Paul Eikenberg: And those lines really haven’t been removed, they’ve been moved to other schedules. So from a complexity of doing your taxes, it is I expect to be every bit as complex as last year. We will have a lot more people this year will be itemizing than previous because of the changes in the standard deduction.
Tim Baker: Yeah, it’s funny because I think the rhetoric behind the tax changes were that we want people to be able to basically file their taxes on the back of a napkin. And obviously, the 1040 itself is smaller, but it looks like they just moved the information to these new schedules, which I understand are actually numeric. So if people are familiar with the tax forms, you know, you have Schedule A, which was typically for your itemized deductions, Schedule C for business income. And now we actually have Schedule 1-6, so it actually makes it a little bit more confusing, in my opinion. Obviously, we haven’t seen kind of the final product of what the forms will actually look like, but interesting that I think it’s still going to be as complex as it was before. So let’s talk about some of the meat of some of the changes that we’re seeing. So you mentioned the new standard deduction. So walk us through some of the big — what is the standard deduction compared to the itemized deduction? And how has that changed for this upcoming year?
Paul Eikenberg: Well, in 2017, the standard deduction for an individual was $6,350. For couples, you were looking at $12,700. This year, it’s going to be $12,000 for single and $24,000 for couples.
Tim Baker: So essentially, it’s doubled.
Paul Eikenberg: It would seem that way except that your personal and dependent exemptions are going away, which was $4,050 per individual.
Tim Baker: So it looks like a little bit of the same stuff with kind of just rearranging the numbers, similar to the lines in the 1040.
Paul Eikenberg: It is. You’ll have, you know, you’ll have a higher standard deduction. So a lot of people who were itemizing last year will be taking the standard deduction this year. There’s estimates all over the board as to how many people will be affected. But you know, we saw a lot of them in our practice that were maybe $2,000-3,000 over the standard deduction last year that it made sense to itemize. This year, they’ll be taking the standard deduction.
Tim Baker: So just to back up, typically, what you want to do as a taxpayer is you want to look at what the standard deduction is and then what you’re itemized deduction is and then you want to take the greater one of those. So last year, if you were single, and you had itemized deductions of $6,500, you would have took that over the standard deduction of $6,350 because it was a greater number. So Paul, quickly, what are some examples of what would constitute an itemized deduction?
Paul Eikenberg: Mortgage interest is one of the big ones. Property taxes, state taxes, charitable contributions, employee business expenses, medical expenses can be if you have a significant amount of medical expenses. In the past, it had to be the amount over 10% of your adjusted gross income. This year, it’s dropped to 7.5%. But for the most part, unless you had a major health factor, you’re not — most people aren’t getting to itemize the medical insurance, I mean medical deduction.
Tim Baker: OK.
Paul Eikenberg: Last year, one of the big changes, state and local income taxes were deductible. They’re still deductible, but there’s a $10,000 limit on the amount of state taxes that can be itemized, and that is withholding taxes and property taxes. So higher income earners, that’s going to be a reduction in what you can itemize.
Tim Baker: So that’s big for high income earners and if you live in a part of the country where your mortgage and state and local taxes are higher, so say in the San Francisco area, that’s going to obviously affect those areas more than, you know, if you live in more of a rural area. How about, Paul, how about with kind of the, you know, if you have kids — how does the tax code change if you have kids?
Paul Eikenberg: Well, the biggest change there is the child tax credit goes from $1,000 per child to $2,000 per child. And the amount that’s refundable goes from $1,100 to $1,400. So that is the biggest change. The other change is that credit was phased out at $110,000 last year for a married couple. The phase-out has been raised to $400,000 this year.
Tim Baker: Which is huge, especially for our listeners, you know, probably as a couple are making more than $110,000. Now if you make up to $400,000, you get that $2,000 tax credit. And really good point of emphasis here is a credit is actually a dollar-for-dollar reduction from your tax bill, whereas a deduction just kind of decreases the income that you’re taxed on, so it’s not necessarily a dollar-for-dollar. And I think for the child tax credit, I believe if you’re single, I think it’s you can make up to $200,000 and still get that $2,000 credit per child. So just like you were talking about, it’s changed but the personal exemptions have gone away, but you’ve increased the child tax credit. So it’s a little bit of a — I don’t want to say bait and switch, but not a huge change. OK, so what about the — in terms of like education? We’re talking like the 529, the student loans and forgiveness. Are there big changes for that? Because that would obviously be something with listeners who have kids that are trying to avoid maybe the student loan hell that they’re in, so they’re saving for 529 or, you know, if you are a borrower and you’re trying to navigate your student loans, are there any big changes to the tax code in those two areas?
Paul Eikenberg: One of the big changes is the student loan discharge due to death or disability is not going to be taxable in the future.
Tim Baker: OK.
Paul Eikenberg: The interest deduction, the phase-out earnings have been raised a little bit but not significantly. I guess the biggest change is the 529 is going to be available for use for primary and secondary education.
Tim Baker: Yeah, so from what I understand, Paul, the 529, you can actually use for kind of your grade school, middle school, high school, which was a change because the 529 was really — before, it was just locked into just college. They did, for you homeschoolers out there, there was supposed to be a benefit that was stripped out at the last minute, so unfortunately, the 529 is no longer good for homeschooling. And so you know, from what I’m hearing more about people that work with clients that use 529s, it could actually — you could use it as a pass-through. So if you’re paying for private school, make sure you’re funding a 529 because you get a state deduction in most states. But then you can also use a 529 almost like you would use a retirement account where you’re accumulating, you know, so if you have a child and they’re going to go to school in 18 years, you’re investing that money and you’re accumulating it over time so you have a bucket of money for your child in the future to apply towards college. And then to circle back, the student loan interest deduction, it remained intact. I think it goes up a little bit, but not enough to really affect a regular pharmacist. Maybe for residents out there, the 2017 phaseouts were I think $65,000-80,000, so anything above $80,000, you didn’t get a deduction. So obviously for residents, for those maybe your PGY1, PGY2 year, you’d probably get a deduction for those years. But you know, beyond that, not necessarily. But the fact that the loans are discharged due to death and disability and not taxable because of death and disability is a big win for those people that unfortunately have to deal with that situation. So I guess, Paul, before we kind of talk about what we can do to prepare for the 2018 tax season, just about I guess the brackets. You know, I think everyone would like simplicity, but with the new tax code, do the tax brackets, how did they change? Did they change? What does that look like?
Paul Eikenberg: It’s pretty much the same number of brackets, but the rates are a little lower. The base rate is still 10%, but the next bracket down from 15% to 12%. The bracket above that went from 25% to 22%. 28% to 24% and then the next bracket, 33% to 32%. The others are pretty much the same or higher. So you know, we’re looking at overall, most of us are going to get a tax reduction between the higher standard deduction and the lower tax rate should have a positive effect on most of us out there.
Tim Baker: Yeah, and I think, you know, the number of brackets, again, like it would be nice to pare those down. I think essentially, though, moving forward with this tax plan, I think it is going to be better from a taxpayer perspective. Most people’s taxes are going to be lower. So that’s something to consider as you plan, you know, for the future. And that’s a good segway into kind of our next discussion is, you know, the difference between tax planning and tax preparation. So Paul, for you, how would you separate those two things?
Paul Eikenberg: The preparation is just more mechanical. We’re taking what happened last year, plugging it in, selecting maybe a couple options, whether itemizing or standard deduction works best for you, should you make an IRA contribution up to April 15 that you didn’t make before the end of the year. But you know, that’s working in the past with a lot of things you can’t change. Tax planning is really taking a long-term strategy, kind of matching your personal goals with your tax strategy. So you know, if your goal is to pay off student loans now, you may not want to defer as much retirement income as somebody without that. It’s just kind of putting all those pieces together and, you know, when we look at planning, like a mid-year plan for somebody, we’re going to look at where you are now, have you had enough taxes withheld that you won’t have a surprise come April? And are you taking advantage of the HSAs? Are you definitely getting the matches in your IRA, in your retirement programs?
Tim Baker: Sure.
Paul Eikenberg: You know. If you have a business, rental property, are you doing everything you can? Are you planning out your expenses for those to mitigate your taxes as much as possible?
Tim Baker: Right. Yeah, and the way I look at prep versus planning, tax prep versus tax planning is the prep I think is the very reactive in nature. You’re like, ope, this is what happened for 2018. Let’s plug in the numbers and see what pops out. And sometimes, it’s a surprise, you get a refund. And sometimes, it’s where you’re writing Uncle Sam a check. And that can’t be fun.
Paul Eikenberg: I know from preparing a lot of taxes that the most painful thing is to be doing your taxes, waiting and being surprised with a big tax bill instead of a small refund you were expecting.
Tim Baker: Yeah, so maybe the approach we take is maybe self-preservation too because it’s tough to sit across the table and say, ‘Hey, you owe a lot of taxes.’ So obviously, what we’re trying to do from a tax planning perspective is get out in front of it, be proactive, and actually, you know, don’t let really the tax situation control you. You’re controlling your — whether it’s, like you said, deferring the taxes or avoiding the taxes, whatever that looks like.
Paul Eikenberg: If you’re proactive, you have a lot more options.
Tim Baker: Yes. Yeah. And for some people, you know, we talk about having funds set aside, whether it’s for home maintenance, emergency fund, a vacation fund, a lot of people don’t have a tax bill fund that they can just write a check and say, ‘Here you go, Uncle Sam. I didn’t pay you enough over the year, so here’s a sum of money.’ So that definitely could be painful. So Paul, let’s break down. You kind of talked through it a little bit, but when you sit down and you do a tax review with a client, what does that look like? How does that play out?
Paul Eikenberg: Let’s say we’re doing one for you now. You know, what I’d want to see is the most recent paycheck stubs. You know, we’d want to look at your last year tax return, and we’d really take your payroll statement and look at where you’re earning are, what type of retirement program you’re in, what other type of health insurance — are you pre-tax, HSAs — and project all the contributions through the end of the year for earnings and withholding, withholding taxes, and pre-tax contributions. From there, kind of review the tax return from last year, look for other sorts of income, deductions, project those, and then we’d sit down for a half hour conference and kind of go over the assumptions that I make projecting your situation through the end of the year, be sure that if you had capital gains last year, rental income, any of those other type of items, that we’re working on the proper assumptions.
Tim Baker: Right.
Paul Eikenberg: You know, are there estimated taxes or anything we’re missing that you’ve already paid Uncle Sam. And from there, we kind of project what we expect your tax bill to be, what your withholding’s going to be, if nothing changes, are you going to have a refund or owe money? And then we kind of walk through your options. To me, the HSAs are a great tool. Everybody should be getting their matching retirement, whether that’s pre-tax or a Roth 401k. If your employer’s matching it, that’s something you want to be sure you’re taking advantage of. And we’d kind of walk through your options of is there anything you should be doing to mitigate the taxes? Have you had too much withheld? Should you lower it? Have you had not enough withheld? Do you need to increase it? You know, are you going to be subject to penalties if nothing changes? Maybe you need to make an estimated tax payment. So there are a lot of things we look at.
Tim Baker: Yeah, and it’s great stuff. What I really like about kind of your review is that, you know, you take the pay stub — and it’s funny because when I used to work for a company, I would get paid with a paper check, I’d rip the check off, I’d deposit it, and I’d throw the pay stub on a pile. And I’d never really look at it. But actually, there’s a lot of good information, a lot of good nuggets on the pay stub about what you’re actually paying into. And it could be your retirement fund or long-term disability or whatever that is. And what I really like about your system is, you know, you use that information to kind of set up where we’ve been throughout the year and then extrapolate that forward to where we expect you to be. And what I like is is that you generally say, ‘Hey, if nothing changes, you’re going to owe $2,000. Or you’re going to get back $2,000.’ You’re going to be basically equal. You won’t owe or get anything back.’ And then if there is an imbalance, then we kind of discuss some of the levers that we can pull. So you know, you mentioned the HSA, increasing a contribution into your 401k, whatever those things are. And I think another one that probably we could talk about is just, you know, changes to your payroll withholding, the W4 form. A lot of people, when you begin a new job, you fill out the W4, and you don’t really look at it. But that W4 form basically dictates to your employer how much tax should be withheld from your paycheck. And then if you owe more taxes than what is withheld, then that’s when you actually have to write a check to Uncle Sam. So it’s kind of important to really understand that form itself and what that does. And sometimes just changing that is one of the levers that we pull. So instead of paying at the end of the year, you just pay a little bit more throughout the course of the year. So these are I think levers that I think are important to look at and go through and be able to, again, be more proactive in your tax situation than just say, ‘Well, this is what happened last year. Cross my fingers, hopefully I don’t get any surprises,’ and go from there. So Paul, are you still doing the reviews for this year? I know we’re into October. What does that look like?
Paul Eikenberg: Yeah, we’ll probably continue doing them until the Thanksgiving holiday is the plan right now.
Tim Baker: OK. So I think, you know, for listeners out there, if you’re interested, some people, you know, really enjoy to do a great job of analyzing your own tax situation. But if you’re not one of them, and you can think of a million other things to do to spend your time, you know, we can definitely help. Paul can definitely help. I think he does a great job with my clients. So you know, if you’re interested, sign up for the Script Financial tax review, and it basically includes a lot of the things we talked about, you know, analyzing your current pay stubs, you know, doing an income projection, you know, for the rest of the year, reviewing last year’s returns to see if there’s any discrepancy. So you know, if there’s big changes like you got married, you bought a house, you had a baby, those are going to affect, you know, obviously your tax situation. And at the end of the review, really to project out kind of your year-end tax status. And with that, basically Paul delivers that in a 30-minute video conference where, again, you review all the assumptions and projections and kind of go over the steps that you need to take to kind of, you know, pull the levers and say, ‘If we want to get money, this is what we would do. If we want to not owe the government money, this is what you should do.’ And I think it’s of great value. So normally, a tax review like this, it would be priced at $99. Between now and Nov. 20, so this episode will be released on Oct. 18, so about a month, we’re running basically a promo for 20% off. So that just brings it down to $79. So if you go to YourFinancialPharmacist.com/tax and use the coupon code YFP, you’ll get that 20% off the $100 price. So it’s YourFinancialPharmacist.com/tax to get that — to sign up for the review and use the coupon code YFP for the discount. So Paul, you know, good stuff today. We kind of talked about changes to the 2018 upcoming tax year, changes to the 1040, it looks like we’ve added some numeric schedules, the standard deduction has increased, and we talked about some of the changes with, you know, with the new tax code with deductions and credits, and then really what you can do for your own tax situation to kind of get in front of the ball and make sure that you have really no surprises for, you know, this upcoming tax season. So Paul, anything else to add before we kind of sign off here for the day?
Paul Eikenberg: Yeah, one more thing to think about that we think we’re going to see a trend with this year with the standard deduction going up. In the past, people have tried to pay their property taxes on December 31, made charitable donations so that they got those in in time to be deductible in the current year. I think the trend’s going to be that a lot of the people will be doubling up on those. They’ll be looking at their tax situation and instead of making donations in 2018, they may make twice as many in 2019. And think about your property taxes as to whether it makes sense — like in Maryland, you’d pay your property taxes from July to July and you have an option of breaking it up. So it may make sense to pay more in one year and then take the standard — alternate your itemized deduction one year to the standard deduction the next year. So that is one of the things we anticipate being a good strategy for quite a few people out there.
Tim Baker: Yeah, and I think just a tip in kind of the direction of doing some proper planning and being as efficient with your tax situation as you can. Like I said, if the listeners are interested in working with Paul and doing a tax review, it’s YourFinancialPharmacist.com/tax and use the coupon code YFP for the 20% discount. So Paul, good stuff today. Thanks for coming on the podcast, really appreciate it. And to the listeners, thanks again for listening. And we’ll catch you next time.
Carissa Explains It All: How One Pharmacist is Accelerating Her Financial Goals Through Rodan & Fields
On Episode 069 of the Your Financial Pharmacist Podcast, Tim Church, YFP Team Member, hosts another edition of the Side Hustle Series featuring an interview with Dr. Crissy Mahl, a pharmacist and entrepreneur from Yuma, Arizona. Crissy talks about her pharmacy career path and how she became interested in entrepreneurship. She started working for Rodan and Fields and has created a significant side income.
In the Side Hustle Series, Tim talks about ways you can create additional streams of income to reach your financial goals faster and highlights pharmacists who are doing this to help you get inspired.
About Today’s Guest
Crissy graduated with her Doctor of Pharmacy from the University of Findlay in 2012. After living in Ohio all her life, she moved to Yuma, Arizona and completed a PGY1 residency. She has a passion for acute care and hospital pharmacy and is now is one of her hospital’s biggest influencers and leaders. She also has a passion for empowering and inspiring others which is what lead her to become an entrepreneur.
Summary of Episode
On this episode, Dr. Crissy Mahl speaks about her pharmacy career and urge to travel which ultimately moved her from Ohio, where she lived all of her life, to Yuma, Arizona. She carries a passion for acute care and hospital pharmacy and currently works in a position where she is able to help create pharmacy jobs. To supplement her pharmacy income, Chrissy took on an entrepreneurial side hustle and started a business selling Rodan & Fields. In doing this, she’s learned how to fit her side hustle in with her full-time pharmacy career, allowing her to make larger payments on her debt and save for the future.
Crissy says that there are certain personality traits and characteristics that aid to the success this type of work. Her leadership skills as a preceptor to PGY1 students and Family Med residents matched with her personality and work ethic allow her to help navigate and balance her busy schedule. Crissy manages her time wisely, prioritizes well, and is incredibly focused on her business. She stopped watching television and even uses the “spare” time she has while walking or on an elevator to send emails and text messages that help fuel her business. By hustling around the clock, she has a goal set to retire by age 39.
Tim Church: Crissy, thank you so much for taking the time to come on the show and for being part of this side hustle edition.
Carissa Mahl: Thank you for having me, Tim. I’ve never done anything like this before, so I’m pretty excited about it.
Tim Church: Awesome. Well, we’re glad to have you on. And I was really excited when you reached out to me on LinkedIn to inquire about Your Financial Pharmacist and just to talk about some of the ways that you’ve been working towards financial freedom.
Crissy Mahl: Absolutely. Honestly, I felt like your page was everything that I wish that I knew when I was in pharmacy school. Honestly, there’s so much when it comes to finances and student loans and all this other stuff, and it’s super overwhelming. And it’s even more overwhelming when you come out of school and you’re not really sure what way to turn. And so this side hustle topic is very dear to my heart, and I think it’s something important for people to consider and kind of learn about too.
Tim Church: Yeah, I couldn’t agree more. I thought it was really cool when we were talking that we actually share a similar background in that we grew up in Ohio, lived there our whole life, and then we said, hey, let’s go ahead and take off to a state pretty far away and really kind of go from there. So I want to — can you share a little bit about how that happened and why you made such a big move?
Crissy Mahl: Absolutely. So I lived in Ohio all my life, moved to Yuma, Arizona about a little over five years now. So I went to pharmacy school in Ohio, the whole nine yards. I didn’t move until a few months ago after I had graduated pharmacy school. Ohio is where my whole family resides. It’s literally the only thing I know, honestly, because we didn’t have a lot of money when I was growing up. So traveling really wasn’t something that I had ever done before, you know, venturing outside of my little heart of Ohio State was a little bit nerve-wracking, but it was something that I felt I really needed just, you know, for my own push to get outside my comfort zone. And that’s exactly what happened. I was definitely outside my comfort zone, but honestly, I love it here in Ohio — or in Arizona! And I mean, the weather is awesome. I am constantly cold, all the time, so Ohio was really not my jam when you get like nine months of winter. So yeah, this heat is — this is my jam.
Tim Church: I hear you, I hear you. That’s how I got — I moved down to Florida, and for me, it was kind of a temporary situation. But after I was here, it was kind of like, you know, this is it. This is where I want to be, at least for awhile.
Crissy Mahl: Yeah.
Tim Church: So what was the main driver for you to get out there? Was it for a particular job? Or did you know people out in Arizona?
Crissy Mahl: You know, to be honest with you, I had always felt this inner — I don’t know what you would call it — this calling, if you will, to just explore the world. And like I said, I’d never really been able to travel when I was younger or even in school, to be honest with you. In pharmacy school, I had an internship, I worked all the time, so I really didn’t travel even while in pharmacy school. But I always had this inner feeling of just wanting to explore the world and get out there and try something new. And when I had first graduated pharmacy school, I actually had applied for pharmacy positions in both Ohio and Arizona. And I just kind of picked Arizona because I’d been to Orlando once before in my life, and my hair doesn’t quite agree with humidity, so I knew that humidity couldn’t be a thing in my life. And so I was like, oh sure, yeah, Arizona. Like their licensure requirements are similar to Ohio and I could totally pull off getting a license there if I needed to. Kind of a long story short, I actually got a job at a hospital where I had done a lot of my last year of pharmacy school rotations at. And I felt very comfortable with it. I was doing something that, you know, I thought that I wanted to do, which was work as a pharmacist at a acute care hospital. But honestly, I was a little bit scared because I felt like I was too comfortable with what I was doing, and I had only worked there for a couple of months. And it kind of gave me this feeling of like is this really it? Like you know, is this the challenge? Is this what I’m going to do my whole life? And you know, I don’t know. I’m kind of weird in the fact that I like constant change. And I don’t do well with monotony. So I actually had went to Midyear in Vegas that year and met up — just to say hey — to the director of pharmacy and the assistant director of pharmacy at a hospital in Arizona that I had done a phone interview for. And I don’t know if you and anybody listening to this right now have encountered this situation, but I feel like whenever you’re applying for a pharmacy position, they want to fill it pretty much immediately. So that was kind of a problem I came across while I was putting in applications, just before actually graduating is that they wanted to fill the position quickly. And so a lot of the positions I had applied for were already taken by the time I graduated. And I said hey to them, and they were like, “You know what? We have a position, and we want to bring you out to Arizona just to see the place and have the experience.” And I was like, “Oh no, I’m fine. I have a job, it’s cool.” And they were like, “Well, we’ll bring you out and you can see what it’s like.” And I was like, “You know, actually, I’m thinking about going back and doing a residency. I feel a little bit too comfortable with what I’m doing, and I really want to get more clinical.” Long story short, they flew me out to Yuma, Arizona, in the month of February where it’s like hell froze over in Ohio and gorgeous in Yuma, Arizona. It’s like 70 degrees during the day and then in the morning, it’s like 50. Like it’s perfect. And so they probably set it up purposely that way. But essentially, I did my residency there for a year in Yuma, Arizona. Yes, I moved to Yuma, Arizona, after going to Midyear and meeting them. And ended up staying on as a pharmacist after residency.
Tim Church: Crissy, was that a tough transition between working as a pharmacist and then actually going back to do a residency?
Crissy Mahl: You know, honestly, it was so much easier. I feel like the first year that you have after graduating and you are a licensed pharmacist is when you learn so much, regardless of if you’re doing a residency or you’re going straight into a new position as a staff or clinical pharmacist. I just learned so much because you — I mean, I guess you do those things ishish to a degree in your last year of school, you know, during your rotations. But when you have to sign your name to all these things and you are now an independent, licensed pharmacist, there’s like this heavy weight on you to constantly overthink everything and all this stuff. But to be honest, I felt like doing a full year as a pharmacist before going into residency — while I understand how unconventional that is — it actually almost prepared me even more for the residency, giving me more of an advantage because honestly, I felt like I was actually training some of the pharmacists that I ended up being a resident under. Not to like an extreme degree, but I was able to actually like cover vacations for people. It was kind of weird. But I’m glad that I did it, and I’m glad that I went back.
Tim Church: I mean, I think that’s just, that’s a cool story because you don’t hear too many pharmacists who are actually working, practicing as a pharmacist and decide, you know what? I am going to go back and do that residency. And so I just really commend you for doing that because I think that when you’re set in a position, as you said, you kind of get comfortable to some degree. And for some people, that’s not the way that they like to feel and they like the challenge of learning new things.
Crissy Mahl: Yeah.
Tim Church: And I totally get that you were much more prepared because you had that experience under your belt. But one of the things that often comes up — and I’ve heard some of this from my colleagues is that you go from making a full pharmacist’s salary, and now you’re taking a huge pay cut for a year. Was that tough having to do that?
Crissy Mahl: Honestly, it wasn’t too terribly tough. And that doesn’t — probably doesn’t make a whole lot of sense, but I will start off by saying that I make much more working in Yuma, Arizona, than I did in Sandusky, Ohio, per hour. So the move alone pay difference, you know, there was that. Also, I had a lot of perks going to the residency here in Yuma, Arizona. They actually have — the hospital owns an apartment complex. And so I was able to stay in their apartment complex for the full year of my residency. And I think I paid like $300 a month in rent, which was like squadoosh. It’s like nothing. And then our residency here in Yuma, Arizona, actually compensated residents a lot more than almost any other residency I looked at. I can’t remember off the top of my head right now what it was, but honestly, I think it was not quite — it wasn’t even half of what I was making as a pharmacist in Ohio. Like it was more than half. And you know, I just — it’s one of those things where if you’ve ever just made a serious commitment in your life, whether it’s I’m going to pharmacy school and you get that acceptance letter and you just like, you’re all in and you are going to make this work and you’re going to do this. And you’re going to see it out until the end, it was something like that. I knew that residency was something that I needed to do if I wanted to be able to work in the position that I wanted. And I knew I had to just go all in, regardless. And you know, I was already kind of used to being a student and having no money, so you know, the one year that I actually was a pharmacist and making a pharmacist salary, it was kind of like a vacation, if you will. And then it was like, OK, go back to student mode.
Tim Church: Did you have to make any sacrifices for that year during the residency? You know, compared to the previous year when you were making the full salary?
Crissy Mahl: You know, I did share wifi with your neighbor. So the wifi was a little bit horrible. I didn’t update my phone every year like I was used to. Like if it fell on that year, I didn’t do it. Actually, the year that I moved to Arizona and was a resident, I just, I did a lot of quick trips to like Sedona and Page and just stayed at cheap hotels. So I mean, I totally made it work. Like I said, it’s like student living. You just know that you can’t go all out with vacations and stuff. And honestly, I feel like our compensation wasn’t too terribly bad. So I felt like I didn’t have to make too many compromises when it came to, you know, the normalcies of life as far as finances.
Tim Church: Sure. So talk about a little bit about your current position and what you’re doing at your full-time job.
Crissy Mahl: Sure. OK. So right now, I am a clinical pharmacist at a 400-bed hospital here in Yuma, Arizona. I literally do a little bit of everything, and most of that is due to the fact that I did my residency here. So as a PGY1 resident, I every month did a different rotation, including oncology, ICU, internal med, infectious disease, like you name it. And so literally, I mean the goal at the end of any residency, in my opinion, should be that once graduated, you should be able to fit in any of those roles confidently. And that’s what I was able to do. So they kind of fill me into almost any position in the hospital, in and outside of the hospital, that is needed. And I’ve actually created a lot of the positions that we have here at the hospital now, including our Tower 2, which is our cardiac unit. We now have a pharmacist position there, so I helped create that. I also helped create an additional staffing position for the evening shift. And let’s see — now it’s been almost two months — about two months ago I helped, me and my coworker created an IV room pharmacist position. And I was actually a IV technician back in my day, so I kind of already know 7.7 and compounding chemo and things like that. So today, I work in the ICU. And yesterday, I was the quality and safety pharmacist.
Tim Church: You’re doing it all.
Crissy Mahl: I know. When I was mentioning that I get a little bit of pharmacy ADD and you know, I don’t like monotony, this is pretty much like, this is pretty much best case scenario as far as getting to dabble into a little bit of everything. And you know, we’re talking now about starting a ER pharmacist position. And actually, our ER here in Yuma is the busiest ER in all of Arizona. So the fact that we don’t have a pharmacist down there yet is pretty surprising to me. So within the next couple of months, I’ll be rolling that out. And I’m super excited about that.
Tim Church: Wow, well you are just doing everything there. And you’re doing a lot. And it’s pretty cool because it sounds like you’re taking on a leadership role as well and helping to get these positions created and just advocating for pharmacy in the hospital.
Crissy Mahl: Yeah, yeah. I mean, I guess I could consider myself — I don’t know if you’re like a Game of Thrones guru or anything — but I’m kind of like Tyrion. I don’t necessarily rule any kingdoms, if you will. But I’m kind of like the hand of the kings and give advice and help make things happen, which is kind of more my passion rather than being a boss, if you will.
Tim Church: And would you say that your going and doing the residency, do you feel that that was critical to be able to do a lot of what you’re doing today?
Crissy Mahl: You know, I do because one of the things that I really tried to make sure that I did during my residency was have experiences that I knew I wouldn’t be able to get as a staffing pharmacist. So for example, when I was doing my ICU rotation as a resident, I made sure that I asked to sit in on a open-heart surgery and then also be in the room when the patient comes up to the ICU and how the nurse handles all of the drips and you know, patient assessment scales and everything. I also followed respiratory therapy and how they adjust ventilation settings. And I even got to sit in on a patient who had a Passy Muir valve put on, which was pretty interesting and gross at the same time. I am so glad that people think that respiratory therapy is the bomb because I cannot handle that stuff. So I really feel like I got to not just get an angle of what a pharmacist does in a hospital setting, clinically, but also what the team approach and what they bring to patient care so that I can understand the process in a holistic manner rather than just constantly looking at it from my angle.
Tim Church: Sure, sure. I think that’s awesome, and thank you for sharing that story and just kind of how you got into that role with the residency. So before we kind of move into your side hustles, I want to ask you one more question. And that is, you know, in our profession, there seems to be a lot of negativity — and I know it depends on the job setting — but a lot of negativity around job satisfaction, just the profession. So I want to know, what do you like about being a pharmacist and about your job in general?
Crissy Mahl: Sure. So honestly, pharmacy wasn’t something that was on my radar when I was 5 years. When I was 5, I wanted to be a tornado chaser. When I was 8, I wanted to be an astronaut. And when I was 10, I wanted to be a veterinarian. You know, I don’t know if it’s because I just never really like knew anything pharmacy existed, but it got into my radar when I was in high school and had to sit down and be realistic about what a career required as far as schooling goes and how much to expect to get paid at that job. And for me, going to school for six years — and now they have the fast-track programs and everything where you can get done even sooner — but more or less, six years, and it paid $100,000+ per year, depending on where you work and what you do, obviously. But you know, I feel like there were other professions at the university that I went to. They obviously paid a little bit less than I did to go to that school because we had that College of Pharmacy tuition tacked on, but you know, at least I feel like I’m not in a position where it’s 100% impossible for me to pay off my student loans if I had only had my pharmacy job, but also pharmacy is growing in a lot of different ways, and one of the biggest things is outpatient services, so you know, oncology is huge right now. Anticoagulation, hypertension, diabetes, all of these clinics, they want to have pharmacy involvement. It’s big right now. And I have a hard time believing that we’re ever going to necessarily run out of different things to do. I know that there has been a concern regarding how many pharmacists are graduating every year and how many positions are available between those graduates and people transitioning in and out of jobs, but honestly, if you keep yourself competitive in a way of always learning and just kind of — I don’t know — having a personality where you are open and willing to work and go above and beyond, then I don’t know that you’d ever have a problem finding a job. You may have to, you know, go outside your comfort zone as far as location — that’s definitely something that I’ve seen, especially coming out of Ohio where we have — oh my gosh, I don’t even know how many.
Tim Church: Seven schools. There’s seven schools now, the last I checked, that’s how many. I don’t think there’s eight yet.
Crissy Mahl: Right. Yeah. And so you know, I remember it being rather competitive trying to find a hospital position in Ohio when I graduated. So I can only imagine how much harder it is now, especially if they’re doing any kind of cuts in the way of hospitals and retail and all that.
Tim Church: I think you’re definitely right, though, that it is competitive and that there are certain markets that are saturated, and there is concern with the number of pharmacy schools. But I think that’s even more incentive just to always keep yourself ahead of the curve in learning new skills and really making yourself incredibly valuable to the organization, the institution that you work for but also learning different ways on how you can provide value in patient care. So I think you really hit that. And I think it will be important too to see as there’s a lot of legislation going through to get provider status, to get more opportunities for pharmacists to bill, so that will be interesting to see kind of how that plays off. Well, let’s switch gears a little bit. So you’re working as a pharmacist, you’re creating all these positions, you’re loving it after you got through your PGY1 residency. How do you transition or how did you say, ‘You know what, I’m making pretty good money. I’m working as a pharmacist. But I’m looking for something else.’ What was your main motivation for pursuing a side hustle?
Crissy Mahl: That’s a really good question. So to be honest with you, my very first side hustle was something that was brought up to me by a coworker. You know, he had mentioned that he worked at a physical rehab hospital where he hooked up a couple of hours every weekend or holiday. It was super chill, he did patient interaction. And it was pretty low-key. And honestly, I wasn’t looking for anything super intense. I was just in my brain thinking, you know what? I could use a couple extra bucks, you know, like thousands of dollars every month going towards student loans and just not really seeing that number go down very much was a little bit depressing. So I was like, OK, yeah, like maybe I could do that. So I actually, that’s why I got into it. My very first side hustle was working as a PRN pharmacist at a local physical rehab hospital. And you know, honestly, at first, it was super chill. I knew half of the pharmacists who were working there, so it was easy and familiar. It was different than what I was already doing because it was a outpatient facility with a different workflow, so my job was essentially to literally face-to-face talk with patients about their home medications and what they were going to get discharged on and make sure that they have the education that they need and whatever paperwork is helpful to them in understanding, you know, what the plan of care is once they go home. So it felt very purposeful and, like I said, it was not very stressful. So it was just kind of nice to make that extra money.
Tim Church: Sure. How many hours were you working there? What was typical when you were doing that side hustle?
Crissy Mahl: Typically, in the beginning, it was around probably six hours, which wasn’t bad because I got to sleep in, you know. Sleeping in is until like 7 o’clock. And then I would go in sometime around 9 o’clock and leave sometime around 3:30 and then, you know, maybe catch a movie or something with some friends afterward. But the problem came when we doubled in size and they were doing cuts left and right. Like they got rid of our HR department, they actually let go the technician that we had for — he worked there for more than 10 years. It was heartbreaking. And then — so literally I was doing technician, which means I was packaging medications, I was doing outdates, I was doing narcotic inventory, all these like things that are just not fun for me. And not only was I in charge of doing that, but I was also now taking care of twice as many patients. And the facility was now accepting patients at pretty much all hours of the day. So I would literally — I remember one time, I got a phone call from a physician — or no, it was from the nurse, bless her heart. She caught me at a bad time. But it was like 11:30 at night, and they needed Levaquin. And I’m just like, are you serious? You’re going to make me get up and go in and get you a Levaquin? When they probably already had a dose before they left the hospital that morning. And in that moment, I was just like, oh my gosh, I don’t want to do this anymore. Like, I was literally — I probably had one or — no, that’s a lie. I probably had two or three days off each month between those two jobs. And at the end, I was probably working 10- or 12-hour shifts every time I went in there. So it went from chill, six hours, you know, doing my thing to over the course of a year or two, now double the work, 10 to 12-hour shifts, getting yelled at for putting in so many hours and just stress, like ugh. I was crabby. Nobody liked me.
Tim Church: So it started out like it was a pretty good position starting out, but then it sounds like with all the extra work and the stress that it wasn’t worth the extra money that you were making in order to kind of accelerate the goals that you were looking at.
Crissy Mahl: Exactly. Yeah.
Tim Church: So how long did you work at that facility?
Crissy Mahl: I am not good at quitting. So I stayed at that facility longer than I wanted to, to be honest. I was there for probably close to three years. And it was probably halfway through there where I actually wanted to quit. And I didn’t have necessarily a backup plan because I was already used to that double income and couldn’t really afford, based on my plan for paying things off loan-wise, I couldn’t afford to just dip out. And so that’s kind of when I got into my second side hustle.
Tim Church: Yeah, so talk a little bit about that.
Crissy Mahl: So my second side hustle was something completely unexpected. Honestly, so I got into it because I wanted an eye cream. I was 29 years old, almost turning 30, and I wanted an eye cream. And I was talking with — this is going to sound so ridiculous — I was talking with a friend of a friend who was also a pharmacist. She’s from Arizona and lives in Wisconsin, and she was talking to me about, you know, what this particular side hustle did for her. And for her, she really, really wanted to be present for her kids at home. And she worked at a retail pharmacy location, and I know that the hours can be long and exhausting and just draining overall in retail in particular, and in my opinion. Maybe it’s just because retail isn’t my jam and it stressed me out more than maybe other people. But she was actually able to go down to only working two days a week with this side hustle. And so that impressed me, and I was like, I know how much a pharmacist makes, and you’re telling me that this side hustle is bringing in enough money that you can go down to working two days a week? That’s intriguing. So I joined the business with her. And within a couple of months, I think it was like less than three months, I was able to make back my initial investment in the business. After that, it was gains. And by, again, I suck at the quitting thing. So I could have quit at the rehab hospital a lot sooner than I did because I was actually to make more with this side hustle, with this business, after only five months than I made at the rehab hospital. So I was making more with this business than I was at the rehab hospital, and I was able to do it from home.
Tim Church: So talk a little bit about the actual business that you’re working for and what you’re actually doing.
Crissy Mahl: Awesome. I would love to. OK, so I am essentially paid to have conversations with people about the No. 1 skincare brand in North America. So I talk with people about their skincare concerns, and I also talk with people about the business opportunity. And I make a commission off of the skincare that people purchase through me, and I also make a commission off of the team that I build under me. So with this particular company, there are certain standards. You can’t just make money by sitting back and not doing anything. You actually have to be physically present in the business, working and like I said, building and coaching your team. Skincare isn’t necessarily something I was passionate about at all. Like literally, you’re talking to the chick who used a Neutrogena face makeup cloth before going to bed every night, and that’s it. Like that’s all my skincare routine included. And so once I got into this, it was kind of opening a whole new door of, you know, what skincare actually is and people started noticing my skin just after a couple of weeks. And that’s really when I saw the value in working with this particular company.
Tim Church: And what is the company that you’re working for, Chrissy? Crissy Mahl: It’s called Rodan & Fields. Have you ever heard of it?
Tim Church: I have heard of that. And is it slang within the biz or is just on the street as R&F, also known as?
Crissy Mahl: No, R&F is like a thing. It’s their logo, it’s their — yeah.
Tim Church: OK.
Crissy Mahl: So that’s legit.
Tim Church: OK. I just didn’t know if you guys typically use that or you use the full name because I’ve kind of heard it both ways.
Crissy Mahl: Sure. So usually if somebody, if I’m bringing it up for the first time, I usually say Rodan & Fields because most people if I just say R&F are kind of like what? But sometimes, people will say, ‘Oh yeah, that sounds familiar. Tell me more.’
Tim Church: Right.
Crissy Mahl: And so that kind of opens up the door to me chatting with them.
Tim Church: So when you were talking about the different ways that you’re serving people and getting additional income, where is most of the income coming from? Is it from the products that you sell? Or is it from getting other people to work for the company?
Crissy Mahl: Sure. So to be honest with you, most of my personal paycheck comes from the products, the skincare products that I sell. However, with this business, that is not the same story for everybody. I know people who really were only interested in building a team. And so they made all their money through commissions on their team’s sales instead of, you know, necessarily selling product themselves to clients. So you can really work it either way. And I’m currently trying to find a balance between the two because I was very comfortable with the talking with people about the products in the beginning rather than the business. And so that’s kind of where I started. And the commission that we get for the products is always retail profit. And then after that, based on your position in the company, you can make, you know, 30%+ commission from product. As far as team-building, it again depends on your promotion within the company, but essentially, you can make 5% of your team’s sales up to six generations below you. So that’s where your residual income comes in. And that’s how people can make six, seven figures doing this business and literally retire them and their spouses in — I think most people like somewhere between like four and nine years. So it’s not a get-rich-quick scheme, it definitely takes work, like anything other business building would. You definitely have to get uncomfortable and push yourself to do things that you normally wouldn’t do because entrepreneurship isn’t something that I ever saw myself doing necessarily. So this is definitely outside my comfort zone, but it’s really been just so rewarding because it’s so different than pharmacy. So much more different than pharmacy.
Tim Church: Was that hard, making that transition into something completely different and kind of shifting your mindset?
Crissy Mahl: You know, it wasn’t that much. It sounds really weird, but I think that because of my natural want to help other people make something extraordinary, whether that’s a pharmacy position or building their own business, that kind of ties in together. And then also, I kind of like to have things that I can call my own, whether that’s a project or whatever, whatever it is. So this thing that is my own is my business. And so I have — give or take — full control over where my business goes. If I put a lot of work into it, I’m going to see a lot of gain from it. If I don’t put a lot of work into it, you know, it can slide backwards. So I have some control over it as far as that goes and that kind of give me a feeling of — I don’t know — safety, if you will.
Tim Church: And I wanted to ask you, Chrissy, because a lot of these business models, sometimes there’s negative connotations with them. And there’s a lot of stories out there of people who are very unsuccessful actually when they’re in these kind of businesses. But what would you say has led you for you to be successful in doing this? Because clearly, you’ve mentioned that it is bringing some additional income and is helping you achieve your financial goals quicker so that you were able to really quit the rehab facility position that you had.
Crissy Mahl: Sure. Yes. So my story in this business is unique to me. I don’t think I’ve ever come across two people with the same story in this business. Some people go super fast, some people are a little slower. You know, some people literally don’t do anything. And honestly, it kind of depends on your mindset — and when I say kind of, it’s like it depends completely on your mindset. So are you willing to do the uncomfortable? Are you willing to put in the work? Are you willing to be coachable? You know, things like that. And honestly, pharmacists have a bit of an edge in this kind of business because we’re already viewed as a trusted resource to people. And so for me, I mean, people would — before I even joined this business, people would come to me all the time, specifically to me, and say, ‘I have this patient. I need your help. What should I do?’ Or, ‘I’m going to Spain, and I need to know what restaurant to go to. Which one do I go to?’ You know, they look to me because they trust my opinion is going to be honest and is going to be helpful and accurate. And so, honestly, the relationship that you have with people in general and the, I guess the personal brand that you have on yourself does impact how well you’ll do in the business, especially in the beginning. So again, pharmacists having that trustworthy, you know, reputation kind of really puts you at a good spot because again, people are going to come to you with their problems. And they expect that whatever you tell them is going to be true and honest.
Tim Church: So besides just being a pharmacist, kind of being a trusted figure, are there any other skills or experiences that you’ve had in pharmacy school or just throughout your professional experience that have helped you be successful?
Crissy Mahl: You know, some of it I probably knew and had experienced throughout pharmacy, and I just didn’t realize it and it hit me more head-on in this kind of business. So for example, different personality types, different learning styles. Even though I am a preceptor to the PGY1 pharmacy residents that we have now as well as I help out with the family medicine residents that we have at the hospital here too, you know, everybody learns a different way. But when you are coaching somebody on how to utilize this system and how to run a business and what works for me, it doesn’t mean that they’re going to do what you tell them to do. And that part can be a little bit frustrating, and you just have to know that it’s going to happen. Like, there’s going to be somebody who wants to do it their way, and you have to just let it happen. There is that — I have encountered that negative connotation about, oh, you’re in direct sales, like what are you doing? And to be honest with you, their opinion doesn’t pay my bills. And if it did, then I would care. But it doesn’t, so I don’t. And you have to have that mentality to get through it because if you care too much about what other people think of you, and if you don’t have a place that you can go to reset your mind and bring you back to you, then you won’t get through it. You have to be able to say, again, ‘I’m all in on this. This is going to work for me. I will make this work. These are my goals. This is my timeline. You know, this is exactly what I want to do.’ And you have to kind of make yourself a plan. Like with pharmacy school, you know you’re going to be in school for six years. You plan it out. Year one, year two, year three, done. So with this, I’m like, OK, personally, my goal is to retire myself at the age of 39, which is a huge goal. It’s scary. It sounds audacious because it is. But you know, you have to believe in yourself enough to know that if you have the grit and the persistence, the coachability, you can literally do whatever you want with this business.
Tim Church: Have you ever considered leaving pharmacy and doing this full-time? Or does pharmacy still have something that’s very central to you?
Crissy Mahl: You know, I have thought about that, which is flipping crazy to think about, honestly, because it’s like, are you serious? Like you just went to school for six years and did a residency, and you’re telling me that you would be willing to drop it and do this business. Like are you nuts? But to be honest, like, once you find that thing that makes you, that fills all the holes from a perspective of career, you know, you kind of just have to go with it. And again, if you have a plan, and it’s a legitimate plan, and you’re moving along with it, it’s hard to turn down. Like if and when I hit that goal of, you know, matching my income as a pharmacist through this company, when I’m 39 years old, how could I not consider it, you know? Like when you have an e-commerce type business — I love to travel now. I don’t think I mentioned that. But instead of working in a pharmacy on holidays and weekend — like I still work holidays and weekends at the hospital because hospitals never close. But I travel so much now, so much. And it’s something, as I mentioned before in the beginning of our conversation, that I really, really, really, really, really wanted to do. I wanted to explore the world and just, you know, take in the cultures and take in scenery and experiences and with this business, I’m able to do that. And so I feel like I have such a better work-life balance, which is honestly pretty much anybody I know would love to have.
Tim Church: Well, that’s what I was going to ask you, Chrissy. I mean, it sounds like, you know, in order to be successful, obviously you have to actually do work. You can’t just sit back and expect to get this residual income that you’ve been. But how do you practically manage your side hustle with your full-time job and your personal life?
Crissy Mahl: Yes. So to be honest, it was really hard at first because I didn’t quit that rehab hospital position right away, you know. So I was literally working two jobs with 2-3 days off every month, in addition to this business. And honestly, it’s just having the focus and utilizing your time wisely. So literally, every nook and cranny that I had in my day, I was doing my business. So if — this is going to sound dangerous, and I don’t recommend that anyone does it — but if you’re walking down a really long hallway in a hospital, I would literally be sending text messages to people and catching up on my messages because, you know, my business is pretty much virtual for the most part, so that’s how I kind of kept up with that. Also, I stopped watching TV, except for Game of Thrones, you can’t take away that. But I stopped watching TV. And my other half, he loves watching TV. So I would literally still be in the same room as him, but I would have my computer in front of me, and I would be doing work. So you know, instead of being I guess nonproductive with my relaxing time, I was actually working my business. I stopped saying no to things that didn’t really benefit me in achieving my goals. So honestly, there’s always a baby shower, there’s always a birthday party, there’s always something going on. And unless there was a legitimate networking opportunity for me or it was, you know, a best friend or an immediate, really close family member, I said no. If I had work to do, then I did work. You know, like any other job, if you don’t get your work done, then it doesn’t get done, and there’s nobody else there to do it, so you have to make the time. I also stopped doing a lot of extra overtime at my full-time position, which now I guess isn’t so much of a problem because when I was first there, we were extremely understaffed, and I was doing a lot of overtime. But I don’t really do overtime anymore. I come home, and I work my business. I mean, also, not only like texting when I’m walking down the hall of the hospital, but you know, texting on the toilet is totally a thing. Just make things work. I was going to make this work. If I am sitting and eating, then I am sitting, eating and texting or emailing or having a conversation with somebody quickly over the phone. You can make it work. And that’s one of the reasons why I really loved this particular company’s business model setup, that it works for busy people. People who are in this particular company, I mean, they excel. And by excel, I mean they’re amazing. They’re like the top of their company amazing at their primary breadwinning position at their careers. It’s pretty astounding because I just got back from New Orleans at our convention, and just seeing all these amazing people and what they’re accomplished, it’s pretty cool that they were able to accomplish something so extraordinary with a business, you know, when they had so much else going on.
Tim Church: Wow, so you basically, you’re not wasting any time going all in in order to really drive this income and get to that goal. But I think that’s cool that you’ve cut out TV and you’re really prioritizing all the things that are really important to you. And I think that’s something that I’ve even struggled with in my side hustles is trying to figure out, you know, what is the process or system that works?
Crissy Mahl: Yeah.
Tim Church: And one of the things that I thought was kind of interesting when I read in this book called, “The One Thing,” by Gary Keller and Jay Papasan is talking about that whole work-life balance and how it’s really not the best way to view something that you actually should do. And I thought that just kind of blew my mind, like when they talked about that because it was basically saying that if you want to be completely balanced and equal in what you’re doing, then that really is how you’re going to be mediocre, that it actually leads to mediocrity. But rather what the reality is is that to be successful in something, sometimes you have to go all in. You have to be willing to do things that are uncomfortable to sacrifice some of the time that might be spending with family members or friends but then kind of shifting back at other times or different periods or seasons and kind of rebalance that in that sense. So it kind of sounds like that’s what it’s taken for you in order to do that. I mean, would that be something that’s fair to say?
Crissy Mahl: Yeah. I would say that’s totally fair to say. And actually, after you mentioned that, I remember reading this quote, and honestly, I can’t remember where I saw it or whose quote it was, but it said something to the effect of, if you are not obsessed with the process of what you’re doing, then you will be average. And it’s kind of true. Like I know people who are literally obsessed — and I call them nerds — with pharmacy. Like literally, I know a guy who on his honeymoon in Hawaii, read like I think it was a BCPS book or something. I’m like, are you flipping serious? Like you’re sitting on a beach in Hawaii, and you’re reading.
Tim Church: Was he still married after that?
Crissy Mahl: Yes. Oh my gosh.
Tim Church: Oh, OK.
Crissy Mahl: Right? She knew what she was getting into. But you know what I mean, and he is like somebody that I can ask any pharmacy question to, and he knows the answer right off the top of his head. I mean, he could probably literally tell me word-for-word, oh, well that study called blah blah blah said on page 3 that this that and the other thing. I’m like, oh my God, what? But if you’re obsessed with what you’re doing, like, you don’t even think about it. You just do it. And it shows, like you can tell when somebody is really into what they’re doing.
Tim Church: I totally agree. Well, Crissy, thank you so much again for coming on the show, talking about your story and your side hustles and some of your goals and aspirations. I think people are going to be better off hearing that, and hopefully that inspires some people to kind of pursue some of the things that they’ve always wanted to do or just really look at that. So again, we thank you. And if somebody wants to reach out to you or learn more about what you’re doing, how can they do that?
Crissy Mahl: Yes, so the best way to get ahold of me honestly is email. Email works perfectly, and you can reach me at [email protected]. So it’s Crissy Mahl at gmail.com. And I’d be more than happy to send you some information about what it is that this company is about, what I’m doing. Honestly, I’m not in the business to convince anybody of anything because I wouldn’t want anybody to do this business if it wasn’t right for them. And I want you to pick the side hustle that fits into your life and your family life best and what you’re trying to pursue.
Tim Church: Thank you, Crissy.
Crissy Mahl: Absolutely. Thank you so much for having me, Tim. This was so fun.
On Episode 068 of the Your Financial Pharmacist Podcast, Tim Ulbrich, Founder of Your Financial Pharmacist, and Tim Baker, YFP Team Member and owner ofScript Financial, discuss the pros and cons ofDave Ramsey’s Baby Steps and how they apply to the pharmacy professional.
Summary of Episode
Tim Ulbrich and Tim Baker discuss Dave Ramsey’s baby steps in this week’s episode by sharing their own experiences and answering questions from the YFP community. Dave Ramsey’s 7 steps include:
Step 1 = Save $1,000 for a starter emergency fund
Step 2 = Pay of all debt using the debt snowball
Step 3 = Save up 3-6 months of expenses in savings
Step 4 = Invest 15% of household income into Roth IRAs and pre-tax retirement accounts
Step 5 = Save for kids college
Step 6 = Pay off home early
Step 7 = Build wealth and give
Overall, Tim and Tim feel that Dave Ramsey’s baby steps lay out are a great framework for an individual or family to follow and then iterate to their own needs. However, these steps aren’t a financial plan and shouldn’t be used solely as one. There are so many scenarios and possible financial goals and plans that differ from person to person. For some, it might make more sense to follow the steps in a different order or to adjust the amount of savings or contribution toward retirement. Often times steps 5, 6 and 7 are happening simultaneously instead of consecutively following one another once the previous one is completed. It’s important to weigh the emotional part of your financial journey, your attitudes, and feelings toward debt and your goals, and what time frame you are working with when thinking about paying off your debt. These steps don’t include other important aspects of creating a financial plan, such as obtaining disability insurance, potentially using the avalanche method when paying off debt, or really take into consideration the amount of student loan debt a pharmacist graduates with.
Tim Ulbrich: Welcome to Episode 068 of the Your Financial Pharmacist podcast. Tim Baker, excited to be back together on the mic. I think it’s been awhile, right?
Tim Baker: It has been awhile. I feel like we cultivated this baby in the podcast and I’ve, like, been absent for the last few weeks. So I’m excited to be back on.
Tim Ulbrich: Yeah, we had a great month in the month of September doing home buying, all things home buying. Nate Hedrick, the Real Estate RPH joined us. Excited about the partnership with Nate. Excited also to jump into the topic we have today, discussing the 7 baby steps that many are familiar with, recommended by Dave Ramsey. We’re going to talk about the pros and the cons and how we think they do and don’t fit to a pharmacy professional. And we’re going to weave in throughout the show feedback from you, the YFP community, that we’ve gotten via email, the YFP Facebook group and via LinkedIn as well. So Tim, it’s my understanding you’re out at the XYPN meeting right now, correct?
Tim Baker: Yeah, I’m in St. Louis for XYPN Live. I think this is the fourth annual meeting. So XY Planning Network is a group of fee-only CFPs that are trying to bring financial planning to kind of the Gen X, Gen Y generation. So yeah, it’s been good to, you know, rub elbows with some of my colleagues and just get good ideas and bring them back to Script Financial and see how I can better serve clients. So it’s been a good week so far.
Tim Ulbrich: And you’re rocking your YFP T-shirt today? Is that right?
Tim Baker: Yeah, I’m flying the flag, Tim. So you know, we’re going to be talking to a lot of different vendors and things like that. Actually, it’s funny. I was telling you before we started recording that people, you know, my colleagues have kind of noticed what we’ve been doing on the YFP side of things and have taken interest in that. So it’s kind of cool to see that, and yeah, so definitely rocking the YFP T-shirt today.
Tim Ulbrich: Exciting time. So let’s jump into this topic. You know, when I think of the Dave Ramsey 7 Baby Steps — and we’re going to link to them in the show notes, and I’ll talk about them briefly — but for those that are not familiar, we’ll go through them quickly and link to more information. This is such an emotionally charged topic, and so when we posted this week, I said, ‘Hey, YFP Facebook group, YFP community, we’re going to do a podcast recording on the Ramsey 7 Baby Steps. What do you think the good, the bad, how does it work? What are the pros and cons? How does it apply to a pharmacist or not? And for our community personally, those that have walked through this step, what are some success stories or challenges they’ve had?’ So I think based on the response that we got in that post, we’ve got lots to talk about. So you ready to do this?
Tim Baker: Let’s do it.
Tim Ulbrich: Alright, so onto the show. Here’s what we’re going to do. I’m going to walk through briefly the 7 baby steps, so for those that haven’t heard of them before, are not familiar, I’m going to talk about them very quickly. Then, I’m going to get Tim Baker’s thoughts on his opinions at a high level. What does he think about the baby steps? Where do you they work? Where are maybe some areas that need more flexibility? And when it comes to advising his clients, where has he seen these work in both the success route but also in maybe areas that he may disagree with. Now, we’re going to weave in some comments and feedback from the YFP community throughout. So Dave Ramsey’s 7 Baby Steps. If you haven’t heard them before, here they are in order:
Step 1 is save $1,000 for what he calls a starter or a baby emergency fund. Now, we’ll come back and talk about this. We talked in Episode 026 baby stepping into your financial plan, two things to focus on first, which an emergency fund was one of those. We’ll link to that in the show notes. And we also have a blog post on why having an emergency fund matters, so if you want to learn more about this topic, we’ll link to that as well. So Step No. 1, baby emergency fund, $1,000. This is all about getting a quick win and making sure you’re starting to build some protection into your financial plan. Step No. 2, probably the step, Tim, that causes the most debate — pay off all, all debt using the debt snowball.
Tim Baker: Right.
Tim Ulbrich: So this is referring to credit card debt, student loan debt, car debt. The only exception here to the word all is mortgage, the primary residence, which we’ll talk back and we’ll come back to this in Step No. 6. So Step No. 2 is pay off all debt except for the mortgage using the debt snowball. And we’ll talk about what that means and we’ll dig into that further.
Step No. 3 then is save up 3-6 months of expenses in an emergency fund. So we mentioned Step No.1 is save $1,000 for a starter emergency fund. Step No. 3 is to build up a full emergency fund, which is 3-6 months of expenses. Now, one that he doesn’t publish on his website but he talks often about is Baby Step 3b. And this, I think, Tim, is codeword for “Woops, I didn’t really think about a home. Where should I put it?” So it’s Baby Step 3b, which is save 10-20% down for a home. And I’ve actually heard him reference 10% in some areas, his Financial Peace University class, but also 20% on his podcast. So that’s Step No. 3 and 3b.
Then Step No. 4 as we’re working through these one by one is invest 15% of household into Roth IRAs in pre-tax retirement accounts. So invest 15% of household income into Roth IRAs and pre-tax retirement accounts.
Step No. 5 is save for kids’ college.
Step No. 6 is pay off the home early.
And Step No. 7, probably the most nebulous one, is build wealth and give.
OK, so those are the 7 Baby Steps, and I think it’s worth noting that his recommendation that I’ve heard throughout the podcast and listening to it over the past several years is that steps No. 4, 5, and 6 are actually happening together. So of course you’re not going to invest in 15% possible income into Roth IRAs and pre-tax retirement accounts and be done and check it off. That’s going to be ongoing. Saving for kids’ college is going to happen over a period of time. And paying off the home early will happen over time as well. So steps 4, 5, and 6 are happening over time. So there you have it, the 7 Baby Steps. And I can speak a little bit from personal experience. My wife and I used the 7 Baby Steps in our journey paying off $200,000 of student loan debt. And we worked through them, we made some modifications along the way, which I think is going to lend itself nicely as we get some questions and feedback from the YFP community. So Tim Baker, your thoughts and opinions at a high level on the 7 Baby Steps. Where do they work? And in your experience working with clients, what are some of the successes you’ve seen in clients using these seven baby steps? And where do you think they maybe have a little bit more downside or maybe points of contention?
Tim Baker: Yeah, I think that as a framework, I like it. Now, I think that’s part of the problem with financial planning — because this is essentially like a framework of a financial plan. And I think a lot of people will throw some shade towards Ramsey because, you know, they say, well, it’s not a one-size-fits-all. And I think financial advisors will sometimes give him some backlash because of, you know, he’s too focused on the debt. And if you remember me talking through like, you know, a lot of advisors are paid based on investments. So they’re not incentivized for you to work through your credit card debt or things like that. And then I think there’s just some disagreements about like his particular investment choices. But as a framework, and I think in some of our engagement with the Facebook group and LinkedIn and things like that, there are people that are identifying, saying, ‘Hey, we’re in Step 2. We moved to Step 3, and then we had to move back,’ things like that. So it is more or less a working financial plan that people can identify with and at least benchmark off of. So I’m in favor of that, and I think it’s good to kind of get the blood up a little bit and talk about these things. But I think there are some people that maybe are a little bit more financially savvy that, you know, have their ducks in a row. And they say, ‘Well, this isn’t necessarily how I would do it.’ But for a lot of people that aren’t in that position — and I come across a lot of them, and they eventually become clients, which is a good thing. Where should I put an emergency fund? How much? Why 15%? And what’s a Roth IRA? That type of thing. And I’m not really being facetious, I think some of these things are, they’re true. So for people that go through Dave Ramsey stuff, you know, there’s an assumption, I think, afterwards that they’re going to know more or less which direction they need to go. And from a financial advisor’s standpoint, they don’t necessarily make good clients because they feel like they’re set. But I do think that there are some strengths but also limitations to me overall to the 7 steps. So for example, you know, if I look at the first one, save $1,000 for your emergency fund. You know, I do have clients that are in this position where they have, you know, hundreds of thousands of dollars of student loans, but they have $30,000 or $40,000 worth of credit card debt. So you know, we’re just trying to dig our way out of, you know, paying through the credit card debts but then, you know, having a buffer of like $1,000, that’s a huge step in that direction. So even — you know, some people might look at this like eh, this isn’t for pharmacists. I would say not so fast. There are some situations where that’s going to be true. So like the way I talk about, and I think we talked about this in Episode 026 of the podcast is, you know, let’s baby step our way into that kind of the foundational part of the financial plan, being the emergency fund. So I look at it as kind of look at it in phases. So maybe Phase 1 is $1,000. And as we work our way through some of the — and I think about more the consumer, not predatory debt, but in that where you’re 16-17% — to focus on that first and really not tend too much to the emergency fund. But as you work your way through that, Phase 2 might be to get that to $5,000 because the fact of the matter is, if you’re a single pharmacist and you have a good amount of credit card debt and student loan debt, that alone with your rent could put your emergency in the $20,000-25,000 because you’re multiplying that monthly number by 6, essentially. So for a lot of people to get to that number, they’re going to default on their credit cards before that happens.
Tim Ulbrich: And I think that’s probably the most common thing we hear from pharmacists is they look at this and say, ‘OK, Step 1 is I need a $1,000 baby emergency fund. Step 2, I have to pay off all my debt.’ And so they may be looking at who knows? $200,000 in student loan debt, $20,000 in credit card debt, a $20,000 car note. Then I need to get a full 3-6 months of an emergency fund and then I start thinking about investing. I think that’s the piece where people are like, wait a minute. I’m not going to be investing for 10 or 15 years? And we’re going to come back to that because I think that, you know, the framework, as you mentioned, obviously — and Dave would admit this — is that mathematically, this is not the most advantageous framework to operate from. It’s really a behavioral framework to help people really get the motivation and the mindset and to have some structure around the steps they’re working through. And if we have a thousand people listening to this podcast when we release it, at the end of the day, we have a thousand different financial situations. And I think that speaks to — to your point — that speaks to that this plan by itself probably should not, in my opinion, stand alone but could be paired with the work of a financial planner, could be customized. And I think that if you look at the plan in and of itself, it’s not meant to be a standalone. It doesn’t deal with issues like insurance, end of life planning, investing strategies. You know, we got some feedback from the Facebook group, which I thought was cool. Matt said that he agrees with a lot of the baby steps in terms of them being introductory and getting yourself on track. They’re a good blueprint to getting out of debt. The only problem is what to do after the steps are complete, so they’re not wealth-building steps. And so if you look at Step 7, this idea of building wealth and giving, obviously that’s not necessarily a blueprint for what you should be doing in terms of investing and saving and strategies and end-of-life planning and all those other things that come along with it. However, I will say for those that are listening — and my wife and I just experienced this firsthand — if you feel like you are extremely overwhelmed, don’t know where to start. If you and your spouse maybe where applicable are having difficulty getting on the same page, I think that these steps or it could be another stepwise approach, but having a stepwise approach that you’re working together and achieving and feeling like you’re getting momentum forward, even if that’s not necessarily the most mathematically advantage approach, you can’t speak enough to the value of getting momentum and getting those wheels going forward. Because Tim, how many people do we talk to that say, ‘I’ve been spinning my wheels for seven years, and I feel like I haven’t made much progress,’ right?
Tim Baker: Right. And we’re proponents of — I think there’s some weight to the emotional side of the — we talk about this in the student loan course over and over again. It can’t be just about the numbers. And of course, we’re talking about, you know, for a lot of people, does it make sense to look at PSLF versus not? And in this scenario, in these seven steps, PSLF I don’t think would even be entertained because if you’re trying to pay off in Step 2, the non-mortgage debts as quickly as possible, it’s not even a thing. So if you’re someone that has a lot of student loan debt, and you have the emotion behind it that, hey, you’re anxious or you’re concerned, you can’t sleep at night, these are all things that people have said to me. Then we weight that somewhat heavily because it doesn’t make sense to take a more maybe of a reactive approach, say from a Public Student Loan Forgiveness, and you want to just be more reactive to that. But I think to your point, Tim, that people get riled up about this because potentially in some situations, especially for pharmacists, you might be waiting 10+ years to start putting any money towards retirement and not, you know, capitalize on match and things like that. And I think that’s where I fundamentally disagree with this model.
Tim Ulbrich: So before we go into some of the more detailed questions, let me read off some of those that commented from the Facebook group that talk about the support of this model and I think some of the positive aspects of the success that it can lead to and the behavioral aspects of the model. And then we’ll dive a little bit deeper into maybe where tweaks could be made to this model, depending on individual situations and scenarios.
So Scott says, “The plan is great. It teaches you to focus on just a few things and do them with intensity. You also need to keep in mind that he only teaches very low-risk strategies. If you lost everything like he did, I’m sure you’d have a similar mindset.” So what Scott’s referring to there, if you haven’t heard his story before, Dave essentially — I think it was in his mid-20s — got pretty deep in real estate investing, kind of lost everything. But I do think to his point, as I think through Jess and I going through this approach, intensity is a good word, right?
Tim Baker: Yeah.
Tim Ulbrich: Because when you’re going all in on one step and you’re singularly focused — and yes, to the comments we received, yes that may be at the expense of other things — but that singular focus has to be factored in somewhere into the equation with the mathematical components as well.
Tim Baker: And I think he uses — what does he use, like gazelle-like? You want to be gazelle-like. I think that’s his term. And I see that, you know. I have clients that come in, I want to buy a house, I want to travel the world, I want to start saving for my kids’ education. There’s I want to pay for my wedding, there’s a million different things. And part of my job is to cut through some and say, OK, what’s most important? Because you can do a little of a lot of things, or you can do a lot of one or two things. Typically, the latter is a better prescription for that.
Tim Ulbrich: Dalton says, “You can’t really argue with its effectiveness. The number of people who have gotten out of debt and built wealth through his plan are incredible. He even acknowledges that the plan doesn’t necessarily make mathematical sense all the time because the benefits of compound interest and retirement savings but always follows that up with the fact that being in debt doesn’t make mathematical sense either because if personal finance was all about math, people wouldn’t spend more than they make. I think that it makes sense for pharmacists mostly if they live like a college student still after graduation. You could actually pay off your loans decently fast, as long as lifestyle creep doesn’t happen.” And then he goes on to talk a little bit more about Baby Step No. 2. So let’s jump in there because I think we had a couple questions from the group about Baby Step 2, which makes sense, right? Because pharmacists are facing average debt loads of $160,000. So Dave Ramsey, in speaking to whatever, 5 or 10 million listeners every week, obviously their average debt load is not $160,000. So that is a unique piece to our audience. And Cole asks the question, “I’d love to hear your thoughts about stopping retirement investing and losing the match while in Baby Step 2.” So talk to me about your thoughts as you’re working with clients, typical pharmacist, $160,000 of debt, maybe you’re thinking about this in the frame of these baby steps. We’ve talked before about the match being a no-brainer, let’s take it. But how do you balance this retirement and student loans or at least looking at the match component while in Baby Step 2.
Tim Baker: Yeah, so just a comment on Dave and like the student loans. Like, I think when I first started hearing some of his stuff about the student loans, like he would almost fall off his chair when like a doctor — I think for awhile, I think a fair criticism of him was that he was a little out of touch. And I’ve seen some things where he’s like almost browbeat people, and that’s not productive. But I think in more recent times, he’s come around and he understands a little bit more about the student loan picture. So that’s the first thing. I think the third thing for me personally is — and I say this when we speak to pharmacy schools and, you know, different organizations is — you know, they say the two certainties in life: death and taxes. And I would add that you should, for the most part, match your 401k or your 403b. I think that is for the majority of people the thing to do because it’s one of those things that the whole thing, it’s free money. Unless you’re in dire, dire straits from a predatory or some type of debt, I wouldn’t do it. If it’s student loan debt, absolutely. You need to be doing the match.
Tim Ulbrich: So death, taxes, and the match are three certain things in life?
Tim Baker: I think so. That’s Tim Baker’s amendment to that. So I think by and large, if you’re not doing that — because most of the time, especially because it comes out tax-free, you’re not missing it. So if you’re an employer — and most employers, it’s 3%, 5%. It’s not like you’re asking to give up 10%. Some are structured like that to get the full match, but to get the full match is typically a small percentage of your income. So that would be my thoughts there. And you know, I kind of with the invest the 15% of household income, I kind of say as a general rule of thumb, which these are, to start getting it in your brainpiece for newly minted pharmacists and new practitioners is a race to 10%. Because what often happens is that you do get the match, you get 5%, and you have the 401k inertia. I talk to you years later, and you haven’t increased it at all. So in their mind, I try to plant the seed. It’s a race to 10%, so if you couple that with the match, you know, you are in that 15% range. And that’s typically, when we do the nest egg calculations, which we did on the APhA webinar here recently, the Investment 101 and 102, the nest egg is going to show that that is, more likely than not, true to be in that range.
Tim Ulbrich: Yeah, and I think this is a great example as you think through Baby Step 2 and this question that Nicole throws out there is that this is not a black and white framework, as we’ve already talked about, especially with everyone’s customized situation. So if you’ve heard Dave talk on the podcast or taken any of his courses like Financial Peace, I think he uses an average time range of debt repayment too of about 18 months or less. So again, a pharmacist with $160,000 as a graduate does not match the national average of somebody coming out from undergrad with $25,000-30,000. Now of course they have a higher income potential, but he’s then under the assumption — when you think about steps 3, 4, 5, 6 and so on — that that debt in Step 2 is going to be gone quickly. Now, if you’re somebody listening that’s got $30,000 or $40,000 of debt, maybe that’s the case. But if you’re somebody that has $200,000 of debt, you know, unless you’re hustling like Adam Patterson-style, Tim Church-style, that’s probably not going to be happening. So now, you have to have this discussion and balance and work with somebody like you as a financial planner to say, OK, what is this timeline of debt repayment? Not that we’re going to carry this on forever, but what is the debt repayment strategy? And then how do we now fit retirement savings into there. Because you and I would both agree that if somebody’s paying off their loans for 10 years, probably not contributing to retirement is not a good idea. Not probably — it’s not a good idea.
Tim Baker: Right.
Tim Ulbrich: But if somebody’s hustling for 2-3 years, that conversation is very different, especially if there’s some behavioral momentum that’s going to be happening. Now, I would agree with you 100% that that match is a given in all of those situations, it doesn’t matter whatever the debt repayment period is in my opinion. I think that that should be there.
Tim Baker: Yeah, and I think the other thing to take note of, call out here that I commend for him is, you know, he’s talking — again, I’ve listened to him talk to doctors that have a truckload of debt. And he’s like, “Oh, you’ve got to hustle.” Even though the make hundreds of thousands of dollars, he’s encouraging them. He’s like, you’ve got to take up, you’ve got to get extra shifts. So he’s not resting on your laurels just because you make a six-figure income. So you know, the people that we’ve highlighted, the Pattersons, the Churches, they’re trying to hustle. They’re thinking of additional ways to increase income, which I think is something that kind of falls by the wayside because we’re always talking about how can we cut our expenses? But it’s a two-sided equation. So I would say that that is something to focus on as well.
Tim Ulbrich: Yeah, and just to wrap up this Baby Step 2 and how do you balance the loans with the investing and what’s your time period, I would say that, you know, for many listening, the answer’s going to be different. We’ve talked a lot on the podcast before and live events that we’ve done about how do you make this decision between investing and paying down loans. I don’t think we need to get in the weeds here, but this really comes down to the factors like interest rates, what is your feelings toward the debt? How is your investing style? All of these things, and for everyone listening, that answer’s going to be a little bit different, which will obviously help determine where you’re going to go with that. Tim, Tyrell asks that he says that he’d like to hear pros and cons of paying off house versus student loans if working toward PSLF or towards PSLF or other forgiveness components. So he’s talking about working for a qualifying company, pursuing Public Student Loan Forgiveness, and obviously then that changes your strategy about paying off your loans, correct?
Tim Baker: Yeah, because, you know, typically, the way to optimize that strategy is to take, you know, Step 4, which is invest 15% of Roth IRA and pre-tax retirement accounts and really cross off the Roth because the Roth is after-tax and put as much money as humanly possible into pre-tax retirement because what that effectively does is lower your adjusted gross income, which affects how much you — which is the number that calculates your payment for student loans. So the lower that your AGI is, the lower that your payment is, and the more that you potentially will be forgiven. So there’s a lot of moving pieces to that. So I would say if you’re weighing paying off a house versus student loans, to me, the picture is are we getting the $18,500 into the 401k or the 403b maybe since it’s a nonprofit. Are we maxing that out? You’re probably not afforded a pre-tax IRA deduction because pharmacists typically make too much. But are you maxing out the $3,450 or the $6,900 if you’re a family in the HSA to get that if you have a high deductible plan. Once those things are checked off, then I would say, OK, you know, what are the goals? And maybe paying off the house is that. But if that house is, you know, if the rate’s 3.25, I don’t know. I don’t know if that’s the best way to go. Some people, again, I know Leah Donnells made a comment on this, and she’s a client of mine, and her mantra is, their mantra is they want to get through the debt as quickly as possible. So they, regardless of what the mortgage or interest rate is, they want that out from underneath them. And I can’t blame them because if you think about, hey, we’re striving for financial independence, what is a greater measurement of that when you don’t have to pay the bank your rent or mortgage anymore? So Tyrell, that’s a good question. But again, there’s a lot of moving pieces and I would say focus on the pre-tax accounts and max those out before, you know, throwing more money towards the house. Tim Ulbrich: So Tim, you know Dave’s a big advocate in Step 2 about the debt snowball. And Ryan in LinkedIn says, you know, as he’s talking about the pros and cons of this model, he says, “Why should I use the debt snowball method? It works great for those people who really benefit from the psychological impact and reward of paying off small debts. But for those who don’t benefit from it will potentially spend more money in the long run.” So give us the quick overview of the debt snowball, how that contrasts to the avalanche method. And as you’re working with clients, how do you guide or advise them in terms of which of those methods may work best for them?
Tim Baker: So the debt snowball method is basically where you write out all of your or you have all of your debts laid out: what kind of debt it is, what the interest rate, what the minimum monthly payment is, and what the balance is. And the idea is to pick the debt that has the lowest balance and pay the minimums on all the other debts. And then for the one that has the lowest balance, you want to pay as much toward that as humanly possible. So when that one falls off, when that debt is paid and dead and gone, then you roll that payment into the next lowest balance. And then when that one falls off, you roll that payment into the next lowest balance. So this is really trying to clear liabilities from the balance sheet. And the idea is that that gives you, if you focus on the lowest one, it gives you a psychological advantage, it gives you momentum, that type of thing. The avalanche method, in contrast, is where you do the same thing except the priority payment is based on the interest rate, not on the lowest balance. So you want to focus on the highest interest rate — this is typically credit card debt and that type of thing — and you pay the minimums on everything else. And then when the highest interest rate falls off, then you direct your attention to the next highest interest rate. So from a math perspective, this makes the most sense because you want to clear those debts off that you’re paying the most interest on. So that’s really the difference between those two. Now, working with clients, theoretically, I coin flip. It’s one of those things where from a math perspective, yes, it does make sense to do the avalanche. But it’s the same thing with everything else. If you’re doing this on your own, don’t get into the paralysis by analysis. Just pick one method and go. For a client that I have, you know, $30,000 of credit card debt with that’s spread out across 20 different cards, to me, it’s just about clearing the balance sheet so she can, you know, work through those effectively. So now, it’s more of an organizational thing. So in that situation, we’re employing the snowball method because it’s almost unwieldy to handle. So it just really depends on where your mind is, if you’re running the math and you’re maybe less emotional towards it, avalanche. If you’re thinking that, hey, it’d be really nice to log into your credit card account or if I plug my client portal that you can sign up for on my website, Script Financial, you can see all of your, you can link all of your accounts and see a dynamic net worth statement. If you see a list of liabilities there that’s $10,000, $12,000 deep, and you really want to log in in six months and see $6,000, then I would say probably the snowball method would be the better route to go.
Tim Ulbrich: Yeah, and I think the time period is critically important here as well, right? So if you’re talking about a wide array of interest rates over a long period of time, say 10 years, obviously the math on that is going to become more advantageous toward the avalanche method. If you’re talking about I’m going to pay off whatever debt we’re referring to in a short period of time, and the interest rate’s aren’t that different, or some combination of that in a couple years, then obviously the math doesn’t matter as much. Does it still matter? Yes, of course. But you have to, again, make this determination about your own behavioral patterns and choices and how important that momentum is or is not. And as I think back to the journey that Jess and I took, that momentum for us was critical, even at the expense of paying a little bit more interest because as we were going through whatever step, let’s use Step 2 as an example, if we were going through a snowball method, if I knew we needed $2,000 more to pay off this loan to get to the next one, we were that more motivated to stay on budget or to look for additional opportunities to earn income, whatever it be, that I’m not sure for us collectively as a couple, we would have been as motivated if we would have been working that through the avalanche method. So did we spend a little bit more interest? Yes. But did we get it paid off faster? For us, I think we probably did. But again, back to the point of customization for somebody else listening, somebody else commenting, that may be a very different situation if for them, it’s very black-and-white, and they can work the system going through the interest rates. I want to encourage for a minute. Amber posted on the Facebook group that, “My spouse and I follow these baby steps, and they are great for getting out of debt. Our problem keeps showing itself on Step No. 3, which is the full 3-6 months of emergency fund. We complete it and are ready to move on, and we have somewhat. But then, wham, something happens and we are right back on No. 3. We’ve been stuck like that for several years now, but living without debt is really freeing and wonderful.” So I think again, it speaks to the power of getting out of debt. But I think is something Jess and I felt as well is that when you talk about something like paying off debt, it can be very exciting to see that balance come down. When you talk about investing, it can be very exciting. Building an emergency fund is not necessarily super exciting. And so obviously, they’ve had some things come up that have derailed them from doing that. But I think for those that are in the grind of building an emergency fund, to your point earlier about how much that could be, $15,000, $20,000, $25,000, $30,000, $35,000, that’s not super exciting. But it’s certainly a critically important step and a foundational part of a financial plan. Tim, wanted to get your thoughts on this. This I think speaks to I think maybe where you have some customization to this seven-step plan. Katie says, “After graduation, we DR’ed our way to becoming debt free.” I love that he has his own DR.
Tim Baker: Yeah, when do we get YFP’ed?
Tim Ulbrich: Seriously, YFP our financial plan, right?
Tim Baker: Can we hashtag YFP’ed? Get that trending on Twitter maybe?
Tim Ulbrich: I like that. Be a trademark, yeah. “The main tweaks we made in the beginning were splitting steps 2 and 3 equally, so equal amounts going toward the emergency fund and debt reduction until we had enough saved, and then we maxed out our own tax-preferred accounts before kids college. It’s not a perfect system, great for debt elimination, not ideal for investing, but it’s simple and gives a roadmap for those starting out. It worked well for us.” So what do you think about that idea of balancing the savings for emergency fund with paying off student loans or other debt? Tim Baker: Yeah, I mean I think that’s exactly what the point is is like, this is a template for then people can iterate off of. And this is what I was talking about with like having, you know, Phase 1, Phase 2, Phase 3 in terms of, you know, Phase 1, it might be get the $1,000 or $2,000. Have a emergency fund that probably covers 80% of emergencies in your situation. And then from there in Phase 2, now maybe go through and start paying off debt and apply maybe little. I think this is a perfect example of how, you know, they looked at the situation and said, well, this doesn’t work entirely for us, so we’re just going to iterate. And again, bias, you know, I think they did it well themselves working off the two of them, but this is where I think a financial planner can come in and provide a little bit of guidance and objective opinion and say, this is what I would do and these are the recommendations. So I think that’s the power of this is people look at it as a benchmark and then they can iterate off of it and apply it to their own lives.
Tim Ulbrich: Absolutely. And so just to build on this a little bit more, Mark asked and has a comment in the Facebook group, and I can speak to this one. I dealt with this last year. He says, “I’m on Baby Step 2 and I’m really concerned about this idea of not having a credit score. Has anyone used manual underwriting to buy a house? And probably because I don’t fully understand a credit score, but I’m a little concerned about not getting a job because of it.” So I think what he’s referring to is that Dave’s a big advocate for no credit cards, cut them up, get rid of them, pay off all your debt, etc. And obviously, there’s some concern about having no credit when it comes to purchasing a home. If you currently are paying a mortgage, Mark, what I learned throughout this process is that that mortgage payment will still provide you with a credit score. Now, if you don’t have a mortgage and you have no credit cards, then obviously after a period of time of having no credit cards and not making mortgage payments, your credit score will effectively be reduced to 0, which could present problems when it comes to purchasing a home. You certainly could do manual underwriting. There is lenders that are out there that do that, just give yourself some more lead time. It will probably take more time. And we didn’t experience this or get to this point, but I’ve heard — Tim, I don’t know if you’ve heard — that sometimes in a manual underwriting process, you may end up paying a little bit higher of an interest rate.
Tim Baker: Yep.
Tim Ulbrich: So something to balance and think of throughout that process. Tim, want to get your thoughts on this. Lisa says, “I definitely don’t think Step No. 4 should be No. 4.” So No. 4, again, is 15-20% into retirement savings and tax advantage accounts. She said, “It should be closer to No. 1. I have always been taught that saving for retirement as early as possible is a necessity and you should think of that 10-15% money as unusable for anything else. So whatever your net income is, write 10-15% off, and that is your new net income. It’s very easy to push that kind of saving off.” So here she says, “For me, it was more like year one post-graduation, it was Baby Step 2 was immediate, very high interest debt like credit cards.” Then she went to Step No. 4, setting up 401k. Then went to Step 1 and 3 of saving an emergency fund. And then as she went into year two post-grad, she further went into Step 4, saving enough to put max in a Roth IRA, into retirement. And then year three post-graduate, she went back into Step 2 to pay off student loans. So I think the risk that I would have with this — I certainly fundamentally agree with what you talked about before of getting that race to 10%, right? Getting that behavior set up for retirement. But doing that at the expense of any emergency fund, I think you’re putting yourself in a risky situation. Would you agree?
Tim Baker: Yeah, I would. I mean, I probably would put it as, you know, maybe 1a. So I think — you know, I was talking to a prospective client the other day, and I was asking him, you know, if something were to happen from an emergency standpoint, what would you do? And the answer is kind of like, eh, credit card or bank of mom and dad. And I think those are two habits that we probably need to wean off of and break. So I’m always — you know, it’s not the sexiest thing, although I get jacked up every time, you know, an interest rate happens. We’re both Ally proponents. Whenever you get the interest payment in your emergency fund, I think that’s cool. But I’m a big proponent of having some cash set aside for those emergencies and then get serious about at least getting the match. That’s kind of how I view it.
Tim Ulbrich: So as we wrap up this episode, Tim, I think that as we look at this framework, I think you and I would both agree that it’s meant to be exactly that. It’s meant to be a framework, it doesn’t apply to everyone’s personal situation, there’s caveats. And again, I think that speaks to the power of individualized, customized financial planning. And I would highly encourage our listeners, if you’re not a part of the YFP Facebook group, head on over, join the group, there’s great conversation going on on this topic as well as many other topics related to your personal financial plan. And that group is really all about encouraging, motivating and inspiring each other in this community of pharmacists, all committed to being on this path towards achieving financial freedom. So Tim, any last thoughts here on the Ramsey plan as we begin to wrap up the episode here?
Tim Baker: Yeah, I would just say, we didn’t focus too much on 5, 6 and 7. You know, I would just say that, you know, the whole saving for kids’ college, that’s not a given for a lot of people, even pharmacists that have gone through kind of student loan hell. That doesn’t necessarily mean that they’re in a position or even there’s a want to do that. So that might be something that we can, you know, address a little bit more in the future about different strategies to do that. And I would say paying off the home early, we addressed that a little bit. It also depends, and finally, I think No. 7 is kind of like, you get to the end of this and you’re kind of released out into the wild and to build wealth and everything is good. But you know, for build wealth — for what purpose? You know, I often say that typically the way that I price my services is based on income and net worth, which is great because I’m incentivized to kind of help you grow income and help you grow net worth over time. But if we fast forward 20, 30 years, and you’re sitting on $10 million but you’re miserable because you haven’t done the things that you’ve wanted to do, then that’s not a wealthy life. So I would say build wealth, but to what end. So last year, you know, you did an episode on giving, which is part of kind of 7b in the build wealth and give. But not everyone has that same worldview, so you know, some people are, they want to give 10% right off the bat of their income, you know, even if they have debt. Some people are even if they don’t have debt, they don’t really feel inclined to give. So it’s just different. But I would say that a big one that’s probably missing from here, especially from a pharmacist’s perspective is disability insurance. If you don’t have any coverage at all from an employer, the ability to work and earn really needs to be protected. So that would be one of the things that I would probably edit from a pharmacist’s perspective. But I think it’s a great list, it’s a great template to look at and to build off of and to iterate for your own purposes. So I think this is a great episode because we had a lot of engagement on the Facebook group, and I hope it keeps going because I think people learn when we shine a light on it.
Tim Ulbrich: Yeah, and to your point, I think we’re going to come back and do a lot more on all of these topics, but especially in 5 and 6, you know. We haven’t done a ton on college savings. And that’s an interesting one because I think especially as we think about pharmacists coming out with such high debt loads, I think there’s a tendency, myself included, to maybe put that one at a different priority than it should be because you’re compensating from your own experiences, and you don’t want to put your own children through that. So you know, 529s, ESAs, what’s the strategy? What’s the timing of that? How do you balance that with retirement, your current debt, all those other things? And then as you mentioned, even in Step 6 and the home, how you prioritize that, what’s your interest rates? What’s your other goals related to real estate? What’s your motivation? Do you care about the debt? Do you not? How do the new tax laws impact all of that? We’re going to come and talk more about that into the future. So I think there’s lots of people that are out there listening today, Tim, to this episode, that are thinking of the Ramsey plan, thinking about the framework but are finding themselves spinning their wheels with their own financial plan, lots of competing priorities coming at them, not sure in what order and how this applies to their own personal situation. And as we talked about, this plan is not intended, the Ramsey steps are not intended to be a standalone financial plan. And so I know personally, you have lots of clients who know these steps, maybe some are following them to a T, others are not. But they still value the one-on-one approach in terms of working with you and working with a financial planner. So for those that are listening that want to take that next step, get engaged with you as a financial planner to learn more, what’s the best next step they can do to do that?
Tim Baker: Yeah, Tim, it’s super easy. You can either go to the Your Financial Pharmacist website and click on the “Hire a Planner” tab at the top and then you can schedule a free call on that page. Or just go to ScriptFinancial.com and on the homepage, you’ll see a “Schedule a Free Call” button there. So those are really the two ways to find me and schedule a free call.
Tim Ulbrich: So again, that’s YourFinancialPharmacist.com. You can click on “Hire a Planner,” and then from there, you can schedule a free call with Tim Baker to discuss next steps. So Tim, great to be back on —
Tim Baker: Yes.
Tim Ulbrich: the podcast with you. Have a great time at the XYPN conference. And we’re certainly looking forward to having you back as we continue with some great content coming forward.
Tim Baker: I’m going to be YFPing this conference. Trending on Twitter.
Tim Ulbrich: Awesome. Love it. Love it. So as we wrap up today’s episode of the Your Financial Pharmacist podcast, I want to take a moment to again thank our sponsor, Splash Financial.
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Tim Ulbrich: Thank you so much for joining Tim Baker and I on this week’s episode of the Your Financial Pharmacist podcast. Next week, Tim Church and I will be tag-teaming some updates related to student loans, including the latest on the Public Service Loan Forgiveness program. Also, for those graduates that are getting ready to come out of the grace period and enter active repayment, we will talk about repayment options and strategies. If you like what you heard on this week’s episode, please make sure to subscribe in iTunes or wherever you listen to your podcasts. Also, make sure to head on over to YourFinancialPharmaicst.com, where you will find a wide array of resources designed specifically for you, the pharmacy professional, to help you on the path towards achieving financial freedom. Again, thank you for joining us, and have a great rest of your week.
